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UK FSA pushes for Mifid II rethink on OTCs

Tuesday 31 January 2012 – by Karina Whalley

 The UK financial services watchdog has called for Mifid II to lift restrictions on OTC derivative dealers and allow them to use their own capital when trading on organised trading facilities.

David Lawton, acting director of markets at the Financial Services Authority, warned on Monday that the limitations set out in the draft proposals could cause a reduction in liquidity in derivative markets.

Europe’s revised Markets in Financial Instruments Directive defines a new type of trading venue, the organised trading facility, as the basis for bringing an existing trading space for liquid and standardised OTC derivatives within a more structured regulatory box.

But Lawton said: “One area, however, where we think the proposals may need amendment is the restriction preventing OTF operators from using their own capital in their OTF.”

He said that the FSA estimates over 95 per cent of dealer-to-client trades in the European interest rate swaps market, which is by far the largest category of derivative, are against the dealer’s own capital.

“We therefore have concerns that, as currently drafted, there will be significant withdrawal of liquidity in those markets,” Lawton told the British Bankers’ Association Mifid conference in London.


The FSA instead advocates putting in place “rigorous conflicts management processes” as is already required for multilateral trading facilities, to achieve operator neutrality and fair and orderly trading within the OTF, he said.

Lawton said further analysis is still needed to better understand how market microstructure changes affect market behaviour and stability but said the FSA supports more robust and legally enforceable risk controls for all firms and trading venues in relation to their automated trading.

He also welcomed proposals for the regulation of firms that are direct members of a trading venue but fall outside the scope of Mifid I.

There has been much industry objection to Mifid II bringing greater pre-trade transparency to OTC markets as it has done with equities. OTC and equities have very different characteristics and there are fears OTC pre-trade transparency will put at risk long standing market operations for uncertain benefits.


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