Will corporate use of dealing platforms be able to continue?
ESMA, the European Securities and Markets Authority, has been consulting on implementation of the updated Markets in Financial Instruments Directive (MiFID II). This long (900 page) consultation is complex. The ACT and the EACT have concentrated on the question of the continued availability of the exemption from being deemed to be providing investment services – a regulated activity requiring becoming an authorised person – for persons dealing on their own account. This exemption may be jeopardised by use of trading platforms such as FXall or 360T if they fell into a category that disallowed it. (See Question 172 in section 5.1 of the ESMA Consultation.) The text of the ACT’s comment is set out here (the actual document submitted is very long and complex but adds no information). Direct electronic access (DEA) Do you consider it necessary to clarify the definitions of DEA, DMA and SA provided in MiFID? In what area would further clarification be required and how would you clarify that? Yes, definitions should be clarified with regard to non-financial companies’ use of and access to trading venues. The economic importance of non-financial companies’ use of derivatives for hedging is widely recognised. Such transactions have been subject to important exemptions in the new legislative framework for OTC derivatives around the world and, notably, in the European Union. We believe that usage of platforms by non-financial companies as part of their normal commercial business and its financing is widespread and regular. To support this view, in the last few days, we polled a 100 strong group of UK treasurers drawn from a wide variety of company sizes and commercial and industrial sectors, both UK based and UK-located arms of overseas based multinationals, about their usage of platforms such as FXall and 360T. (If you are not familiar with such platforms, http://www.360t.com/cnt_about360t/about360t.php is very brief and you can find access to a demonstration from that page.) We found that 45% of respondents were using them, 55% not. Many companies, mainly manufacturing companies, volunteered that their usage was for a major part of their volume. Interestingly, 14% of respondents commented in covering e-mails (it was not a question that we asked) that they were considering using them. Only 2 respondents had been advised by their lawyers of the risk arising from the concern raised in this response: the risk is not widely appreciated. We ourselves became aware of it only towards the end of the consultation period and have been able to discuss it with very few users or associations. The platforms considered are an important way for corporates to benefit from competition for their trades as well as increased process efficiency and liquidity. In conducting their business, non-financial companies fully depend on two important exemptions in MiFID provisions. First, for companies within a group of companies, they rely on the exemption for “services exclusively for their parent undertakings, for their subsidiaries or for other subsidiaries of their parent undertakings”. But, of course, the relevant unit within a group of companies and stand-alone trading companies also depend on access to the market to deal with their own risks and exposures and, in groups, those resulting from intra-group transactions. Accordingly, the exemption for dealing on own account in Article 2(1)(b) is also vital. Our concern arises from the possibility that platforms such as FXall or 360T may find it beneficial to be qualified as or may in any case be recognised as Organised Trading Venues (OTFs) and Multilateral Trading Venues (MTFs). The current Article 2(1)(b) exemption used by nonfinancial companies when accessing trading platforms has been considerably narrowed and the new exemption under Article 2(1)(d)(ii) excludes “members of or participants in a regulated market or an MTF or have direct electronic access to a trading venue.” This risks bringing non-financial companies using platforms of the type discussed above into the scope of full MiFID obligations, making them subject to CRD IV and having other knock-on effects. Clarification of the terms used is thus vital. It is our understanding that the intention of the new wording was to catch high-frequency traders. Of course, the volumes conducted by non-financial companies and the number of trades are trivial in this context. To avoid these unintended consequences – or the chilling effect of ambiguity – clarification of definitions of the terms relevant, especially of “direct electronic access” seems to be necessary. There is no policy benefit from bringing in to regulation non-financial firms. A move away from platforms by existing users and a reduction or elimination of adoption by new users, denying them the clear and important benefits is economically undesirable. It would also have adverse policy implications as it would go against intentions to encourage more use of electronic platforms in trading. We believe that ESMA has the important duty to clarify these matters and, especially, that the definition of direct electronic access does not include end-users who access electronic execution platforms in the way considered in this comment.
