In October, the European Commission is expected to publish the proposed legislation for Mifid II, which is designed to promote transparency and harmonise regulations across trading facilities.

The report by GreySpark warned against Mifid II adopting a universal approach for market segments and called on legislators to introduce rules concerning pre and post trade transparency as well as the push to exchange trading for some instruments in phases across asset classes.

Fred Ponzo, managing partner at GreySpark, said: “Mifid II is wide in scope and has a lack of precision in areas such as the treatment of commodity derivatives. It is clear that some of the proposals are there to appease the public.”

Watered down

Despite this, the GreySpark report said that it was unlikely that some of the more controversial aspects of Mifid II will be published in the draft due out this autumn.

The consultancy predicted that FX and Forward FX contracts will be deemed “pure OTC” due to the requirement to specify nominal amounts. “Too much standardisation reducing hedging efficiency for a corporate client base, which would run contrary to Mifid objectives,” it said.

In addition, it is unlikely that Mifid will grant powers for local regulators to introduce position limits and intervene at any stage of the derivative contract. “This power would create a further level of uncertainty in markets as to whether contracts will be settled without intervention from authorities,” the report said.

This casts doubt on the spectre of position limits in commodity trading, much feared by some market participants who claim that they unfairly discriminate against certain investors.

The GreySpark report also pointed out that position limits are unlikely due to the “administrative overhead” involved in the market analysis required to determine meaningful levels.

For investment banks, GreySpark identified three key areas where the traditional business model may be affected: parameters of relationships with corporate and commercial clients, investment in technology and the search for more efficient funding structures in the wake of higher margin requirements.

Margins are predicted to shrink on equity and equity-like instruments, such as ETFs, as the costs associated with greater pre-trade transparency impact on costs.

In terms of high frequency trading, the report said that it is unlikely that individual algorithms will be required to be made available as was feared but warned that minimum tick sizes and the introduction of a limit for the ration of orders to transactions could impact on the trading strategy.

European SEFs

Mifid II looks certain to mandate that OTFs will be subject to the same oversight and authorisation legislation as MTFs, although details on exactly what form these structures will take has been vague on both sides of the Atlantic.

Ponzo said that the legislation should set out minimum requirements for operating OTFs, specifying minimum standards and a minimum set of specifications.

The introduction of OTFs or “European SEFs” as they have been termed due to their expected similarity in structure to the Swap Execution Facilities being set up in the US is a key issue for the industry.

According to the WMBA, the creation of a facility that “unambiguously recognises and endorses the multiple means deployed by IDBs to execute multi-asset derivative transactions” is an essential component of regulatory reforms.

Alex McDonald, chief executive of the WMBA, said: “There is much healthy debate on how to optimise execution mechanisms and post-trade infrastructure of the OTC derivatives markets. As the gatekeepers of OTC liquidity, the inter-dealer brokers are essential solution providers to both market users and supervisory bodies.

“While the rulemaking process continues, the inter-dealer brokers have continued to design, build and offer electronic execution mechanisms and sophisticated post-trade solutions geared specifically to minimise counterparty and operational risk and to ensure that customers, and their transactions, will be compliant with future regulations.”

Features