1. 14/05/2015 1 MiFID and Reg NMS: a test-case for substituted compliance? Karel Lannoo Centre for European Policy Studies (CEPS) www.ceps.eu www.eurocapitalmarkets.org

2. 14/05/2015 2 MiFID and NMS “Omnis comparatio claudicat” Two substantive pieces of regulation, came into force at about the same time, only co- incidence? –Best execution concept at the centre –But substantial differences in regulation and supervision of equity trading How will it apply on transatlantic level?

3. 14/05/2015 3 What is MiFID? Update of 1993 ISD Drastic change in the regulation of financial markets, opening-up of networks (cfr. telecoms) Liberalisation of execution venues, abolition of monopoly of exchanges. 3 types of “venues”: –Regulated Markets (exchanges) –MTF’s –Systemic Internalisers (banks) Higher protection of investors –“Best execution” on the basis of a broad set of criteria –Client suitability criteria or obligation to create a client profile –Strict regulation of pre- and post-order price transparancy for equity securities –Other conduct of business rules

4. 14/05/2015 4 What is Reg NMS? Based upon the 1934 Securities Market Act Builds upon the 1975 National Market System (NMS): unified system for buy and sell orders of equity securities, aimed to stimulate competition between markets, but at the expense of liquidity? 4 key provisions –Order protection rule: prohibition of trade through (best execution), but with many exceptions –Access rule: limitations of fees a trader can charge to access protected quotations –Sub-penny rule: rules on pricing of quotations (not less than 1 cent) –Market data rules: rules on single data consolidator

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8. 8 Differences more pronounced Reg NMS is protective of exchanges, MiFID liberalises (execution venues, data) Definition of best execution: more principle in EU (series of criteria, tailored), more rule in US (only price, but with many exceptions), but which one is most effective? Best execution applies to exchanges in US Elements of price regulation in US are surprising to Europeans Single data consolidator, single settlement system in the US

9. 14/05/2015 9 “Substituted compliance” Tafara-Peterson article SEC interested in a form of bilateral mutual recognition, based upon –agreement on minimum standards –comparability assessment –developed system of exchange of information (MoU) between supervisors No race to the bottom, but healthy degree of regulatory competition, “race to optimality” 4 step process

10. 14/05/2015 10 Problems to EU-US mutual recognition with MiFID-Reg NMS the definition of best execution differences in the role of data consolidators in both markets differences in the role and performance of clearing and settlement systems the different supervisory set-up on both sides, with a big role for self-regulatory organisations in the US, and varying degrees of supervisory effectiveness and enforcement in the EU

11. 14/05/2015 11 Conclusion MiFID and Reg NMS are only at first glance very similar –Best execution –Context is different Will transatlantic markets create opportunity for arbitrage? EU to use interest of SEC in more mutual recognition to get better market access Start detailed comparison between MiFID and Reg NMS