The Markets in Financial Instruments Directive (MiFID) will lead to a deterioration in the transparency of IPOs and undermine smaller stock exchanges in Europe, by obliging firms that “internalise” trades to publish the prices at which the trades are matched. Or so says the Federation of European Securities Exchanges (FESE) in its response to the European Commission consultation on MiFID.
FESE is critical of several proposals in MiFID, but especially its definition of liquid shares. The definition of a ‘liquid share’ is crucial, says FESE, because it says that securities firms which do not pass on their clients’ orders to an exchange but deal through their own books (so-called ‘internalisers’) will have to comply with minimum transparency requirements by publishing firm quotes. The publication of such quotes is only mandatory for shares that are regarded liquid.
Internalisers would like to have a very high threshold, says FESE, which would qualify many shares as illiquid and so exempt them from transparency. Internalisers argue that they would otherwise be stuck with such illiquid shares after honouring a mandatory quote.
“We have to consider the overall interest of Europe’s capital markets,” says Massimo Capuano, FESE President. He says he understands the argument but is not convinced, adding that transparency is a key element in creating trust. “By subtracting a substantial part from transparency requirements you are effectively making markets less transparent for the investor and issuer community.”
Capuano says he is particularly worried about the proposed new rule on IPOs. According to the latest Commission proposals, any share that comes new to the market will be exempted from liquid share status – and thus from transparent internalisation – for six months, regardless of the size of the IPO and the trading activity.
“This is unthinkable,” argues Judith Hardt, Secretary General of FESE. “Think of giant share issues such as Deutsche Telekom or Vodafone that immediately jumped to the top of turnover tables. To claim it cannot be predicted that some IPOs will bring highly liquid shares is a farce.”
FESE demands that market activity after an IPO be estimated ex-ante on the basis of previous offers of comparable size and attractiveness, as had been suggested by the Committee of European Securities Regulators (CESR) in an advice to the Commission. “When regulators feel comfortable that they can make estimates of a new share’s expected liquidity, why should the Commission doubt this?” asks Hardt. “It is in the first days and weeks after the IPO that transparency in trading is most important for new shares. Investors know this, regulators know this – and we do.”
The Federation of European Securities Exchanges (FESE) is the association of regulated securities and derivatives markets in Europe. Having incorporated EACH – the European Association of Clearing Houses – it now has 25 full members providing equity and derivatives trading services as well as central counterparty functions in 28 European countries (EU-25 plus Iceland, Norway and Switzerland). In addition, FESE has several corresponding members from other European countries.
The Federation is headquartered in Brussels.