ECMI Policy Brief

In their assessment of the Markets in Financial Instruments Directive (MiFID), adopted by the EU in April 2004 and implemented at Member State level by the end of 2007, Karel Lannoo and Diego Valiante find that the legislation has been remarkably successful in terms of improving market structure and efficiency. In their view, the upcoming MiFID review should therefore take a ‘light touch’, clarifying some definitions and extending price transparency to related segments of securities markets.

The European asset management industry is feeling squeezed from all sides, as a result of growing prudential, product and conduct regulation. A new Directive, UCITS IV, has only just been enacted, and already new challenges are emerging in the regulation of hedge and venture capital funds, the review of the regulatory regime for depositaries (or financial custodians) and amendments to the MiFID Directive. In addition, a new European supervisory framework is in the making, which implies much stricter controls on enforcement.

Since 2003, the EU and the US have conducted a vibrant regulatory dialogue on financial regulation, but domestic priorities seem to have taken precedence in response to the financial crisis. This ECMI Policy Brief compares the institutional and regulatory changes occurring on both sides of the Atlantic. On the institutional side, it compares macro- and micro-prudential reforms. On the regulatory side, it compares four key areas: bank capital requirements, reform of the OTC derivative markets, and the regulation of credit ratings agencies and hedge funds.

The financial crisis has sharpened the debate on Europe’s back office architecture. This paper reviews the ECB’s decision to proceed with its Target 2 Securities (T2S) project, which aims to establish a common IT platform for securities settlement, reducing differences between current infrastructures. The apparently solid configuration of the project shakes, however, when we closely examine the impact of this common infrastructure on the competitive landscape.

Credit ratings are a quasi-public good, and investors and financial markets regulators need an independent assessment of the credit-worthiness of an issuing entity because of information asymmetries and principal agent problems. In light of the high volatility of market-based measures and the failure of internal risk management, private CRAs are best fit for purpose. However, natural barriers of entry in the rating business and conflicts of interest have led to an inflation of ratings and a deterioration in their quality.

There remains considerable confusion as to how exactly the MiFID and UCITS directives will interact in the long run. This uncertainty reflects the growing pains of a regulatory transformation that represents no less than a tectonic shift from intense and prescriptive product regulation to a more flexible, principles-based regulation of management functions. Unlike UCITS, MiFID is a horizontal directive that cuts across the entire financial services industry (except for insurance).

by Karel Lannoo

by Karel Lannoo

by Peter G. Dunne

by Karel Lannoo