MiFID amendments lift barrier to brokers owning OTFs

Tweaks to the Markets in Financial Instruments Directive (MiFID) text would allow owners of organised trading facilities to engage in matched principal trading.

Brokers should be allowed to conduct so-called matched principal trades on new derivatives trading platforms created by the Markets in Financial Instruments Directive (Mifid), according to amendments filed by both the Council of the European Union and members of the European Parliament (MEPs) last month.

The European Commission’s original version of the new legislation stated that owners of the platforms – dubbed organised trading facilities (OTFs) and introduced to meet a Group-of-20 (G-20) commitment to shift derivatives trading to recognised venues – would not be allowed to trade on the platform using their own capital. That could have been a problem for interdealer brokers, which operate by simultaneously conducting identical trades with two counterparties – known as matched principal trading. Many brokers are planning to set up OTFs.

Proposals from the council and MEPs are seeking to remove the threat. “To safeguard the provision of liquidity, matched principal trading, precisely and narrowly defined, and independent market-making should be allowed,” says the compromise text published by the Danish presidency of the council, which suggests the job of coming up with a definition be left to the European Securities and Markets Authority.

Eight of the 10 MEPs that proposed amendments to the proprietary capital ban for OTF owners make some attempt to narrow its scope – although only one specifically mentions matched principal trading.

Outgoing French MEP Pascal Canfin – whose term ended on May 15, five days after amendments were submitted – and Danish MEP Anne Jensen are the only two that submitted amendments without weakening the ban.

French MEP Sylvie Goulard and Finnish MEP Sirpa Pietikäinen both propose deleting the OTF category from article 20, which contains the proprietary capital ban. Italian MEP Alfredo Pallone, Dutch MEP Corien Wortmann-Kool, Portuguese MEP Diogo Feio and German MEP Wolf Klinz all suggest some form of opt-in amendment, allowing clients to choose whether to trade against the OTF operator’s own capital or not. Swedish MEP Olle Schmidt also suggests an opt-in amendment, and refers to the importance of matched principal trading.

“We want an intelligent ban on proprietary trading, but we would also like clients to be able to operate as they choose. That’s the main reason we want to have this changed,” says Schmidt, one of five shadow rapporteurs for Mifid, responsible for assisting the main rapporteur, German MEP Markus Ferber, in shepherding the legislation through parliament. The other shadow rapporteurs are Canfin, German MEP Sven Giegold, Luxembourg MEP Robert Goebbels and UK MEP Kay Swinburne.

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