Shaping the Future of Financial Markets: Delving into MiFID III

MiFID III represents the latest effort to refine the regulatory landscape, building upon the foundations laid by MiFID I, MiFID II and MiFIR. It seeks to address the shortcomings and inefficiencies of its predecessors, adapting to the new challenges posed by evolving market structures and technologies.

The regulations aim to promote fair competition among trading platforms by standardising organisational requirements and ensuring non-discriminatory access to venues, clearing houses, and benchmarks. They enhance financial stability through stringent requirements for investment firms and trading venues, particularly concerning high-frequency trading.

Additionally, the rules ensure fair access to market data by mandating that it be provided on a reasonable commercial basis and made freely available after a delay. The regulations introduce liquidity assessments and thresholds for pre- and post-trade transparency across various financial instruments. They enforce a trading obligation for certain shares and derivatives to be traded on regulated platforms, limiting over-the-counter (OTC) trading. A double volume cap mechanism is also implemented to reduce dark trading and control the use of waivers for shares and equity-like instruments.

A critical focus of MiFID III is enhancing both pre-trade and post-trade transparency.

• Pre-Trade Transparency: This involves the disclosure of bid and offer prices and the depth of market orders. Such transparency is crucial for fair price formation and ensuring a level playing field. It empowers market participants by providing insight into the available liquidity and market depth, which aids informed trading decisions however its informational value when compared to post trade is up for debate. ¹
• Post-Trade Transparency: This requires the timely publication of trade details once transactions are executed. Ensuring that market participants have access to accurate and prompt trade data is vital for assessing market conditions, pricing accuracy, and maintaining trust in the market’s integrity. ²

MiFID III aims to refine these transparency requirements, addressing existing loopholes and adapting to technological advancements like algorithmic trading and high-frequency trading. By doing so, it seeks to reduce information asymmetry, curtail market manipulation, and foster a more transparent, efficient and level market environment.

Post-Brexit, the UK has been keen to establish a distinct yet robust regulatory framework, aligning with international standards while addressing local market needs. The Designated Reporter Regime (DRR) is pivotal to this strategy. The EU has also followed suit and as with most regulations the EU’s Designated Publishing Entity (DPE) looks to achieve the same outcome, but with all global regulations, there needs to be some divergence.

The UK DRR which was implemented on 29th April 2024 is designed to streamline and simplify reporting obligations for market participants, particularly smaller firms. Under this regime, specific entities known as Designated Reporters (DR), per the DR Register published by the FCA, opt in to perform Post Trade Transparency reporting of transaction data in RTS 1 and RTS 2 UK TOTV instruments via an Authorised Publication Authority to the Financial Conduct Authority (FCA). DRR aims to:

• Simplify the party responsible for Post Trade Transparency reporting.
• Reduce the compliance burden and barriers for entry on smaller firms.
• Ensure consistency and accuracy in the reported data.
• Enhance overall market transparency and regulatory oversight.

The DPE framework focuses on entities opting in to take the responsibility for managing and reporting data on designated financial instrument classes. This system ensures that detailed, product-specific data is available for regulatory scrutiny, thereby enhancing market oversight. By concentrating expertise within designated entities, the DPE framework aims to improve the quality and reliability of market data, benefiting both regulators and market participants.

ESMA has released Public Statement on 22nd July 2024 confirming the implementation date of DPE will be on 2nd February 2025. The regulation also requires ESMA to establish the DPE register by the 29th September 2024. SI’s will no longer be responsible for performing Post Trade Transparency reporting in the EU.

The distinct difference between the DRR and DPE is that DRR applies at an entity level, however the DPE will apply at instrument class level. ³

The concept of a Consolidated Tape (CT) has long been discussed in the context of European financial markets. The CT aims to aggregate data from multiple trading venues into a single, comprehensive feed, providing a real-time view of market activity.

Benefits of a Consolidated Tape

• Enhanced Market Transparency: By consolidating data from various sources, the CT provides a unified view of trading activity, helping participants make more informed decisions.
• Improved Best Execution: A comprehensive market overview supports best execution requirements, ensuring that investors achieve the best possible prices.
• Increased Market Efficiency: The CT mitigates data fragmentation, fostering a more efficient and competitive market environment.
• Strengthened Regulatory Oversight: Regulators benefit from a single source of comprehensive market data, facilitating more effective monitoring and enforcement.

Implementation Challenges

Despite its benefits, implementing a CT presents significant challenges, including:

• Data Standardization: Ensuring uniformity in the data reported by various trading venues.
• Governance: Establishing a robust governance framework to oversee the CT’s operation and maintenance.
• Cost Allocation: Determining how the costs of developing and maintaining the CT will be shared among market participants.
• Venue Cooperation: Securing the participation and cooperation of all trading venues to ensure comprehensive data coverage.

ESMA has releases their technical standards consultation paper and industry feedback is currently being submitted for ESMA’s review and consideration. ⁴