Trying to enforce Mifid II could kill it

The FT reported yesterday (paywall) that the European Securities and Markets Authority (ESMA) has issued guidance toughening the rules on securities trading transparency.

Under the upcoming Mifid II rules, banks will no longer be able to offer clients fixed income products kept on their own books (which accounts not only for most fixed income trading in the market, but also for a large chunk of bank trading profits).

The new statement closes a loophole that would have allowed banks to band together to form “dark pools”, effectively trading securities on the books of other members in the group, without needing to go through pesky public exchanges.

ESMA has made clear that any such group would need regulatory approval.

The potential consequences of this clampdown (and all the others embedded in Mifid II) could on the one hand be positive: increased transparency is likely to push down bond prices and open up the market.

Or, they could be negative: rather than make bond trading more transparent, the market movers (mainly banks) could decide to curtail their trading operations, which could result in a less liquid market.

The potential negative impact could also be what ends up killing Mifid II implementation.

Why? Because of the power of the banks.

Let’s backtrack a bit: Mifid II is all about increasing the transparency of securities markets, and enhancing investor protection.

Equities are already mostly transparent. The same cannot be said of fixed income, where trading has traditionally been over-the-counter (OTC).

Banks dominate the fixed income market, where they make most of their money (allegedly due to the lack of transparency). As the deadline for implementation approaches, we could well start to see significant pushback from an influential sector.

Surely ESMA could tell the banks to shut up and behave? If you have small children, you know how that generally turns out. Any large bank could resort to the typical two-year-old defense of “I’m going to hold my breath until you do what I want”. And it’s unlikely that ESMA will want a messy bank failure on its hands.

Giphy
Giphy

Also, one of the largest purchasers of bonds in Europe is the European Central Bank, which has been buying fixed income at the not inconsiderable rate of €80bn a month (now down to €60bn). I doubt very much that they will be happy with a change that is likely to reduce bond prices, let alone one that could provoke a contraction in liquidity. There aren’t enough bonds to meet demand as it is.

Furthermore, a possible result of the clampdown will be a migration of the market for European bonds to the US, which has a more relaxed attitude to bank bond trading. Since a large chunk of Trump’s cabinet seems to be made up of ex-investment bankers, that attitude is unlikely to change any time soon.

Losing an important market to the US is not something that the various organizations with confusing initials that currently govern Europe are likely to be happy about.

So poor, beleaguered ESMA could well come under pressure to go easy on market transparency. But if it does, then Mifid II unravels. Parts of it could still be implemented, and brokerage houses and asset managers will still have to scramble to improve reporting and lower costs. But the essence, the need to increase market transparency to protect investors and to avoid a repetition of the financial crisis, will be tainted.

Intriguing public comments on the Bitcoin ETF proposal

by Gemma Evans via StockSnap
by Gemma Evans via StockSnap

While you have most likely heard about the upcoming decision by the SEC on whether or not to approve the proposed Winklevoss Bitcoin ETF (given that most mainstream press is attributing the recent bitcoin price increase to positive expectations), what you maybe didn’t know is this:

Comments sent to the SEC advising on this decision are public. Anyone can tell the SEC what they think. And you can see what they wrote.

It’s fascinating, especially since some sector influencers have sent in their opinions.

For instance, Joshua Lim and Dan Matuszewski of Circle Internet Financial write:

“Both institutional and individual investors stand to benefit from the potential listing of the Winklevoss Bitcoin Shares. Such a listing would create a trusted, safe, transparent and regulated entry point into this maturing asset class, which is growing in importance as an investible store of value globally.”

Chris Burniske of ARK Invest (manager of the first ETF to invest in bitcoin) disagrees:

“After thorough examination, we think it would be premature to launch a bitcoin ETF because we do not believe the bitcoin markets are liquid enough to support an open-end fund, or that an ecosystem of institutional grade infrastructure players is yet available to support such a product.”

Attorney and professor of law Philip Chronakis is in favour:

“Denial of the proposed rule will not stop Bitcoin’s progress, but approval of the proposed rule, and the underlying COIN ETF, will put the SEC in the ideal position to oversee Bitcoin’s development as an investment asset – and provide fair, broad-based investment opportunities for not only the connected (or technologically savvy) few, but to all Americans who deserve the same chance to benefit from this technological breakthrough and financial opportunity.”

Michael Lee is against, and sheds some interesting light on recent price movements:

“The price of bitcoin is being heavily manipulated at this very moment on exchanges which somehow began the day of the SEC’s Feb 14th meeting but before the news of this very meeting was released to the public. Currently, we are at all time highs based on rumors and speculation on this meeting alone and it feels like we are again in a price bubble which could result in a huge loss for new investors. An approval of the COIN ETF at this time would only exacerbate this bubble and result in a price crash even before ETF trading will be fully available.”

Ben Elron uses stirring language:

“The Bitcoin ETF represents a rare opportunity for our country to embrace a revolutionary financial technology (the blockchain) with relatively low risk. Indeed, if approved, this fund would arguably be the most transparent, efficient and secure instrument ever offered – requisites enumerated in the Commission’s founding charters.

Blockchain is the future. If American regulators fail to embrace it, others will, and we will then be forced to follow. Let us lead once again.”

And in a somewhat quirky and impassioned comment, Diego Tomaselli implores:

“We understand your role is to protect the American Investor.

Please, just don’t forget to protect also the American Spirit.”

The magnitude of the price bump that approval would generate is uncertain. Given that the bitcoin price has increased by more than 18% since the beginning of the year, a case could be made that approval is already largely priced in.

Today CoinDesk revealed that GABI (currently one of the largest institutional investors in bitcoin) believes that the market is over-optimistic and is therefore reducing its holdings. Since early yesterday morning, the price has been falling, and at time of writing is down almost 8%.

Whatever happens over the next few days, it’s safe to assume that the bitcoin price will be volatile. Which may not be what you want in the underlying asset of an ETF.

That said, I’m hoping that it gets approved. 🙂