IEA: Brexit is an opportunity to opt out of "burdens" of European-wide regulation
25 September 2018 London
Image: Shutterstock
“The second Markets in Financial Instruments Directive (MiFID II) has not improved liquidity in the markets, which most [industry] participants believe is the major problem”, according to Institute of Economic Affairs (IEA).
The institute made this comment in a white paper, entitled ‘Plan A+: Creating a prosperous post-Brexit UK’, in which it suggested Brexit is an opportunity to opt out of some of the "burdens” 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.”
“MiFID 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.”
In relation to securities lending, IEA stated: “UK regulators should also drop the EU’s preoccupation with short selling.”
The institute said: “The 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.”
“In 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”, it added.
The white paper also delved into the world of double volume caps (DVC). It said after Brexit, “the 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 “hurt the heavily traded, UK markets, making it more difficult for large investors to trade in large sizes without moving the market price against them”.
It added: “The UK has a comparative advantage in asset management and trading, and should not risk losing this market due to a trading limit set for smaller and low volume EU markets.”
It was also reported in the whitepaper that “reducing the burdens of MiFID II regulations on small firms, especially excessive data collections, the ‘suitability and appropriateness’ assessments, as well as the “complex” investment determinations for retail clients, would all help to expand private client investments” post-Brexit.
In addition, the institute claimed reducing MiFID II’s rules after the UK’s exit from the EU could “improve the capital-raising process for new companies, which predominantly rely on private client investors”.
It suggested: “When [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.”
The institute made this comment in a white paper, entitled ‘Plan A+: Creating a prosperous post-Brexit UK’, in which it suggested Brexit is an opportunity to opt out of some of the "burdens” 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.”
“MiFID 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.”
In relation to securities lending, IEA stated: “UK regulators should also drop the EU’s preoccupation with short selling.”
The institute said: “The 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.”
“In 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”, it added.
The white paper also delved into the world of double volume caps (DVC). It said after Brexit, “the 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 “hurt the heavily traded, UK markets, making it more difficult for large investors to trade in large sizes without moving the market price against them”.
It added: “The UK has a comparative advantage in asset management and trading, and should not risk losing this market due to a trading limit set for smaller and low volume EU markets.”
It was also reported in the whitepaper that “reducing the burdens of MiFID II regulations on small firms, especially excessive data collections, the ‘suitability and appropriateness’ assessments, as well as the “complex” investment determinations for retail clients, would all help to expand private client investments” post-Brexit.
In addition, the institute claimed reducing MiFID II’s rules after the UK’s exit from the EU could “improve the capital-raising process for new companies, which predominantly rely on private client investors”.
It suggested: “When [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.”
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