Dutch Regulator AFM Provides Policy Recommendations for MiFID II

Dutch regulator the Authority for the Financial Markets (AFM) has published its policy recommendations this Tuesday in connection with the current review of MiFID II taking a look at the areas of equity, commodities and investor protection.

At present, the European Commission and the European Securities and Markets Authority (ESMA) are reviewing MiFID II, which came into effect on the 3rd of January 2018. In light of this, the AFM has carried out its own study and put forth its own recommendations based on this.

“Central underlying themes for equity are whether transparency has increased sufficiently, what the impact is on Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term and how the market structure has changed, as a consequence of MiFID II,” the Dutch regulator said in its statement today.

“For commodities, we investigated the impact of the introduction of position limits, position management controls and pre-trade transparency requirements for trading venues that trade in commodity derivatives in the Netherlands. The MiFID II regime has enhanced retail and professional investor protection throughout the European Union (EU).

Whilst the AFM lays out a number of recommendations, which can be viewed here, some of them include the role that high-frequency trading firms play in the trading markets and whether measures such as speedbumps and periodic auctions are necessary.

AMF: HFT firms play a valuable role

According to the report, the Dutch watchdog believes that HFT firms are acting as genuine Liquidity Providers Liquidity Providers A liquidity provider (LP) constitutes either individual and/or institution that functions as a market maker in a given asset class. Broadly speaking, liquidity providers will act as the both the buyer and seller of a particular asset, thus making a market. In the equities space, many stock exchanges rely on liquidity providers who make the commitment to provide liquidity in a given equity. These liquidity providers commit to providing liquidity in the hopes that they will be able to make a profi A liquidity provider (LP) constitutes either individual and/or institution that functions as a market maker in a given asset class. Broadly speaking, liquidity providers will act as the both the buyer and seller of a particular asset, thus making a market. In the equities space, many stock exchanges rely on liquidity providers who make the commitment to provide liquidity in a given equity. These liquidity providers commit to providing liquidity in the hopes that they will be able to make a profi Read this Term and play a valuable role in the market structure and price formation process, after discussions with various market participants.

“We are therefore not necessarily a proponent of the introduction of speedbumps or similar forms of barriers that could hamper the manner in which trading information is equally accessible to different types of participants, unless there are real concerns that a level playing field is impacted by low latency advantages of HFT firms,” the regulator said in its reports.

Taking a look at the MiFID II position limit regime for commodity derivatives, the watchdog believes that it has been working reasonably well for well-developed benchmark contracts.

“The AFM suggests to review and amend RTS 21 for less liquid contracts to capture the MiFID II objective of having position limits which prevent market abuse. The AFM also acknowledges that the scope of the position limit regime should be narrowed down to focus on benchmark physically settled contacts only.”