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European laws still apply after “Brexit” says UK FCA – but the buy-side say MiFID II is not designed in the best interest of the end investor

The future of the UK’s financial markets could be up for grabs, following a shock victory for the “leave” campaign in Britain’s EU referendum last night.

The nation awoke to find that the “leave” campaign had won by 51.9% versus 48.1% for “remain”.

In an official statement, the FCA has stated that any future decisions will have to be taken by the UK government; in the meantime it reminded the industry that it is still bound by all existing regulations and laws, including those from Europe.

“The FCA is in very close contact with the firms we supervise as well as the Treasury, the Bank of England and other UK authorities, and we are monitoring developments in the financial markets,” said the FCA in its official statement. “Much financial regulation currently applicable in the UK derives from EU legislation. This regulation will remain applicable until any changes are made, which will be a matter for Government and Parliament.”

The regulator added that firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect.

However, the end of the UK’s relationship with Europe throws into question the longer term arrangements of the UK with regard to MiFID II, the magnum opus of European legislation which is due to take effect in the UK in January 2018. While that date is within the two-year “grace” period before the UK would actually leave the EU, the FCA could potentially put the UK on a different path, since the directive has to be transposed into national law by the national regulator in each country.

For the present, the FCA has refused to comment on its longer term plans, stating that the overall regulatory framework for the UK will depend, in part, on the relationship that the UK seeks with the EU in the future. “We will work closely with the Government as it confirms the arrangements for the UK’s future relationship with the EU,” said the FCA in its official statement.

Nevertheless, UK investors are questioning whether aspects of MiFID II – including the caps on dark trading, prohibiting broker crossing networks (BCNs) and the transparency regime for fixed income – are really in the best interest of end investors. Feedback received by K&KGC from its own buy-side community suggests that the buy-side is seriously discontented with these measures, which would appear to benefit national exchanges to the detriment of the long-term investor.

The dark pool volume caps due to be introduced under MiFID II will force non-displayed venues to cease trading any stock once it crosses a 4% or 8% volume threshold. This measure, ostensibly intended to force flow back onto the lit markets, was introduced on the spurious grounds that dark pools undermine price formation. However, while we have not seen evidence to support such statements, the regulators should prioritise the fact that non-displayed institutional trading is an effective mechanism to protect the best interest of millions of underlying investors. Many participants in the industry believe that these measures are simply a result of the greater lobbying power of the exchanges in Brussels rather than a sensible, objective policy in the interests of investors.

There has also been great frustration at the term “dark pools”, which is felt by many in the industry to be unhelpful. The suspicion that regulators are punishing “dark pools” including BCNs merely because of misunderstanding about the name (it’s dark so it must be nefarious) combined with lobbying pressure from exchanges has also upset the buy side.


Concerns over the fixed income transparency regime have repeatedly been raised at K&KGC’s buy-side debates, with many participants seriously alarmed that the effect of too much transparency could have a damaging impact on liquidity, undermining the ability of the fixed income markets to function which could threaten the possibilities for millions of people to retire comfortably in the future.


Therefore, given the UK vote in favour of Brexit, K&KGC proposes that the UK FCA might consider which parts of MiFID II are in the interests of investors, and which parts should be discarded.

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