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Foreword
The Markets in Financial Instruments Directive (MiFID) adopted in 2004 revolutionised the trading landscape in Europe. It paved the way for alternative trading venues and algorithmic trading, at a time when these were just emerging, to become dominant features. Seven years later, the Commission proposed a ‘MiFID review’ to extend the scope and depth of the legislation to the full range of capital markets, a timely move as European economies struggle to find new sources of funding.
Finance Watch welcomes the Commission’s ambitious proposals to strengthen the powers of regulators and investor protection, reinforce regulatory and market transparency and address challenges such as high frequency trading and the ‘financialisation’ of commodity derivative markets. We support as well efforts by the Parliament to enhance the text.
Nevertheless, we believe there are still areas that can be improved and consider it vital that proposals are not watered down at the final stages. The spotlight will be shortly on the Council, who we are confident will stick to the EU’s G20 commitment to take strong measures to avoid another financial crisis by securing financial market stability and discouraging practices that harm the real economy and society.
Introduction
After the 2008 financial crisis, the G20 has clearly signalled that ‘less is more’ is no longer a valid maxim in financial regulation, whether in relation to lending to consumers, securitization and repackaging of risks by banks, or oversight of professional investors and trading of financial instruments including complex instruments.(1)
Self-regulation did not always bring benefits
The last 30 years – and the most recent half of that period in particular – showed us that self-regulation in the markets for equities, bonds and derivatives did not always bring financial stability and benefits to society.
A system of self-regulated markets designed to promote competition resulted instead in the concentration of market power in a few hands, the rise of complex ‘ad hoc’ market structures and deregulation. Regulators must address these features head on if they are to restore stability and fairness to financial markets, remembering always that markets should adapt to regulations, not the other way around.
Ending short-termism will hurt
Policy makers rightly wish, in a period of economic underperformance, to re-direct capital from short-term and often speculative strategies to long-term investment in the economy. For those who have benefited from short-term strategies this shift is going to hurt. There is no point denying this. But over time, this reality will allow business models to adapt and be renewed for the benefit of all. In that respect, we must keep in mind the market’s primary purpose of capital allocation and remember that the costs of financial intermediation are only ever justified if they serve the needs of those ultimately supplying or consuming that capital. Finance Watch is of the view that policy makers should seriously question the usefulness of financial activities that are not customer facing or that do not contribute to bringing capital to productive use.
A shift from short-term ‘betting’ strategies towards longer-term investment would transform the financial system into one that serves the real economy and society as a whole. It is our view that this shift, which could be summed up as ‘investing not betting’, is central to any public interest analysis of MiFID2.(2)
You cannot hedge the whole system
Central to this is the realisation that capital must share the fate of the broader economy: if the economy succeeds, it generates returns; if the economy fails, it incurs losses. Hedging can make sense at a micro-level but there is no such thing as hedging away all risks at a macro level. A system that tries to do this is not only an illusion but also a recipe for disaster. Someone must hold the ‘hot potato’ at the end of the chain; this rule suffers no exception.
For the MiFID review to restore trust in Europe’s financial markets it must encourage markets that deliver social benefits, including returns for savers, efficient capital allocation, price formation and appropriate risk management instruments.
(1) European Commission, MiFID IA, p.4.
(2) The terms ‘MiFID review’, MiFID2/MiFIR and MiFID2 all refer to the same legislative package, which is referred to in this report as MiFID2
Author: Benoît Lallemand
Editors: Thierry Philipponnat, Greg Ford, Emily McCaffrey
Acknowledgements: We are grateful to the Members of
Finance Watch, and in particular to the MiFID working group for their invaluable input and for the work done in common while preparing this report.
Read the position paper :
http://www.finance-watch.org/wp-content/uploads/2012/04/Investing-not-betting-Finance-Watch-position-paper-on-MiFID-21.pdf
The Markets in Financial Instruments Directive (MiFID) adopted in 2004 revolutionised the trading landscape in Europe. It paved the way for alternative trading venues and algorithmic trading, at a time when these were just emerging, to become dominant features. Seven years later, the Commission proposed a ‘MiFID review’ to extend the scope and depth of the legislation to the full range of capital markets, a timely move as European economies struggle to find new sources of funding.
Finance Watch welcomes the Commission’s ambitious proposals to strengthen the powers of regulators and investor protection, reinforce regulatory and market transparency and address challenges such as high frequency trading and the ‘financialisation’ of commodity derivative markets. We support as well efforts by the Parliament to enhance the text.
Nevertheless, we believe there are still areas that can be improved and consider it vital that proposals are not watered down at the final stages. The spotlight will be shortly on the Council, who we are confident will stick to the EU’s G20 commitment to take strong measures to avoid another financial crisis by securing financial market stability and discouraging practices that harm the real economy and society.
Introduction
After the 2008 financial crisis, the G20 has clearly signalled that ‘less is more’ is no longer a valid maxim in financial regulation, whether in relation to lending to consumers, securitization and repackaging of risks by banks, or oversight of professional investors and trading of financial instruments including complex instruments.(1)
Self-regulation did not always bring benefits
The last 30 years – and the most recent half of that period in particular – showed us that self-regulation in the markets for equities, bonds and derivatives did not always bring financial stability and benefits to society.
A system of self-regulated markets designed to promote competition resulted instead in the concentration of market power in a few hands, the rise of complex ‘ad hoc’ market structures and deregulation. Regulators must address these features head on if they are to restore stability and fairness to financial markets, remembering always that markets should adapt to regulations, not the other way around.
Ending short-termism will hurt
Policy makers rightly wish, in a period of economic underperformance, to re-direct capital from short-term and often speculative strategies to long-term investment in the economy. For those who have benefited from short-term strategies this shift is going to hurt. There is no point denying this. But over time, this reality will allow business models to adapt and be renewed for the benefit of all. In that respect, we must keep in mind the market’s primary purpose of capital allocation and remember that the costs of financial intermediation are only ever justified if they serve the needs of those ultimately supplying or consuming that capital. Finance Watch is of the view that policy makers should seriously question the usefulness of financial activities that are not customer facing or that do not contribute to bringing capital to productive use.
A shift from short-term ‘betting’ strategies towards longer-term investment would transform the financial system into one that serves the real economy and society as a whole. It is our view that this shift, which could be summed up as ‘investing not betting’, is central to any public interest analysis of MiFID2.(2)
You cannot hedge the whole system
Central to this is the realisation that capital must share the fate of the broader economy: if the economy succeeds, it generates returns; if the economy fails, it incurs losses. Hedging can make sense at a micro-level but there is no such thing as hedging away all risks at a macro level. A system that tries to do this is not only an illusion but also a recipe for disaster. Someone must hold the ‘hot potato’ at the end of the chain; this rule suffers no exception.
For the MiFID review to restore trust in Europe’s financial markets it must encourage markets that deliver social benefits, including returns for savers, efficient capital allocation, price formation and appropriate risk management instruments.
(1) European Commission, MiFID IA, p.4.
(2) The terms ‘MiFID review’, MiFID2/MiFIR and MiFID2 all refer to the same legislative package, which is referred to in this report as MiFID2
Author: Benoît Lallemand
Editors: Thierry Philipponnat, Greg Ford, Emily McCaffrey
Acknowledgements: We are grateful to the Members of
Finance Watch, and in particular to the MiFID working group for their invaluable input and for the work done in common while preparing this report.
Read the position paper :
http://www.finance-watch.org/wp-content/uploads/2012/04/Investing-not-betting-Finance-Watch-position-paper-on-MiFID-21.pdf
