IEA: Brexit is an opportunity to opt out of "burdens" of European-wide regulation
25 September 2018 London
Image: Shutterstock
鈥淭he second Markets in Financial Instruments Directive (MiFID II) has not improved liquidity in the markets, which most [industry] participants believe is the major problem鈥�, according to Institute of Economic Affairs (IEA).
The institute made this comment in a white paper, entitled 鈥楶lan A+: Creating a prosperous post-Brexit UK鈥�, in which it suggested Brexit is an opportunity to opt out of some of the "burdens鈥� of European-wide regulation.
It also suggested elements of MiFID II that hinder competition in the market should be reviewed post-Brexit.
It stated: [MiFID II] has created a major compliance burden for the industry, increasing the transaction data-gathering requirement by 270 percent, as well as adding best execution policies and onerous private client regulations.鈥�
鈥淢iFID II now requires 65 data points for every transaction by both buyer and seller, but it is beyond the ability of regulators to monitor this amount of information in any meaningful way. Under the first MiFID directive, implemented in 2007, only 24 data points were required, and even this was considered excessive by most market participants.鈥�
In relation to securities lending, IEA stated: 鈥淯K regulators should also drop the EU鈥檚 preoccupation with short selling.鈥�
The institute said: 鈥淭he idea that short selling is riskier than buying is partly a symptom of a nine-year-long bull market; in a bear market the reverse will be true.鈥�
鈥淚n the futures market, both long and short transactions may be uncovered by the underlying physical commodity and yet the futures market functions well, with margins required from both sides鈥�, it added.
The white paper also delved into the world of double volume caps (DVC). It said after Brexit, 鈥渢he UK financial authorities should abandon the DVC or at least increase it to the 11 percent and 17 percent recommended by the Financial Conduct Authority to The European Securities and Markets Authority (ESMA).
It claimed the present 4 percent and 8 percent caps 鈥渉urt the heavily traded, UK markets, making it more difficult for large investors to trade in large sizes without moving the market price against them鈥�.
It added: 鈥淭he UK has a comparative advantage in asset management and trading, and should not 锟紃isk losing this market due to a trading limit set for smaller and low volume EU markets.鈥�
It was also reported in the whitepaper that 鈥渞educing the burdens of MiFID II regulations on small firms, especially excessive data collections, the 鈥榮uitability and appropriateness鈥� assessments, as well as the 鈥渃omplex鈥� investment determinations for retail clients, would all help to expand private client investments鈥� post-Brexit.
In addition, the institute claimed reducing MiFID II鈥檚 rules after the UK鈥檚 exit from the EU could 鈥渋mprove the capital-raising process for new companies, which predominantly rely on private client investors鈥�.
It suggested: 鈥淲hen [the UK] leave[s] the EU, the UK should extend exemptions in regulations and increase the financial threshold so that start-up and disruptor companies can get more than just a foothold in the UK market.鈥�
The institute made this comment in a white paper, entitled 鈥楶lan A+: Creating a prosperous post-Brexit UK鈥�, in which it suggested Brexit is an opportunity to opt out of some of the "burdens鈥� of European-wide regulation.
It also suggested elements of MiFID II that hinder competition in the market should be reviewed post-Brexit.
It stated: [MiFID II] has created a major compliance burden for the industry, increasing the transaction data-gathering requirement by 270 percent, as well as adding best execution policies and onerous private client regulations.鈥�
鈥淢iFID II now requires 65 data points for every transaction by both buyer and seller, but it is beyond the ability of regulators to monitor this amount of information in any meaningful way. Under the first MiFID directive, implemented in 2007, only 24 data points were required, and even this was considered excessive by most market participants.鈥�
In relation to securities lending, IEA stated: 鈥淯K regulators should also drop the EU鈥檚 preoccupation with short selling.鈥�
The institute said: 鈥淭he idea that short selling is riskier than buying is partly a symptom of a nine-year-long bull market; in a bear market the reverse will be true.鈥�
鈥淚n the futures market, both long and short transactions may be uncovered by the underlying physical commodity and yet the futures market functions well, with margins required from both sides鈥�, it added.
The white paper also delved into the world of double volume caps (DVC). It said after Brexit, 鈥渢he UK financial authorities should abandon the DVC or at least increase it to the 11 percent and 17 percent recommended by the Financial Conduct Authority to The European Securities and Markets Authority (ESMA).
It claimed the present 4 percent and 8 percent caps 鈥渉urt the heavily traded, UK markets, making it more difficult for large investors to trade in large sizes without moving the market price against them鈥�.
It added: 鈥淭he UK has a comparative advantage in asset management and trading, and should not 锟紃isk losing this market due to a trading limit set for smaller and low volume EU markets.鈥�
It was also reported in the whitepaper that 鈥渞educing the burdens of MiFID II regulations on small firms, especially excessive data collections, the 鈥榮uitability and appropriateness鈥� assessments, as well as the 鈥渃omplex鈥� investment determinations for retail clients, would all help to expand private client investments鈥� post-Brexit.
In addition, the institute claimed reducing MiFID II鈥檚 rules after the UK鈥檚 exit from the EU could 鈥渋mprove the capital-raising process for new companies, which predominantly rely on private client investors鈥�.
It suggested: 鈥淲hen [the UK] leave[s] the EU, the UK should extend exemptions in regulations and increase the financial threshold so that start-up and disruptor companies can get more than just a foothold in the UK market.鈥�
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