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Markt-consultations-mifid@ec.europa.eu Interest Representative Register ID number: 5437826103-53

2 February 2011 Dear Sir/Madam,

Review of the Markets in Financial Instruments Directive (MiFID)

Thank you for providing us with an opportunity to respond to the MiFID consultation. The IMA represents the asset management industry operating in the UK. Our Members include independent fund managers, the investment arms of retail banks, life insurers and investment banks, and the managers of occupational pension schemes. They are responsible for the management of €4 trillion of assets, which are invested on behalf of clients globally. These include authorised investment funds, institutional funds (e.g. pensions and life funds), private client accounts and a wide range of pooled investment vehicles. In relation to the market facing issues, our member firms are a significant part of the buy-side voice in the EU In summary (the order reflects more the order of the paper than a priority):

1. We support the Commission in its proposals to address the quality of post-trade data in the equity markets. We consider the Commission should ensure it has powers to introduce a consolidated tape even if time is still given for an industry solution.

2. The diverse range of markets in the EU requires consideration specific to each market. We support introducing the concept of OTFs and ask for a work programme on sub-regimes. Additionally, transparency rules cannot be made for non-equity markets in general - nor are the equity markets necessarily a good starting place for such rules.

3. We support improved market surveillance across all organised markets. 4. We state that the interests of large investors such as the pension funds and savings pools

are not always served by lit trading. 5. We oppose a suggestion that UCITS should be split into complex and non-complex as this

fails to give due recognition to the regulation of this product and the required separation of roles which are themselves important components of investor protection.

6. We support an alignment of MiFID, UCITS, AIFMD and PRIPs so as to provide a level playing field for members and for the sale of products in the EU. The ability of national regulators to add domestic rules or to have the ability to use article 4 of MiFID’s implementing directive should be weighed up in that light.

7. Third country access by exemptive relief is important for maintaining the EU’s competitiveness.

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8. We support a more harmonised approach to the powers of supervisors and the sanctions imposed; making new rules will not be sufficient, existing rules should be more consistently enforced.

We would welcome an opportunity to discuss further liquidity measures for non-equity transparency as you develop your thinking. Yours sincerely Guy Sears Director, Wholesale

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2. DEVELOPMENTS IN MARKET STRUCTURES 2.1. Defining admission to trading (1) What is your opinion on the suggested definition of admission to trading?

Please explain the reasons for your views.

The Commission has not identified the purpose of this proposal. Extending the application of admission to trading to any financial instrument to be traded on an MTF or organised trading facility (OTF) would trigger obligations on issuers under the Market Abuse Directive, the Prospectus Directive and the Transparency Directive. Whilst the former may be appropriate, this might be seen to run counter to the SME work at the heart of the Commission’s concern. For example the AIM market in the UK is an MTF which trades the shares of small and medium sized companies. To treat a decision by an MTF to permit trading as equivalent to an admission to trading would lead to the issuers being treated equally in all respects as on a regulated market (save for the 18 month rule regarding prospectuses and trading on alternative RMs). We have wondered whether this proposal is about consent of issuers to the identity of those who trade in their shares, as this example has been raised publicly by an exchange. We would not support this suggestion in any case, as it fails to recognise that shares in a company are the property of their owners and not of the company. We would encourage the Commission to articulate its objective more clearly.

2.2. Organised trading facilities (2) What is your opinion on the introduction of, and suggested requirements for, a

broad category of organised trading facility to apply to all organised trading functionalities outside the current range of trading venues recognised by MiFID? Please explain the reasons for your views.

(3) What is your opinion on the proposed definition of an organised trading

facility? What should be included and excluded?

I. As regards question 2, it is understandable that the Commission wants to ensure that proportionate rules can be applied to many forms of trading systems and in principle we support this. An overly narrow definition is unlikely to be “future proof”, given the enormous variety of trading systems and the level of innovation seen in financial markets. OTFs will of course include a very wide range of financial instruments as well. For this reason we understand why the Commission will want to adopt a wide definition. However, it is important that underneath such an umbrella definition, there is sufficient flexibility for regulators to address different sub-regimes in different and proportionate ways, particularly as the equity trading model cannot be readily adapted to other instruments (and has its own weaknesses).

II. As an example, the paper makes specific proposals in relation to BCNs as a distinct

sub-regime within the family of OTFs. The proposals are said to be “proportionate, [and] take into account to the hybrid nature of the business”. As will be seen later, we support the creation of a BCN sub-regime. But when it comes to other instruments, such as sovereign and corporate bonds, CDS or other financial

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derivatives, it will be critical to determine how to identify other sub-regimes (for example would sovereign debt and corporate debt form one or two sub-regimes?) and what should be any proportionate response. It is worth remembering that there are already wide powers to supervise the activities of firms when trading outside regulated markets and MTFs.

III. In terms of what would constitute a proportionate response, many of the matters

set out in the Commission paper already to apply to firms - even the specific notification of the OTF is something that could be requested by a supervisor. We do not object to their being specifically listed for an OTF, but there are several which as users of markets we agree should be considered. We would particularly identify the need for conflicts of interest management and disclosure, and also for a greater responsibility shared amongst all OTFs (and MTFs for that matter) in relation to market abuse.

IV. Other requirements will need to be considered on a sub-regime by sub-regime

basis. This would include rules on transparency (both pre- and post-trade) and thresholds above which an organised system would be required to offer non-discriminatory access to persons other than clients of the operator firm.

V. Regulators need to ensure that they have the necessary tools and information to carry out their functions. If every facility that could be an OTF needed to be notified, there is a risk competent authorities could be overwhelmed with information. The fast-moving nature of the market will mean updates will be frequently needed. It would assist the market if ESMA is given the powers to make rules identifying specific sub-regimes and the information required for each. There will be some facilities or systems which fall under a wide definition of OTF which ESMA may decide are not material, or where additional regulatory burden would be disproportionate - recognising that markets develop and such judgements need to be reviewed regularly. A clear workplan would be helpful.

VI. If the proposed revision of MiFID does not identify principles upon which

proportionality would be based, there is a risk that investment and innovation would be blighted. Businesses will not be able to foresee the range of expected regulatory responses when sub-regimes other than equity BCNs are tackled by ESMA in due course. Additionally, the Commission should carefully consider the barriers to entry that will be created by introducing OTF sub-regimes and the extent to which competition is thereby reduced, especially given the impact that may have on fees.

VII. The definition of OTFs proposed is so wide that it could capture systems in asset

management firms, particularly for crossing, subject to how the EMS/OMS exemptions are drafted. We would want to assist you wherever possible to determine what other systems should justifiably be exempted (though we recall how in MiFID I it was suggested large numbers of businesses would be impacted as SIs and in the event very few were seen). The Commission should ensure that any powers given to ESMA as suggested above also include the ability to exclude certain facilities and systems where this is proportionate.

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(4) What is your opinion about creating a separate investment service for operating an organised trading facility? Do you consider that such an operator could passport the facility?

This is a single market directive: passporting should be permitted for OTFs, or access

should be allowed across borders as with RMs. There should be no barriers to cross-border investment.

(5) What is your opinion about converting all alternative organised trading

facilities to MTFs after reaching a specific threshold? How should this threshold be calculated, e.g. assessing the volume of trading per facility/venue compared with the global volume of trading per asset class/financial instrument? Should the activity outside regulated markets and MTFs be capped globally? Please explain the reasons for your views.

Our members understand the rationale behind the proposal to require OTFs to convert to MTFs once they reach a certain size. It is legitimate to ask why a sub-set of the market could trade privately if it comprises a material part of the market - that is what we understand by the suggestion that there could be conversion to an MTF. We think the concern is still largely theoretical even in the equity market. For example, recent research by Tabb Group shows that many OTC reported trades are for CFDs and non-addressable transactions. We suspect the Commission’s key concern is about access to these systems and, in equities, about pre-trade transparency subject to waivers. But there are other rules which will need careful thought as well. For example, MTFs can defer the publication of some trades (this is conceptually unavailable to BCNs) and they can operate outside Articles 19, 21 and 22. We think further thought needs to be given to what it is hoped conversion to an MTF would bring in terms of investor protection and market integrity. We note as well there may be significant business model problems, but our immediate concern is as said about investor protection and market integrity. On the basis of current explanations, IMA members therefore do not agree with the proposal to convert all equity OTFs to MTFs once they have reached a specific threshold. If there were to be an upper limit, institutional investors would just go to another OTF to avoid pre-trade transparency. As regards non-equity markets, the suggestion is premature. Although RMs and MTFs are used in government bond markets and to a limited extent in corporate bonds, there is little organised trading currently in OTC derivatives. These markets should be subject to further review as they develop, rather than made subject to provisions now which pre-judge how they might develop.

2.2.2. Crossing systems (6) What is your opinion on the introduction of, and suggested requirements for, a

new sub-regime for crossing networks? Please explain the reasons for your views.

IMA members support the Commission’s proposals for a sub-regime for crossing networks for equities (BCNs) and the additional requirements regarding identifiers. On balance, they also support trade disclosure, trade by trade, in real time. A robust regulatory framework to help improve the quality of data would increase confidence in post-trade

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transparency and alleviate some of the misperceptions and concerns regarding crossing networks. However, the IMA would not support such a regime for non-equities without a considerable amount of work being done to analyse the impact in terms of operational issues and market impact. It is vital that debt issuance and trading are not adversely affected in the current economic environment. It is a concern throughout the paper that the term ‘non-equities’ is even used. There is no such natural category, and the difference between various instruments is substantial. The continued use of the term, as opposed to considering each class of financial instrument on its own merits, hampers dialogue on policy development.

(7) What is your opinion on the suggested clarification that if a crossing system is

executing its own proprietary share orders against client orders in the system then it would prima facie be treated as being a systematic internaliser and that if more than one firm is able to enter orders into a system it would be prima facie be treated as a MTF? Please explain the reasons for your views.

We think it is right to address the two different circumstances. We can also appreciate that if a firm were allowed to execute its own proprietary share orders, it could use it as an avoidance mechanism. But we cannot see that the proposal to treat the firm as an SI brings benefits to investors. We think that preparing thousands of quotes at retail size serves no purpose, as the experiences of various SIs clearly demonstrates. We could support the concept that if more than one firm is able to enter orders into a system, that system should be treated as an MTF, but it will be important to understand the details and be clear as to how that positioning works to support the market.

2.2.3. Trading of standardised OTC derivatives on exchanges or electronic trading platforms where appropriate

(8) What is your opinion of the introduction of a requirement that all clearing

eligible and sufficiently liquid derivatives should trade exclusively on regulated markets, MTFs, or organised trading facilities satisfying the conditions above? Please explain the reasons for your views.

We agree with the G20 aim of ensuring that, where appropriate, trading in standardised derivatives moves to exchanges or electronic trading platforms. If done properly, such a move could lead to better pricing and more transparency, both of which would benefit investors. We also agree with the overall G20 objectives of increasing transparency, mitigating systemic risk and protecting against market abuse. However, we do not believe it is necessary or indeed desirable to take regulatory action in order to change the nature of trading in derivatives markets in the manner suggested by the Commission, and particularly not at this point in time. Decisions about how to execute a trade should ultimately be left to market participants. From the regulatory perspective, it is far more important to get the overall market structure and underlying principles right – not only for derivatives, but for other financial instruments too. Our members think it would be better to build on the outcomes of policy initiatives already underway, such as that on central clearing contained in EMIR. This is because

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EMIR could engender significant structural changes in derivatives markets, as more products become standardised and centrally cleared. This evolution seems to us to be better than a ‘big bang’ approach to change. It is worth remembering that the OTC derivatives market is both very large and also relatively immature compared with the equities market. A more gradual change would therefore seem appropriate, with the Commission clearly articulating the attributes of a future market structure it wishes to see. More generally, we would caution against using equity markets as a template and as a model of what trading in all instruments should look like. Equities are constructed as fungible instruments which prima facie allows for continuous matching of buying and selling interests. This cannot easily be replicated elsewhere in the absence of fungibility. In case markets do not deliver the desired change, or it fails to meet the Commission’s objectives, regulatory authorities should consider taking further measures. MiFID should therefore contain a review clause which would include powers to take action at a later stage. This would build on CESR’s advice about setting firm targets for the industry to meet, and about regulators incentivising certain market structures and ways of interacting. It is important to remember that derivatives markets are different from equities today. The greater part of the market is conducted OTC, where trades are bilateral and most are done ‘on risk’ – that is, dealers will use their own balance sheets to facilitate client trading. Investors are therefore heavily dependent on dealers for liquidity; and dealers will not put their balance sheet unduly at risk in the absence of protections covering transparency in particular. Some derivatives are simply not suitable for organised trading. We address the issue of fungibility below but, in short, some are bespoke instruments designed for a particular purpose and cannot be standardised. (This is unlike equities, where one share is exactly the same as another). It would make no sense to prohibit their use because they cannot be traded in an ‘organised’ way: there is no doubt that this would not best serve the interests of our members’ clients, who are ordinary savers and investors. Finally, this is a wholesale market with infinitesimal retail participation. It would be inappropriate to apply to it rules designed with retail investor protection in mind. If this were to be done, it may lead to perverse outcomes: more retail investors could be attracted to derivatives believing they are no longer risky due to their standardised nature and organised trading. This is presumably not the Commission’s intention.

(9) Are the above conditions for an organised trading facility appropriate? Please

explain the reasons for your views. We understand why the Commission may wish to introduce a new concept into the waterfall of market service providers caught by MiFID. However we are not convinced that the new category of organised trading venue as defined in the Commission’s proposals will result in a better market structure without further work on the dividing lines between the various types of facilities. As things stand, the OTF concept is too widely drawn, and the meaning of ‘organised’ unclear. The judgement about what constitutes an acceptable execution mode and therefore a venue depends on the policy objective one is trying to achieve. In our view, organised trading that is subject to multi-laterality, discretionary access and trade transparency would not automatically meet the G20 objectives of increasing transparency, decreasing

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systemic risk and tackling market abuse. We believe there are initiatives already in place which would address these concerns more effectively. First, the issue of systemic risk is to a large extent tackled by changes to clearing - both central and bilateral, and including changes to capital requirements. Second, the scope of the Market Abuse Directive is widening to include the instruments in question. Finally, reporting to trade repositories will ensure that regulators have all the information necessary to monitor these markets and intervene if necessary. Transparency does not have to entail transparency to the market as a whole, and reporting to the regulator may be sufficient in some markets – we address this in our answers to Section 3. It follows that our members believe that organised trading in derivatives markets should not be the main focus of the MiFID review. In addition, it is not clear to us how this subset of organised trading facilities would differ from MTFs. Both would be required to offer multi-lateral and non-discriminatory access, and both would be subject to pre- and post-trade transparency requirements. The difference between them does not appear material. It is also not obvious what the ‘dedicated systems or facilities for the execution of trades’ are meant to be, and whether multilaterality refers to dealers or participants or both. More generally, it may be worth taking a step back and articulating more clearly what kind of market structure the Commission is trying to achieve, and how the existing and new categories of trading venues fit into that.

(10) Which criteria could determine whether a derivative is sufficiently liquid to be required to be traded on such systems? Please explain the reasons for your views. Organised trading is substantially dependent on instruments being fungible. Fungibility, however, is not uniquely a function of clearing or liquidity, though both are, of course, useful starting points. In order to be centrally cleared, products have to be capable of being valued with certainty but this does not mean they must also be identical. Similarly, products can be very liquid but not standardised – foreign exchange is a case in point. We would argue that it is standardisation – rather than organised trading – that should be the main policy objective for regulators. This is in accord with the advice given to the Commission by CESR some time ago. Once products are standardised, centrally cleared and reported to regulators, it should become obvious which ones amongst them are suitable for trading on ‘venues’ of some sort. If the market is efficient, this should occur naturally, since liquidity tends to pool. As a rule we would prefer regulators to allow the market to develop naturally and intervene only where its efficiency is clearly questionable. As explained above, the purpose of EMIR was to distinguish between contracts which are truly bespoke and those which can – in due course – become more commoditised. We would therefore urge the Commission to take time to consider and build upon the outcomes of existing policy initiatives before making further changes. We would add that if liquidity is taken as one of the parameters for determining eligibility for organised trading, there cannot be a one-size-fits-all solution. Liquidity would have to be measured for each asset class, and any calculation would have to be done over a

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period of time and not as a snapshot. Unlike the largely continuous trading in equities markets (though even here there are differences between small and large cap companies), liquidity in derivatives can be more unpredictable, with high levels at certain points of a product lifecycle and almost none at others. It should be remembered that dealers who are liquidity providers in derivatives markets are under no obligation to continue making markets if this is no longer commercially viable.

(11) Which market features could additionally be taken into account in order to achieve benefits in terms of better transparency, competition, market oversight, and price formation? Please be specific whether this could consider for instance, a high rate of concentration of dealers in a specific financial instruments, a clear need from buy-side institutions for further transparency, or on demonstrable obstacles to effective oversight in a derivative trading OTC, etc.

In terms of other factors that ought to be considered in order to meet G20 objectives, we would suggest that regulators look at the overall value of contracts and the activity of liquidity providers specifically but also of other market participants, both dealer to dealer and dealer to client. This should shed light on the structure and performance of the market as a whole, and therefore on the build-up of potential problems.

(12) Are there existing OTC derivatives that could be required to be traded on regulated markets, MTFs or organised trading facilities? If yes, please justify. Are there some OTC derivatives for which mandatory trading on a regulated market, MTF, or organised trading facility would be seriously damaging to investors or market participants? Please explain the reasons for your views.

We would caution against regulators drawing up a list of instruments deemed suitable for organised trading. Unlike central clearing, which we believe is a legitimate regulatory target as it reinforces the safety of the market and guards against systemic risk, the choice of execution methods or venues is best left to market participants to determine. As mentioned above, central clearing should provide sufficient impetus to commoditise certain products. It should become easier to distinguish over time between the genuinely bespoke derivatives and those that can be made fungible. We disagree with the proposal to ban altogether trading in products which are eligible for organised trading but which have no venue on which such trading can be carried out. Trading venues base their decisions about admission on commercial grounds, and there may be many reasons why a certain product would not be deemed suitable. It would be wrong to assume that just because a venue has not come forward to offer trading in a derivative, there must be some kind of investor detriment.

2.3. Automated trading and related issues (13) Is the definition of automated and high frequency trading provided above

appropriate? The IMA believes that the definition is an appropriate start. We would be surprised on this basis if many buy-side firms were not involved in automated trading. As far as high frequency trading is concerned, work will need to be done to ensure the quantitative threshold is appropriate. We would imagine that both the number and size of orders would need to be considered.

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(14) What is your opinion of the suggestion that all high frequency traders over a

specified minimum quantitative threshold would be required to be authorised?

The IMA would support the proposal that HFTs above a certain threshold be required to be authorised. Firms entering as many orders as these traders do on to a regulated market are in the business of trading. The firms which presently are not regulated are predominantly those who trade only on own account. These own account traders are themselves a key part of secondary market trading and not merely users of it. As such, they should be authorised and subject to the same regulatory obligations as other market participants, in particular as to transaction reporting, the power to require information and with respect to systems and controls and capital. In the past, some exchange rules might have covered them (akin to locals on futures exchanges) but now MiFID must be extended to include them. A threshold based on number of orders submitted (and perhaps cancellation rates) should distinguish these own account traders from other owners such as pension funds (it is important that the extension of regulation does not inadvertently capture the large savings pools). Careful consideration needs to be given as to how high frequency traders are identified. If the definition is too simplistic, for instance by referring to the number of equities traded, it might be avoided by HFTs trading swaps with prime brokers who then trade the corresponding risk position in the equities market. We would expect that the United Kingdom report by Foresight and will assist an evidential consideration of these issues. We are also unsure how persons outside the EEA will be regulated.

In addition, the market infrastructure appears to be developing and allocating resource in a manner dictated by the needs of HFTs. The dependence of organised markets on fees and related data profits that arise from the volume of trading generated by HFTs has meant that they have an interest in preserving such activity. Regulation could therefore not be left to exchanges in any event.

(15) What is your opinion of the suggestions to require specific risk controls to be

put in place by firms engaged in automated trading or by firms who allow their systems to be used by other traders?

Such firms should have extensive risk controls already in place under the framework Directive. There will however, always be an unforeseeable event which has the ability to throw out automated systems - by its very nature what is unforeseeable cannot be protected against. We would caution against introducing prescriptive risk controls that might lead to a tick box approach. The IOSCO’s Principles for Direct Electronic Access to Markets published in August 2010, which sets out principles to guide markets, intermediaries and regulators, are not mentioned in the Commission’s paper. We think these should be a starting point for any proposal.

(16) What is your opinion of the suggestion for risk controls (such as circuit

breakers) to be put in place by trading venues?

IMA members support a requirement to impose risk controls on trading venues although it would be surprising if most venues did not already have certain controls. Any controls,

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such as circuit breakers, however should be designed to be able to be co-ordinated across member states.

(17) What is your opinion about co-location facilities needing to be offered on a

non-discriminatory basis?

IMA members believe that co-location facilities must be offered on a non-discriminatory basis – this is a paramount principle of access to regulated markets and must extend to such facilities.

(18) Is it necessary that minimum tick sizes are prescribed? Please explain why.

It would be helpful for tick sizes to converge on a minimum size, a trend which is already in place. It would be preferable for this to happen without prescription which has been shown to lag the direction of the market. There is however an optimal tick size which balances the provision of liquidity and the cost of trading to the investor. The IMA would support giving the power to ESMA to bring in a prescribed regime should that balance become distorted.

(19) What is your opinion of the suggestion that high frequency traders might be required to provide liquidity on an ongoing basis where they actively trade in a financial instrument under similar conditions as apply to market makers? Under what conditions should this be required?

HFTs do not “provide” liquidity as part of their activity which is purely to trade securities, mostly in small size. To impose an obligation to provide liquidity would make HFTs into something which they are not.

(20) What is your opinion about requiring orders to rest on the order book for a

minimum period of time? How should the minimum period be prescribed? What is your opinion of the alternative, namely of introducing requirements to limit the ratio of orders to transactions executed by any given participant? What would be the impact on market efficiency of such a requirement?

The IMA believes that such a regime would be impractical. The result would be a series of auctions, albeit every second or so, which would give those who can see the order a free option within the resting time. Before the Commission decides to introduce a measure to curb market activity which has developed only recently as a result of technological innovation, we would urge further investigative work on the impact of such measures. This would include modelling what might happen if a minimum resting time were imposed.

2.4. Systematic internalisers (21) What is your opinion about clarifying the criteria for determining when a firm

is a SI? If you are in favour of quantitative thresholds, how could these be articulated? Please explain the reasons for your views.

(22) What is your opinion about requiring SIs to publish two sided quotes and

about establishing a minimum quote size? Please explain the reasons for your views.

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We see little purpose or benefit in the existing SI regime. Although one purpose may have been to ensure that firms offering markets were also made subject to a specified form of regulation for that activity, the SI provisions have never properly met this policy intention in practice. The fundamental problem is that the SI provisions impose obligations but provide no credible safeguards. They are a dangerous category for dealers to operate within, and therefore many choose other alternative and better protected ways of providing their services. By contrast, if the SI provisions were intended solely to protect retail size clients, we believe there may be better ways of doing this. The reality is that most of the entities that are identified as SIs are not focusing upon retail clients, though they may be affected by the fact that many of the trade sizes are so small that they are looked at as if they were retail in size. The Commission needs to consider the anomalous effect of the requirement for explicit consent to trade away from a regulated market or MTF, which reduces the likelihood that retail clients will have access to SIs, and the fact that regulated markets are permitted to have rules by which members can then treat trades as having been executed on a regulated market even though it could be argued that they are really acting as SIs.

2.5. Further alignment and reinforcement of organisational and market surveillance requirements for MTFs and regulated markets as well as organised trading facilities (23) What is your opinion of the suggestions to further align organisational

requirements for regulated markets and MTFs? Please explain the reasons for your views. We agree that there is no need for substantially different approaches to RMs and MTFs. The Commission should aim to apply proportionality in applying the requirements so that smaller firms do not have to bear the full burden of the obligations as they are establishing themselves. This will only serve to raise barriers to entry and to reduce competition. We think it is unrealistic to expect a brand-new exchange operating a regulated market just to emerge - we would expect the new entrants in the market to first be seen as MTFs.

(24) What is your opinion of the suggestion to require regulated markets, MTFs and

organised trading facilities trading the same financial instruments to cooperate in an immediate manner on market surveillance, including informing one another on trade disruptions, suspensions and conduct involving market abuse?

The IMA strongly agrees with the Commission’s proposal regarding co-operation and believes that there should be some oversight body which would ensure that such co-operation actually took place. This could be ESMA or a national regulator. This should be seen as a key priority of ESMA’s work stream.

2.6. SME markets (25) What is your opinion of the suggestion to introduce a new definition of SME

market and a tailored regime for SME markets under the framework of regulated markets and MTFs? What would be the potential benefits of creating such a regime?

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(26) Do you consider that the criteria suggested for differentiating the SME

markets (i.e. thresholds, market capitalisation) are adequate and sufficient?

I. Given the primary and secondary market functions provided by the existing growth markets across Member States, their default regulatory status as MTFs does not accurately reflect the function or importance of the European SME markets and therefore does not provide an appropriately tailored regime for them.

II. Any strategy that seeks to assist SMEs in obtaining appropriate funding must also deal with more than the regulatory environment for admitting to trading and secondary market regulation; the SME sector (however defined) is a complex mix of types of issuers, investors and advisers and all aspects must be addressed to have any prospect of delivering a successful outcome. Growth markets across the Member States already vary widely as to the size and nature of the companies supported, the profile of the investor base, the type of regulatory environment and other cultural and economic factors; the key element in any initiative to support SMEs is to recognise the need for all these elements to be managed in some way.

III. The challenging task of categorising “SMEs” in this context, both in terms of size and

nature of activities will require recognition that there must be a political trade-off between precise and inflexible regulatory certainty (which may comfort regulators, but will likely stifle the market and growth sought) and flexibility to allow issuers and markets the scope to develop according to their needs and those of their investors and customers. If additional constraints are placed on the European growth markets, it is probable that intermediaries will focus on providing services to larger issuers as their liability associated with servicing more established corporates is lower and the levels of remuneration are higher.

IV. In addition, it will be necessary to recognise that supporting small businesses requires

action along a continuum; appropriate funding arrangements and initiatives to promote liquidity need to be introduced in order to stimulate the development of the SME market infrastructure and ensure that the SME funding environment encourages and supports small businesses and their venture capital backers who need dynamic and liquid public markets to facilitate successful exits.

V. In the wider context of other changes to MiFID, it is also important to recognise the

implications for SME funding of the tendency for SME securities to be classified as “complex”, thereby precluding their being available to many types of investors and the consequent negative impact this has on the ability of SMEs in their capital raising. We support the proposal in Option A of para 7.2.1 of the Consultation paper to classify shares admitted to trading on an MTF as “non-complex” and urge the Commission to adopt this approach throughout MiFID, not only in relation to this particular point.

VI. We suggest the Commission, together with ESMA, establish an industry EU Growth

Market Working Group, comprised of all exchanges that currently operate growth markets or who would be interested in doing so, together with representatives of investors, issuers and advisers. The task of the Group would be to review the way in which the current growth markets operate, draw out common principles and guidelines and identify whether this could be developed into a cohesive framework for a harmonised pan-EU approach to supporting SMEs, covering not only the admission

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to trading aspects, but the cultural, financial, economic and educational requirements. Key characteristics of such a framework would include:

It must provide a properly constructed framework which would allow SMEs to

raise equity capital more efficiently; It must not undermine investor protection by reducing standards of disclosure

and transparency; It must be supported beyond the pure regulatory framework by measures to

extend the investor base and facilitate investment in smaller companies e.g., providing appropriate exemptions from State Aid rules and providing a framework for appropriate fiscal incentives to help address the structural equity financing gap across Member States;

It must allow for exchanges and advisers to adopt innovative and flexible solutions to supporting smaller companies, including in the areas of , knowledge transfer and support by advisers (for example as sponsors, accountants and lawyers),research provision, creation of indices and attribute groups;

It should allow for harmonisation across Member States but ensure flexibility at Member State and market operator level to enable domestic growth markets to account for local market practices and cultures. Quantitative / size criteria are not appropriate for setting eligibility of such markets; what is needed are flexible eligibility criteria around SME markets and adequate flexibility at the local level to allow growth markets to attract appropriate companies and investors, adapt as market conditions change and increase investor confidence in SMEs as an asset class. Criteria must not be set too low as this would inhibit the development of the growth markets, diminish liquidity and result in many SMEs having to decide whether to apply for a “listing” or to return to other, less public, forms of funding.

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3. PRE-AND POST-TRADE TRANSPARENCY 3.1. Equity markets 3.1.1. Pre-trade transparency (27) What is your opinion of the suggested changes to the framework directive to

ensure that waivers are applied more consistently?

The IMA supports efforts to improve the pre-trade transparency waiver regime and believes that a more precise description of the waivers would provide greater clarity for market participants and competent authorities. Some need to be described far more precisely. As the Commission observes, the waivers need to be applied consistently across member states and we support the requirement that ESMA monitor their application on an ongoing basis. This should also be with regard to market developments. Regarding the proposal in c), however, if the waivers were sufficiently well defined then there should be no need for any further discussion as to their application.

We also have a general point on waivers which is that if several are to change, their cumulative impact and interactions will need also to be considered. So, whilst our members see no reason at this time to alter the large in scale waiver, for example, if ESMA decided to change the pre-trade transparency position of BCNs, then our members may wish to consider the appropriateness of retaining the large in scale waiver at its current level.

(28) What is your opinion about providing that actionable indications of interest

would be treated as orders and required to be pre-trade transparent? Please explain the reasons for your views.

If there are systems in existence in which a so-called IOI can be directly “hit” so forming a contract for the sale or purchase of securities, then it seems to us beyond doubt that such an IOI is itself a bid or offer. There is, in our view, adequate existing regulation to cover such a circumstance. IOIs are marketing communications in the terms of MiFID. They ought therefore to be subject (when published by an investment firm, including those operating an MTF) to the obligation to ensure that such communications are fair, clear and not misleading. Additionally the Market Abuse Directive itself addresses communications that may be misleading. If such IOIs are used to mislead the market or are consistently inaccurate to an extent that shows that the publisher is taking little or no care, then there are adequate existing regulations which could be enforced by local supervisors.

IMA members agree with the Commission’s suggestion in d) up to the words “….pre-trade transparency requirements”. The rest of that sentence should just reflect what the market’s rules are regarding an order. Presently the wording is ambiguous as to whether the obligation applies even where there would be an applicable waiver for pre-trade transparency. We think the proposal is not seeking to limit pre-trade transparency but to ensure that an actual IOI is treated as if it were an order for all such purposes.

It is important to note that the SEC proposes to treat actionable IOIs analogously to information which is subject to pre-trade transparency obligations. Therefore even in the United States the equivalent of the large in scale waiver would be applied to such

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actionable IOIs, though with a qualification. Consistent with the approach taken to pre-trade transparency in the European markets, one might expect that if the IOIs relate to trades that will take place at the mid-point cross, they would therefore be entitled to reference price pre-trade transparency waiver under MiFID anyway.

(29) What is your opinion about the treatment of order stubs? Should they not

benefit from the large in scale waiver? Please explain the reasons for your views.

IMA members support retaining the current regime whereby order stubs remaining from a large in scale order to continue to benefit from the waiver. It is important to note that investors do not want residual stubs; they are a reflection that there is insufficient available liquidity in a chosen pool. Asset managers will at times, in the interests of their clients, move a residual stub for execution elsewhere. Technically of course this means that the stub is cancelled and a new order, here ex hypothesi below large in scale, will be sent somewhere else. It cannot therefore be concluded that all stubs do in fact remain dark because of the LIS waiver.

If stubs are not given protection under the LIS waiver, then either the market in question will need to have facilities for this to occur or the firms will need to monitor what residual order is left. Indeed if a rule were to be introduced, it may in practice always be necessary for the firm to do the monitoring since some markets may not have a lit facility. What would be the time limit under any rule? What if a stub is unexecuted for one second? By the time the firm or its systems react (and the proposal assumes that all firms will need to have fast real-time automated order management systems), the stub may have been executed in the dark venue.

The incentive, both commercial and regulatory, to act in the best interests of a client means that many asset managers monitor execution on an ongoing basis and make decisions about the stub rather than just leaving an unexecuted order in a market. This is very different, however, from imposing a hard-edged rule that as soon as an unexecuted order is below LIS, it must be made pre-trade transparent.

If the Commission intends to introduce a rule to make stubs pre-trade transparent, it needs to present clear evidence of real adverse impact. We are quite unsure that residuals do remain unexecuted for long periods of time and firms will normally consider sending the residual to another venue, including a BCN and venue with a price reference waiver. In practice, the commercial incentives upon firms to find good execution mitigate against such residuals being left in the original venue for any appreciable time. We consider that ESMA should provide evidence for what may turn out to be an overly theoretical concern about a small value of orders. Even if there is some deterioration in pre-trade transparency, the costs of any solution would, we suspect, far outweigh any consequent benefit in price.

(30) What is your opinion about prohibiting embedding of fees in prices in the price

reference waiver? What is your opinion about subjecting the use of the waiver to a minimum order size? If so, please explain why and how the size should be calculated.

We understand from members that the printed price can be different from that traded in that it includes commission or fees. We believe that a mid-point cross should be printed at the mid-point price.

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(31) What is your opinion about keeping the large in scale waiver thresholds in

their current format? Please explain the reasons for your views.

Our members see no reason to alter the current calibrations. Although they trade some of the largest blocks in the EU, they see no reason to reduce the minimum order size. No evidence has been provided that they need to change. CESR’s consultation paper of April 2010 in fact showed there is no discernible trend since Q1 2008 in the percentage of orders using this waiver suggesting that there is not a problem with the current LIS regime.

3.1.2. Post trade transparency (32) What is your opinion about the suggestions for reducing delays in the

publication of trade data? Please explain the reasons for your views.

Those IMA members who do little risk trading are generally supportive of the Commission’s proposals to reduce trade reporting delays. On the other hand, those who do use risk capital have concerns that it will almost undoubtedly raise the cost of trading, adversely affecting their clients. However, even they acknowledge that the delays currently in place are longer than those that the UK market used to have before the implementation of MiFID.

Our firms are generally supportive of more transparency but not where the cost of trading outweighs the benefits of transparency. This cost can be particularly acute where large blocs are being traded in smaller to medium sized companies where, because the shares are illiquid, the consequent impact on the share price would be significant.

Because of the short consultation period, the IMA has not been able to produce data to quantify by how much trading costs might rise. Anecdotal evidence from the US suggests that the premium demanded for risk pricing increases by approximately 50% from the morning to the afternoon because of the shortened period available to offset the risk transfer, which must be reported at the end of the day.

IMA members also observe that the current real time reporting thresholds are often not being complied with, and would urge ESMA to enforce the real time regime.

3.2. Equity-like instruments (33) What is your opinion about extending transparency requirements to

depositary receipts, exchange traded funds and certificates issued by companies? Are there any further products (e.g. UCITS) which could be considered? Please explain the reasons for your views.

IMA members support the objective of providing transparency to the above instruments. We think that some thought will have to be given to the definitions, especially if ETFs are to have a qualification based upon the underlying. We have no examples of further products which could be considered.

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(34) Can the transparency requirements be articulated along the same system of

thresholds used for equities? If not, how could specific thresholds be defined? Can you provide criteria for the definition of these thresholds for each of the categories of instruments mentioned above?

In relation to ETFs we think consideration will need to be given to the difference between the more primary market role of market makers and approved intermediaries whose activities are often characterised by the redemption or subscription of units, and the pure secondary market activity of individual investors buying and selling units between themselves. Which trade should print and which should be exempted will need to be carefully defined.

We understand colleagues in the Danish market whose funds are already subject to transparency apparently would be affected by this change if it meant that they were obliged to use the regulated market’s arrangements for publishing the trades. We would encourage the Commission to allow existing well-functioning post-trade publication arrangements in some of these equity-like financial instruments to continue, and not require them to be handed over to a regulated market or MTF.

3.3. Trade transparency regime for shares traded only on MTFs or organised trading facilities (35) What is your opinion about reinforcing and harmonising the trade

transparency requirements for shares traded only on MTFs or organised trading facilities? Please explain the reasons for your views.

IMA members support the proposal to reinforce and harmonise the trade transparency requirements for shares admitted to trading only on MTFs or organised trading facilities. While this would currently affect only very few shares, we do not see why there should be any difference in transparency obligations as a result of where the shares are admitted to trading. Indeed, a less detailed regime applying to some shares and not to others could encourage gaming.

(36) What is your opinion about introducing a calibrated approach for SME

markets? What should be the specific conditions attached to SME markets?

We have provided our answer about SMEs under questions 25 and 26. 3.4. Non-equity markets 3.4.1 Pre-trade transparency

It is generally true that the buy-side benefits from increased market transparency. We are therefore in favour of frequent and in-depth regulatory scrutiny in order to determine if the current transparency arrangements are appropriate. However, the Commission should be aware that there is always a fear amongst the buy-side firms that more transparency would damage liquidity. Transparency is not a panacea. This is particularly true in OTC markets where our members firms are fully dependant on the provision of liquidity by dealers and where no mechanism exists to protect those dealers from losses when the market moves against them. This applies in

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particular to corporate bond and OTC derivatives markets where trades are substantially bilateral negotiated (In equities markets, there is a sophisticated process of permitted delays when trades are done on risk, to allow time for unwinding.) Therefore we do not agree with the Commission’s proposals on pre-trade transparency. Although we are not against additional transparency being provided by organised trading venues (much of this happens already), we would strongly oppose any suggestion that firms trading OTC have to publish quotes in the way suggested. It would appear that the intention behind the proposal is to create a quasi systematic internaliser regime, where firms trading OTC are required to disseminate their quotes which reflect current market value. As we do not believe the SI regime works in equities, for the reasons described above, we regard the proposal to introduce it elsewhere a recipe for failure. There is no doubt that pre-trade transparency across the board and for all the instruments lumped together under the ‘non-equities’ banner would represent a fundamental change in market structure. Apart from anything else, we believe more time should be taken to consider this proposition. Regulators should focus on getting the structure of organised trading right. If the mainstream business moves onto regulated markets, MTFs and organised trading facilities of some kind, there will be much less need to worry about genuine over-the-counter trading. In advance of this move occurring, we do not believe it is appropriate to set parameters for trading.

3.4.2. Post-trade transparency (37) What is your opinion on the suggested modification to the MiFID framework

directive in terms of scope of instruments and content of overarching transparency requirements? Please explain the reasons for your views.

Our members welcome developments post-trade transparency, but again believe it should be introduced per instrument at the outset. We have been very supportive of the approach taken by CESR, where a straightforward publication model is fine-tuned according to the asset class in question. This is sensitive to the idiosyncrasies of different markets, while ensuring investors’ interests are protected.

In particular, our members welcome provisions for a post-trade transparency regime for corporate bonds. This has been discussed at length for some time now.

(38) What is your opinion about the precise pre-trade information that regulated markets, MTFs and organised trading facilities as per section 2.2.3 above would have to publish on non-equity instruments traded on their system? Please be specific in terms of asset-class and nature of the trading system (e.g. order or quote driven).

We have outlined above our strong objections to a pre-trade transparency regime which extends to trades executed over the counter. For corporate bonds in particular, IMA members trade in large size and to have the quotes that they receive from brokers made public would seriously damage liquidity and their ability to transact business. No market maker would be willing to reveal what is held on his book in size; other market participants would immediately trade against him. The market as it is presently structured would seize up.

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It is important to take into consideration that most corporate bonds are illiquid and so any pre-trade transparency is only as good as a bond’s liquidity and trading frequency. Institutional investors such as IMA members are able to shop around for competing quotes. If the intention is to protect the retail investor, the Commission should consider that the vast proportion of retail investors’ savings are within pension, insurance and retail funds managed by institutional investment managers. Those are the funds which would be damaged by this proposal. If the Commission nevertheless believes that a regime should be mandated, we would urge it to confine the obligations to RMs, MTFs and OTFs offering trading facilities in non-equity instruments.

(39) What is your opinion about applying requirements to investment firms

executing trades OTC to ensure that their quotes are accessible to a large number of investors, reflect a price which is not too far from market value for comparable or identical instrument traded on organised venues, and are binding below a certain transaction size? Please indicate what transaction size would be appropriate for the various asset classes.

We are unsure how the proposed requirement on OTC traders to ensure that quotes are accessible to a large number of investors could be implemented. Investment firms which trade OTC are for the large part wholesale firms who quote on request or who make their offerings available to established clients on proprietary networks. For OTC derivatives in particular we believe it would be premature to consider any further publication until the move to central clearing in development with EMIR is further advanced, such that regulators can see how these markets develop as they achieve greater standardisation of instruments. For retail size quotes, investors can access the Italian and London stock exchanges retail bond trading platforms.

(40) In view of calibrating the exact post-trade transparency obligations for each

asset class and type, what is your opinion of the suggested parameters, namely that the regime be transaction-based, and predicated on a set of thresholds by transaction size? Please explain the reasons for your views.

The corporate bond markets are polarised between a strong retail presence in some countries and an almost exclusively wholesale market in others. The size of trades is equally polarised. It is therefore important that post-trade publication takes account of the different need of both types of investor. IMA members agree that the regime be transaction-based and predicated on a set of thresholds by transaction size. We believe that thresholds for transaction sizes should not be set too high thereby damaging liquidity. The IMA proposed to CESR in its call for evidence the following thresholds: Over €1mn should be treated as “large” in size, price should be disclosed but not

volume (with an indication that it is large in size) and publication should be end of day;

Retail trades should have a cut off of €50,000, price and volume would be disclosed with a 15 minute delay; and

Between €50,000 and €1mn would publish price and volume at end of day.

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We still consider that these thresholds are appropriate, promising the least impact on liquidity combined with usefulness for market users. It may be that regulators should consider further provisions to ensure that dealers remaining on risk for large trades have additional time to manage the risk. The IMA believes that all trades should be reported and that the above limits apply to all bonds whatever their rating or liquidity. To limit the obligation to report only liquid names or to have multiple thresholds for differently rated bonds would only encourage a bifurcation of the market and a have a detrimental effect on efficient pricing. We would encourage ESMA to consider the method and cost of delivering post-trade transparency, especially in the light of the deterioration in post-trade transparency in equity markets after the implementation of MiFID. Although across Europe equity markets have seen more information published, its usefulness has been considerably impaired because of the fragmentation of publication and the lack of consolidation. In the absence of an exchange or MTF, consolidation will be very much more difficult for bonds than for equities.

In addition, buy-side firms do not have the systems or the capability to report trades to the market. These would be expensive to introduce, and likely to require additional staff. As in equities, intermediaries should continue to report trades to the market. We therefore urge the Commission to impose a trade reporting obligation on those making a market in bonds, and other instruments, and on those providing broker services to the market.

We would also urge the Commission to consider carefully the terminology used. MiFID

Level 1 talks about firms which ‘conclude transactions’ in the context of trade reporting and ‘execute transactions’ in the context of transaction reporting. As explained in our general comments to Section 6, we do not believe that portfolio managers do in fact execute transactions. They should therefore not be subject to the transaction reporting obligation. The current consultation paper uses the term ‘execute transactions’ when talking about firms reporting to APAs. This should be avoided in the legislative proposal.

(41) What is your opinion about factoring in another measure besides transaction

size to account for liquidity? What is your opinion about whether a specific additional factor (e.g. issuance size, frequency of trading) could be considered for determining when the regime or a threshold applies? Please justify.

We do not believe that it is necessary to add in another measure besides transaction size. This would only serve to confuse and possibly to enable the system to be gamed. We would prefer to keep the regime simple.

3.5. Over the counter trading (42) Could further identification and flagging of OTC trades be useful? Please

explain the reasons.

IMA members support further identification and flagging of OTC trades. It is difficult to track trading on crossing networks as it is amalgamated with a lot of lower quality, off-order book trading volume. A robust regulatory framework to help improve the quality of post-trade data would increase confidence in post-trade transparency and alleviate some

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of the misperceptions and concerns regarding crossing networks. Our members often complain that they have no idea what has happened to their order once it has gone into a BCN. More granularity in the identification and flagging of OTC trades would therefore give investors comfort as to how and where their order had been executed.

Our principal suggestion is that trades printed by such systems should be identified even if on a delayed basis. We would also support that such publication should be mandatory, the data should be published at the end of the day at the latest identifying each system separately (aggregated across the day), and that client flow that is crossed should be identified separately from own account trading within the crossing network.

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4. DATA CONSOLIDATION 4.1. Improving the quality of raw data and ensuring it is provided in a consistent format (43) What is your opinion of the suggestions regarding reporting to be through

approved publication arrangements (APAs)? Please explain the reasons for your views.

(44) What is your opinion of the criteria identified for an APA to be approved by

competent authorities? Please explain the reasons for your views. (45) What is your opinion of the suggestions for improving the quality and format

of post trade reports? Please explain the reasons for your views.

We strongly support the proposal to bring in APAs. We believe that the Commission has identified the appropriate criteria for an APA to be approved, and that it has highlighted the need for regulation to be amended so as to ensure consistency of both the content and format of trade reports.

As in other areas, our members remain concerned that the introduction of the APA should not be seen as an excuse for investment firms to fail to comply with their obligations nor should it allow competent authorities to consider that their job will be done by an APA. The existence of APAs will not reduce the extent to which competent authorities will need to engage more with investment firms to ensure that the quality of data in Europe approaches the minimum needed to provide a consolidated tape. It is clear that some of the reporting of trades through OTC reporting mechanisms offered by regulated markets suffer from very simple errors such as fat finger mistakes by the reporting firms. Good supervision is therefore essential We do however consider that a key part of the Commission's review of MiFID should be to ensure that data quality is finally secured in the equity market and the mechanisms are put in place in order to keep up with market developments and prevent any reduction in data quality in the future. Rules will need to be made as to what constitutes a transaction, who should report what and the identifiers used for those reports. Whilst we consider that various industry bodies may be able to identify a large number, if not all, of the required rules to ensure that data is of a consistently high standard and can be consolidated, it will be necessary to impose rules to ensure all participants comply. To that end the Commission should take powers under MiFID to introduce all the necessary requirements to achieve a consolidation of post trade equity data. We consider the current rules upon firms should be replaced with an outcome-based power at level 1: “… to make standards so as to facilitate the consolidation of equity market data designed to be: comprehensively adopted; consistently applied; and cost-effectively administered;

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... by market participants, execution venues and infrastructure providers across the EU marketplace.”

(46) What is your opinion about applying these suggestions to non-equity markets? Please explain the reasons for your views.

If a post-trade transparency regime is to be introduced for non-equities, then, as pointed out in Q40, careful consideration needs to be given to the method and cost. In the absence of an exchange or MTF, consolidation will be very much more difficult for bonds than for equities. There appears to be no reason however why non-equity market trades could not be reported through an APA.

4.2. Reducing the cost of post trade data for investors (47) What is your opinion of the suggestions for reducing the cost of trade data?

Please explain the reasons for your views.

(48) In your view, how far data would need to be disaggregated? Please explain the reasons for your views.

(49) In your view, what would constitute a "reasonable" cost for the selling or

dissemination of data? Please provide the rationale/criteria for such a cost.

It is not immediately obvious how to reduce the cost of trade data. Clearly there is a public good element which argues for regulatory intervention. It may well be that unbundling of current packages could have a beneficial effect as customers would be able to tailor what they purchase to their specific requirements. The data should be disaggregated to a level where there is sufficient demand to make the offering viable. We would also support that data be made free after 15 minutes in line with general current practice.

We do not have a definitive answer as to what would constitute “reasonable” cost and we would encourage the Commission to carry out some economic analysis.

(50) What is your opinion about applying any of these suggestions to non-equity

markets? Please explain the reasons for your views.

Any moves which can reduce the cost of data are to be welcome. Given however that the proposed regime for post-trade transparency for non-equity markets is for larger orders to be reported at the end of the day, there may be less immediate need to pay for real time data.

4.3. A European Consolidated tape (51) What is your opinion of the suggestion for the introduction of a European

Consolidated Tape for post-trade transparency? Please explain the reasons for your views, including the advantages and disadvantages you see in introducing a consolidated tape.

IMA members support the proposal to introduce a European Consolidated Tape (ECT) for post-trade transparency. We do recognise that not all firms will want to use the ECT as it

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will be too slow. Other firms will be content to use consolidated products from the data vendors informed by the 15 minute delayed data e.g. for valuation and transaction cost analysis, and this will likely be of very low cost. The cost of an ECT would fall between the two extremes of real time and delayed data.

(52) If a post-trade consolidated tape was to be introduced which option (A, B or C)

do you consider most appropriate regarding how a consolidated tape should be operated and who should operate it? Please explain the reasons for your view.

IMA members’ preference would be for option C, given that competing commercial providers would be more likely to be able to offer the ECT at reasonable cost. They are likely to have extensive experience in the gathering and consolidation of data, which should in any case be more easily done given the establishment of APAs and the introduction of standards as to content and format. Having said that, however, it is over three years since the implementation of MiFID and commercial approaches have failed to produce a consolidated tape. We would encourage the Commission to take powers to introduce options A and B should the market fail to deliver option C. It is however likely to be the case that if the Commission had to revert to options A or B, there may well be a market solution in the meantime. Our second preference would be for option B.

(53) If you prefer option A please outline which entity you believe would be best

placed to operate the consolidated tape (e.g. public authority, new entity or an industry body).

(54) On Options A and B, what would be the conditions to make sure that such an

entity would be commercially viable? In order to make operating a European consolidated tape commercially viable and thus attaining the regulatory goal of improving quality and supply of post-trade data, should market participants be obliged to acquire data from the European single entity as it is the case with the US regime?

(55) On Option B, which of the two sub-options discussed for revenue distribution

for the data appears more appropriate and would ensure that the single entity described would be commercially viable?

IMA members have no strong views as to the two sub-options but do support the suggestion that the single entity should have a fixed term contract which comes up for public tender after a set period e.g. every three years. This should properly incentivise the entity to provide a high quality and robust service at reasonable cost.

(56) Are there any additional factors that need to be taken into account in deciding

who should operate the consolidated tape (e.g. latency, expertise, independence, experience, competition)?

We believe that the Commission has picked out the most important factors.

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(57) Which timeframe do you envisage as appropriate for establishing a consolidated tape under each of the three options described?

After the establishment of the APAs it should not take an inordinate length of time to produce a consolidated tape. We would expect one to be available within 12 months.

(58) Do you have any views on a consolidated tape for pre-trade transparency

data?

We do believe that a consolidated pre-trade transparency tape would be “nice to have” but as the Commission observes, it is likely to be extremely costly. The availability of pre-trade data is now higher than it was - although only for RMs and MTFs. It is far more important to get a post-trade consolidated tape right first.

(59) What is your opinion about the introduction of a consolidated tape for non-

equity trades? Please explain the reasons for your views.

A consolidated tape for corporate bonds would be meaningless. Most trades would only be reported at the end of the day and so any information on a consolidated tape would be stale by the time of publication and therefore of no value to participants.

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5. MEASURES SPECIFIC TO COMMODITY DERIVATIVE MARKETS 5.1. Specific requirements for commodity derivative exchanges (60) What is your opinion about requiring organised trading venues which admit

commodity derivatives to trading to make available to regulators (in detail) and the public (in aggregate) harmonised position information by type of regulated entity? Please explain the reasons for your views.

We support the adoption of a harmonised approach towards position information and the need for regulators to obtain “a comprehensive and objective picture of the activities of different types of traders”. However this need should be handled in a proportionate way, such that the key financial centres for trading commodities would be expected to take the lead. There is considerable danger in detailed commercial information passing freely amongst regulators with little in the way of protection for the underlying holders of positions. We suggest that the current MiFID model, whereby market operators are required to monitor individual markets and raise issues with the regulator when noted, is a practical and effective method of achieving much of the objective. We suggest that regulators should take as the model the information published by exchanges. This does not include position information, which has always been treated as private information to which only regulators may be privy. The purpose should be to provide information about trades, which for OTC markets would be more appropriately addressed by publishing aggregated market information.

(61) What is your opinion about the categorisation of traders by type of regulated

entity? Could the different categories of traders be defined in another way (e.g. by trading activity based on the definition of hedge accounting under international accounting standards, other)? Please explain the reasons for your views.

This approach could be difficult to define and police in practice. Where RMs are concerned it would be appropriate for them to satisfy themselves, by application of appropriate rules, that they were running proper markets. In the OTC markets the categorisation effectively loses much of its meaning and we suggest is better dealt with by appropriate reporting to regulators.

(62) What is your opinion about extending the disclosure of harmonised position

information by type of regulated entity to all OTC commodity derivatives? Please explain the reasons for your views.

We do not support position reporting as we believe it is near to unworkable. For example, it would have to take account of the structural complexity of commodity markets, covering a wide variety of product terms and contracts, fragmentation of trading venues and difficulties in defining which contracts would be caught. In addition, it would have to deal with difference between financial and purely physical contracts.

(63) What is your opinion about requiring organised commodity derivative trading venues to design contracts in a way that ensures convergence between futures and spot prices? What is your opinion about other possible

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requirements for such venues, including introducing limits to how much prices can vary in given timeframe? Please explain the reasons for your views.

We are aware that problems have emerged in relation to some US agricultural derivatives in particular, but note that there have been no similar problems in the EU. We suggest this is because the approach adopted to approving exchange traded contracts is already sufficiently robust. IOSCO has adopted various provisions over the years for regulating commodity derivative markets and we believe much of this work remains valid. In some countries further implementation of these standards would assist in improving the operation of markets..

5.2. MiFID exemptions for commodity firms (64) What is your opinion on the three suggested modifications to the exemptions?

Please explain the reasons for your views.

We offer no view on this. 5.3. Definition of other derivative financial instrument (65) What is your opinion about removing the criterion of whether the contract is

cleared by a CCP or subject to margining from the definition of other derivative financial instrument in the framework directive and implementing regulation? Please explain the reasons for your views.

We suggest a review of the MiFID product definitions to ensure that they continue to be up-to-date.

5.4. Emission allowances (66) What is your opinion on whether to classify emission allowances as financial

instruments? Please explain the reasons for your views.

We offer no view on this.

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6. TRANSACTION REPORTING In relation to questions 67 to 74, we offer the following introductory comments on the present state of transaction reporting: Given the discretionary nature of the service offered by portfolio managers we consider that their placing an order1 with a broker/dealer does not amount to ‘execution’ by them for transaction reporting purposes2. Whilst we could agree with point a) on page 47 of the consultation paper that “for transaction reporting purposes, a transaction refers to any agreement concluded with a counterparty to buy or sell one or more financial instruments”, placing an order with a broker is not execution of the transaction by the portfolio manager. As regards brokers’ reporting of client identities by brokers who receive and transmit an order to another broker, we consider that the following activities are carried out:

If there is no obligation on the first broker to report, in A, then this means that, in scenario B, under MiFID, there is no transaction report received in the EEA:

Thus the only arrangement, under MiFID, which will capture all the reports and ensure that they are reported to the competent authority, as they want, in a harmonised manner, is as follows:

The portfolio manager, in placing its order with the first broker is no more executing the transaction than is the first broker in passing it to the second. As the first broker has more information about the transaction, knowing not only the client but also the ultimate broker and execution venue, there would seem to be no impediment to the first broker transaction reporting. No regulator should be able, therefore, super-equivalently, to require a portfolio manager to report transactions in this situation3. The current UK regime would expect a report from the portfolio manager (as the initiator of the trade)4. 1 Article 45 of the Implementing Directive (2006/73/EC) 2 See Article 44(1) of the Implementing Directive and Article 25(3) of the framework Directive (2004/39/EC) 3 The FSA is super-equivalent in this respect 4 This is subject only to a form of double-reporting exemption

Regulated or unregulated

firm

RTO Execution

First Broker Second Broker – Non EEA

Market

Transaction Report

Placing of Order

C

First Broker

Placing of Order

RTO Execution

Market Second Broker A

Execution

Unregulated firm

First Broker

Second Broker – Non EEA

Market B

Placing of Order

Client

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We would strongly urge the Commission to seek to ensure a level playing field in the application of transaction reporting. 6.1. Scope (67) What is your opinion on the extension of the transaction reporting regime to

transactions in all financial instruments that are admitted to trading or traded on the above platforms and systems? Please explain the reasons for your views.

This extension of scope to include OTC derivatives and some, but not all, MTFs (e.g. AIM and PLUS) has already been introduced by the FSA, in the UK. As long as the Commission is willing to consider the lessons from the experience of imposing transaction reporting on instruments not listed on an RM, and to OTC derivatives, which is not as straightforward as it may, at first glance, appear, then the extension of the scope should not be too problematic. However we would repeat a request made in previous consultations to CESR (now ESMA) for a definitive list to be made available to allow firms to know which instruments are, indeed, reportable.

There is a clear requirement in the Directive (Article 11 of Regulation No. 1287/2006) for such a list to be collated.

The fact that firms across Europe do not have one has been costly in respect of their ability to identify reportable transactions and has led to firms over reporting, again at an additional cost to firms and inconvenience for regulators.

(68) What is your opinion on the extension of the transaction reporting regime to

transactions in all financial instruments the value of which correlates with the value of financial instruments that are admitted to trading or traded on the above platforms and systems? Please explain the reasons for your views.

This seems reasonable as to do otherwise allows loopholes in the market abuse

prevention regime. Again the issue relates to certainty as to instruments.

A definitive list is needed so it is clear when ETFs or index products need to be reported.

(69) What is your opinion on the extension of the transaction reporting regime to

transactions in depositary receipts that are related to financial instruments that are admitted to trading or traded on the above platforms and systems? Please explain the reasons for your views.

We agree with this proposal. (70) What is your opinion on the extension of the transaction reporting regime to

transactions in all commodity derivatives? Please explain the reasons for your views.

While this may seem inevitable, given the extension of the Market Abuse Directive and the main reason for transaction reporting being market supervision, we would query whether, given the development of Trade Repositories under EMIR, this would actually be

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necessary. We consider that the national regulators will have access to all the information they would need on commodity (and other) derivatives from the Repositories, so requiring transaction reporting as well would be unnecessarily duplicative. Either way, the extent of reporting requirements should be made clear, e.g. should agricultural derivatives be reportable? A definitive list should be made available to allow firms to know which instruments are indeed reportable.

(71) Do you consider that the extension of transaction reporting to all correlated instruments and to all commodity derivatives captures all relevant OTC trading? Please explain the reasons for your views.

As far as we are aware, this should be the case. (72) What is your opinion of an obligation for regulated markets, MTFs and other

alternative trading venues to report the transactions of non-authorised members or participants under MiFID? Please explain the reasons for your views.

Although this would not affect our members, in order for competent authorities to have

complete information, this would seem necessary. (73) What is your opinion on the introduction of an obligation to store order data?

Please explain the reasons for your views. This should not impose any new requirement on our members, only on Regulated

Markets, MTFs and organised trading facilities, so we would not object. (74) What is your opinion on requiring greater harmonisation of the storage of

order data? Please explain the reasons for your views. Harmonisation across Europe is to be encouraged. As in our answer to Q73, this should

not impose any new requirement on our members, only on Regulated Markets, MTFs and organised trading facilities, so we would not object.

6.2. Content of reporting (75) What is your opinion on the suggested specification of what constitutes a

transaction for reporting purposes? Please explain the reasons for your views. It would be helpful to have one, clear and unambiguous definition for what constitutes a

transaction across the whole of the EU. This should take into account the difference between a portfolio manager placing an order with another entity for execution (Article 45 of the implementing directive) and a broker executing a client order (Article 45 of the implementing directive). Consistency and harmonisation across the EU is essential to drive down costs and achieve the aims of the Directive.

(76) How do you consider that the use of client identifiers may best be further

harmonised? Please explain the reasons for your views. We have no fixed opinion on this. Our members, as regulated discretionary portfolio

managers, when placing orders (arising from decisions to deal) with brokers, would be

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identified through the use of their Firm Reference Number, assigned by the Competent Authority.

(77) What is your opinion on the introduction of an obligation to transmit required

details of orders when not subject to a reporting obligation? Please explain the reasons for your views.

We would argue that firms which receive and transmit orders, but do not themselves execute the order, should be obliged either to transaction report themselves, or to pass full details on to the next firm in the execution chain, so that full information may be transaction reported by a firm further along the chain. If this chain is diverted outside the EU then the obligation to report should fall on the last regulated firm in the EU. Should this not be required then many firms could evade any reporting requirement, negating competent authorities’ attempt to stop market abuse. As we set out in the introduction to this section, portfolio managers place order with broker/dealers who then either RTO these orders on, or execute them against the market. If they RTO them on the broker to whom they transmit them will execute. The Commission should ensure that the harmonised requirement is that the last regulated firm in the order chain, who has all the relevant information, should be required to transaction report. Thus: If a portfolio manager is a member of a Regulated Market and executes against that

market then they should report. If a portfolio manager places an order with a broker who executes the order then it is

that broker who should report. If the first broker passes all details on to a second EEA broker then the second broker

should report. If the second broker is outside the EEA, or the first broker chooses not to pass on the

client ID, then the first broker should report. It is important that there is clarity and consistency across Europe as to who is required to transaction report.

(78) What is your opinion on the introduction of a separate trader ID? Please

explain the reasons for your views. We understand that firms are already required (under Regulation 1287/2006, Art 7(b),

Art 8.1(e) and Art 8.2(b)) to record and retain these details. It is not clear, from the consultation, exactly why this information is proposed to be in the

transaction report. We would object to the introduction of this requirement without a proper discussion of the benefit accrued.

However, we agree that it should be available to the competent authority on request. There is an unnecessary additional cost in providing it to regulators upfront.

(79) What is your opinion on introducing implementing acts on a common European

transaction reporting format and content? Please explain the reasons for your views.

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This should not present undue difficulties, as long as due process if followed. As long as ESMA (or whichever other body is involved) consults widely and implements proposals in a tailored and proportionate manner, then the increased harmonisation should lead to reduced costs and ensure that the aims of the Directive are met. We would object to the harmonised reporting format merely representing a cobbling together of every field used by any competent authority across the EU. The choice of format and content must be informed by technology experts to ensure any implementing act identifies all necessary technical standards and descriptions (and not for example merely give a paper based facsimile of the report fields as in MiFID).

6.3. Reporting channels (80) What is your opinion on the possibility of transaction reporting directly to a

reporting mechanism at EU level? Please explain the reasons for your views. While we would not be in favour of obliging firms to transaction report to ESMA (or

whichever other body would manage this mechanism) it may be useful in some certain situations for firms to have the option of reporting at an EU level, as long as it would be clear that such a report would meet any national obligation. The final rules must ensure that firms are not required to double-report.

This option may be most useful where firms are currently acting across borders, and

reporting responsibilities are not clear.

However it must be clear that this reporting mechanism is an option for regulated firms, not a requirement.

(81) What is your opinion on clarifying that third parties reporting on behalf of

investment firms need to be approved by the supervisor as an Approved Reporting Mechanism? Please explain the reasons for your views.

This seems reasonable. (82) What is your opinion on waiving the MiFID reporting obligation on an

investment firm which has already reported an OTC contract to a trade repository or competent authority under EMIR? Please explain the reasons for your views.

This would seem essential, both to reduce costs and to avoid double-reporting. (83) What is your opinion on requiring trade repositories under EMIR to be

approved as an ARM under MiFID? Please explain the reasons for your views. This seems reasonable.

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7. INVESTOR PROTECTION AND PROVISION OF INVESTMENT SERVICES 7.1 Scope of the Directive 7.1.1 Optional exemptions for some investment service providers (84) What is your opinion about limiting the optional exemptions under Article 3 of

MiFID? What is your opinion about obliging Member States to apply to the exempted entities requirements analogous to the MiFID conduct of business rules for the provision of investment advice and fit and proper criteria? Please explain the reasons for your views.

We agree with the proposal that Member States be permitted to retain the possibility to exempt from the Directive provisions certain entities providing advice on the grounds of proportionality, provided that those Member States require those entities to meet certain obligations equivalent to those arising under MiFID. Those obligations should include: An authorisation process, including assessment of fit and proper criteria, Prescribed information to be supplied to the consumer A suitability test to be carried out Suitable rules on inducements An obligation to report to consumers A duty to act in the best interests of the consumer.

All the above are broadly equivalent to the requirements already imposed upon the advice-giving community in the UK, the majority of which have not hitherto been subject to MiFID requirements.

7.1.2 Application of MiFID to structured deposits (85) What is your opinion on extending MiFID to cover the sale of structured

deposits by credit institutions? Do you consider that other categories of products could be covered? Please explain the reasons for your views. We agree that relevant parts of MiFID should be extended to cover structured deposits; particularly as such products have been identified as having the investment characteristics which should bring them within the scope of the PRIPs regime. As a technical matter, the sale may also be intermediated by firms other than credit institutions. MiFID should cover this as well.

More generally we are concerned with the sectoral approach towards PRIPS being taken by the Commission, and in particular the fact that insurance PRIPS will continue to be regulated under IMD. In our view an over-arching piece of legislation would have been much more appropriate.

The IMD requirements with regard to sales are not as stringent or detailed as those under MiFID and even taking into account the proposals in the IMD consultation paper, it is not clear that they will offer as comprehensive investor protection as the MiFID requirements, for instance with regard to advised sales where the adviser is not giving whole of market advice.

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If the Commission is not to proceed with an overarching piece of legislation then it is important that the MiFID review and IMD review are closely coordinated and that the IMD requirements are more closely aligned with those in MiFID. Or as an alternative (and in our view a better approach) sales of insurance PRIPS should be subject to the MiFID selling requirements rather than those under IMD.

Finally in this context we do not agree with the Commission’s proposal in the PRIPS CP to exclude personal pensions and annuities from the PRIPS regime. Personal pensions meet all the criteria laid out in the Commission’s proposed definition of PRIP. Equally, personal pensions constitute long term savings products which compete directly with other products fulfilling the same role. And, as regards annuities, in the UK there is evidence that consumers do not always make the best choice when purchasing an annuity. Therefore we believe that all annuities should be included in the PRIPs regime so that consumers can make more informed, and therefore better, choices. And since such products if brought into this regime would presumably be classed as insurance PRIPS and therefore fall under IMD in the Commission’s current proposals, the above comments with regard to IMD would also apply to them.

7.1.3 Direct sales by investment firms and credit institutions (86) What is your opinion about applying MiFID rules to credit institutions and

investment firms when, in the issuance phase, they sell financial instruments they issue, even when advice is not provided? What is your opinion on whether, to this end, the definition of the service of execution of orders would include direct sales of financial instruments by banks and investment firms? Please explain the reasons for your views.

In such direct sales to retail clients, it is unrealistic to suggest that the bank or firm is

only ever acting as an issuer. We think conflict management should apply and Articles 19(1) and (2) should apply as well. Where the sale occurs otherwise than at the initiative of a retail client, then the Article 19(5) provisions should apply – as they would if a separate legal entity arranged the deal.

7.2 Conduct of business obligations 7.2.1 “Execution only” services (87) What is your opinion of the suggested modifications of certain categories of

instruments (notably shares, money market instruments, bonds and securitised debt), in the context of so-called "execution only" services? Please explain the reasons for your views. Much depends on what the Commission is trying to achieve and what evidence of failure of the current regime exists. We do not feel able to offer an informed opinion on the suggested modifications without information on these two points.

(88) What is your opinion about the exclusion of the provision of "execution-only" services when the ancillary service of granting credits or loans to the client (Annex I, section B (2) of MiFID) is also provided? Please explain the reasons for your views.

We think it important to exclude execution-only in such circumstances because it is

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patently not only execution. It is tantamount to the situation where an instruction is not at the initiative of the client, since the client is not alone able to decide to trade but needs the assistance of funding.

(89) Do you consider that all or some UCITS could be excluded from the list of non-

complex financial instruments? In the case of a partial exclusion of certain UCITS, what criteria could be adopted to identify more complex UCITS within the overall population of UCITS? Please explain the reasons for your views. The EU created UCITS as an investment brand for retail investors, to be marketed freely cross-border. UCITS are subject to requirements designed specifically to ensure a prudent spread of risk. Even if the view is taken that some UCITS are internally complex (whatever that might mean), a critical feature of UCITS regulation is the focus upon governance and separation of roles of the parties responsible for the oversight and management of the activities and the assets. It is this, together with detailed and specific disclosure and document requirements that makes them appropriate for purchase by retail investors. They are the EU’s non-complex retail investment vehicle. We strongly believe that regulatory intervention should be taken only where there is a clear market failure and supporting cost/benefit analysis. There is nothing in the paper to suggest that the approach taken in MiFID is failing such that regulatory intervention is required. Therefore we believe the position of UCITS is absolutely clear; namely, in accordance with MiFID, UCITS are non-complex. This reflects the will of the Commission, Parliament and the Council. MiFID was finalised a number of years after the UCITS III Directive (2001/108/EC) was finalised, so the wider investment powers set out in UCITS III were clearly in the contemplation of the above-mentioned bodies when they took the decision to treat as non-complex all UCITS. We can see no reason for bringing into question the decision taken by those bodies at that time. To ignore the UCITS governance structure and to equate a UCITS with any arrangement mirroring an exposure to the same investments (such as by a structured bond exposure) would be misleading.

(90) Do you consider that, in the light of the intrinsic complexity of investment services, the "execution-only" regime should be abolished? Please explain the reasons for your views.

No, we do not agree with the suggestion to abolish the ‘execution-only’ regime, as it will have implications for consumers in terms of choice and cost. MiFID introduced a calibrated approach that fitted between advice and execution-only. It is right that investors should understand that some instruments may be too complex for them to consider on their own. After only a few years, to now proceed as if all instruments were complex would reduce the impact of any distinctions. Even under execution–only, investors receive a warning. Appropriateness can be assessed when, for example, a directed marketing campaign is targeted only at clients who are known to have the knowledge and experience necessary, it does not require any communication with the client. It should not be assumed investors will be better protected if the execution-only regime is abolished, but only that costs of sales will increase.

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7.2.2 Investment advice (91) What is your opinion of the suggestion that intermediaries providing

investment advice should: 1) inform the client, prior to the provision of the service, about the basis on which advice is provided; 2) in the case of advice based on a fair analysis of the market, consider a sufficiently large number of financial instruments from different providers? Please explain the reasons for your views.

We agree that intermediaries should be required to disclose to their clients what type of advice they are offering and this should be done before a service is provided. Intermediaries must disclose the basis on which the advice is provided, and which investments and providers are available. This will allow clients to understand if there are any limitations to the service they are being offered by these intermediaries. In conjunction with clear disclosure, we consider it reasonable that intermediaries should also base their advice on a fair analysis of the market, the providers and an appropriate number of financial instruments, in order to allow the client to make an informed decision.

(92) What is your opinion about obliging intermediaries to provide advice to specify in writing to the client the underlying reasons for the advice provided, including the explanation on how the advice meets the client's profile? Please explain the reasons for your views.

(93) What is your opinion about obliging intermediaries to inform the clients about

any relevant modifications in the situation of the financial instruments pertaining to them? Please explain the reasons for your views.

(94) What is your opinion about introducing an obligation for intermediaries

providing advice to keep the situation of clients and financial instruments under review in order to confirm the continued suitability of the investments? Do you consider this obligation be limited to longer term investments? Do you consider this could be applied to all situations where advice has been provided or could the intermediary maintain the possibility not to offer this additional service? Please explain the reasons for your views.

As regards questions 92 – 94, we fully support the Commission’s suggestion that intermediaries providing investment advice should make clear the basis on which the advice is provided. That is to say whether the adviser is acting on behalf of a provider and therefore the advice is limited in some way, or whether the adviser is conducting an analysis of the whole market and the advice is unrestricted. We are of the view that it is very important that any consumer seeking advice is aware of any potential limitations or restrictions on the service they receive. This concept has been promulgated in the UK financial services industry for many years and the FSA’s Retail Distribution Review has clarified the criteria from which an adviser can describe whether their services are independent or restricted. Consumer confidence is enhanced if they are made aware of the distinction. We welcome the proposal that firms providing advice should report in writing to the consumer the reason for the advice and why it meets their needs. This too has been a

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feature of the UK advice sector for many years, with “reason why” letters being required to be sent to consumers following advice. The Commission further suggests that it would be appropriate that the consumer could expect longer term assistance from intermediaries providing the advice. For example:

Reporting regularly to the consumer on the market value and performance of the recommended financial instruments

A regular update of the consumer’s personal circumstances Confirmation that the financial instrument(s) still meet the consumer’s needs and is/are suitable

All these could be reasonably expected from a competent intermediary in offering an ongoing service or review to the client. However, this is unlikely to be undertaken by the intermediary for no cost and without some sort of agreement between the two parties. The Commission should consider how agreement might be reached and the cost be met. This could be through the continued payment of trail commission/renewal/retrocession, for example. Whatever its attractions, we think it unrealistic to propose an ongoing obligation upon all advisers; we fear the economics of this proposal will lead to increased financial exclusion. In the UK, the FSA, as part of its Retail Distribution Review, has proposed that such payments be banned and that arrangements for ongoing payments will need to be devised by agreement between the intermediary and the consumer. We do not believe an outright ban is necessary to achieve the Commission’s aims. The competency of the adviser (whether independent or connected with the product provider), together with clear and regular disclosure of payments made and received, will largely achieve deliver the desired outcome.

7.2.3 Informing clients on complex products (95) What is your opinion about obliging intermediaries to provide clients, prior to

the transaction, with a risk/gain and valuation profile of the instrument in different market conditions? Please explain the reasons for your views. We support the view that prospective clients should be provided with as much information about their products as reasonably practicable in order for them to make a considered decision when buying an investment product. But there needs to be some consideration of the categorisation of the client (and their subsequent knowledge) that is being provided with this information. It should not be assumed that by the mere provision of information clients will be in a better position to make decisions. In principle, though, we support efforts to improve the information provided to investors.

(96) What is your opinion about obliging intermediaries also to provide clients with

independent quarterly valuations of such complex products? In that case, what criteria should be adopted to ensure the independence and the integrity of the valuations?

(97) What is your opinion about obliging intermediaries also to provide clients with

quarterly reporting on the evolution of the underlying assets of structured

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finance products? Please explain the reasons for your views. (98) What is your opinion about introducing an obligation to inform clients about

any material modification in the situation of the financial instruments held by firms on their behalf? Please explain the reasons for your views.

Clearly, the crisis showed that some intermediaries did not understand the products that

were being sold and could not explain them to clients. In relation to questions 96 - 98, therefore, we believe it appropriate to consider some form of obligation to provide ongoing reporting about complex products. This might assist in raising advisers’ awareness of the need to attain and maintain an appropriate level of competence and the need for ongoing monitoring of products. However, annual reporting should suffice, we suggest, other than where there has been a significant change in the structure or expected outcome of the product.

(99) What is your opinion about applying the information and reporting

requirements concerning complex products and material modifications in the situation of financial instruments also to the relationship with eligible counterparties? Please explain the reasons for your views.

We see no justification for such a requirement in relation to eligible counterparties. Such clients are active market participants. They have access to (or regularly request) relevant information, and have the expertise to analyse that information.

(100) What is your opinion of, in the case of products adopting ethical or socially

oriented investment criteria, obliging investment firms to inform clients thereof?

To inform a client whether a product is ethically or socially oriented may be part of the marketing practice but we see no need for it to be made part of the required documentation of a product unless such reporting is part of the terms of business between the client and the firm.

7.2.4 Inducements

(101) What is your opinion of the removal of the possibility to provide a summary disclosure concerning inducements? Please explain the reasons for your views.

We do not think it practicable to provide a full list of all the details of inducements,

particularly because at the moment there is no definition of inducement that is sufficiently agreed-upon. If the commission is concerned that the summaries are too short or do not provide information to customers so that they can be said to be fair clear and not misleading statements, then supervisors should require more. This could be addressed at ESMA to ensure a consistent basis applied across the EU.

(102) Do you consider that additional ex-post disclosure of inducements could be

required when ex-ante disclosure has been limited to information methods of calculating inducements? Please explain the reasons for your views.

We have no specific view on this. Again this could be a matter that ESMA looks at with

supervisors.

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(103) What is your opinion about banning inducements in the case of portfolio management and in the case of advice provided on an independent basis due to the specific nature of these services? Alternatively, what is your opinion about banning them in the case of all investment services? Please explain the reasons for your views.

Neither the current MiFID rules nor the Commission’s consultation provide a definition of an inducement. For the purposes of this response we have assumed that this refers to a fee, commission or non-monetary benefit. We suggest that, for clarity, the Commission or ESMA should issue guidance on what constitutes an inducement. The Commission should focus on the distinction between fees, commissions and non-monetary benefits, and how these interact with enhancing any service to a consumer. We believe that the distinction has an inherent weakness in that non-monetary benefits provided by a provider can often enhance the service a consumer receives but this is difficult to quantify. On the other hand, the payment of a fee or commission is much more straightforward and is received in relation to a specific service provided. Rather than banning inducements for intermediaries and portfolio managers outright the Commission should introduce measures requiring such payments and benefits to be made entirely transparent to the consumer. In that way the consumer can make an informed judgement over whether the service they are receiving is appropriate to the inducements being received by the intermediary or portfolio manager. An additional requirement should be that inducements in the form of commission etc. can be received provided both parties explicitly agree and/or the consumer has expressed agreement. It is interesting that the Commission envisages that inducements would be banned for any intermediary offering independent advice as it would be incompatible with the concept of independence. We fail to see why the distinction is made. Any advice, whether independent or restricted, should be free of bias and, therefore, should be free of any influence brought about by any inducements. An adviser giving “restricted” advice can still be influenced in their advice giving by salary structure, bonuses and targets. It follows, therefore, that if inducements are to be banned, it should be done for all forms of advice-giving.

Commission sharing agreements If there were to be a ban on third-party inducements in relation to portfolio management, we think it likely that research could no longer be bought from execution fees. The measures which address softing and unbundling in the UK are seen as an expression of the inducement rule and an article 4 notification was given. We understand that France is also introduced legislation about commission sharing agreements. A ban would therefore lead to very substantial changes in the equity capital markets. We would welcome further discussion with the Commission about its intentions in this regard.

7.2.5 Provision of services to non-retail clients and classification of clients (104) What is your opinion about retaining the current client classification regime in

its general approach involving three categories of clients (eligible counterparties, professional and retail clients)? Please explain the reasons for

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your views. Generally, if a per se professional client considers itself to be lacking in appropriate knowledge and expertise, it can either request to be categorised as a retail client or seek specialist advice. We do not believe there is any need to change the current rules for client categorisation save for in relation to a best execution point. ECP clients are deemed to be able to look after their own interests. We do, however, consider there is an anomaly in the way that categorisation works in relation to best execution. As the Commission will be aware, firms must categorise their clients as professional or retail when providing the service of portfolio management. The requirement to act in the clients’ best interests when placing orders arising from decisions to deal under discretion is regulated by Article 45 of the Level 2 directive. These provisions essentially mirror the obligations owed by the firms when executing client orders that are placed with them. However, the operation of Article 24.2 of MiFID means that the portfolio manager is not entitled to the protection of Article 21 of MiFID since it is treated as an ECP per se. The second tiret records only that the portfolio manager can request treatment as a professional (in effect for the benefit of its clients). We consider that the provision of such protection should not be left to the unilateral decision of a broker dealer. IMA supports an amendment of MiFID Article 24.2, second tiret to add an additional provision. This should clarify the issue of best execution for portfolio managers when dealing with brokers, as follows (showing text by comparison to 24.2 even though we suggest this is in addition): “Classification as an eligible counterparty under the first subparagraph shall be without prejudice to the right of such entities firms providing the service of portfolio management to request require, either on a general form or on a trade-by-trade basis, treatment as clients whose business with the investment firm is subject to Articles 19, 21 and 22.”

(105) What are your suggestions for modification in the following areas:

a) Introduce, for eligible counterparties, the high level principle to act honestly, fairly and professionally and the obligation to be fair, clear and not misleading when informing the client;

b) Introduce some limitations in the eligible counterparties regime. Limitations may refer to entities covered (such as non-financial undertakings and/or certain financial institutions) or financial instruments traded (such as asset backed securities and nonstandard OTC derivatives); and/or

c) Clarify the list of eligible counterparties and professional clients per se in order to exclude local public authorities/municipalities? Please explain the reasons for your views.

ECPs should be subject to article 19(1) and (2), but otherwise we see no good reason to change the current system.

(106) Do you consider that the current presumption covering the professional clients' knowledge and experience, for the purpose of the appropriateness and

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suitability test, could be retained? Please explain the reasons for your views.

We do not believe it is appropriate for investment firms to be required to assess knowledge and experience of entities considered to be per se professionals. If such entities consider themselves to have insufficient knowledge they can either ask to be treated as retail clients or seek an appropriate specialist adviser.

7.2.6 Liability of firms providing services (107) What is your opinion on introducing a principle of civil liability applicable to

investment firms? Please explain the reasons for your views.

We think it would be better to require all Member States to permit clients who have suffered loss by reason of a breach of a rule to bring a claim. It would not be appropriate to seek to harmonise all substantive law in the EU.

(108) What is your opinion of the following list of areas to be covered: information

and reporting to clients, suitability and appropriateness test, best execution, client order handling? Please explain the reasons for your views.

This seems broadly reasonable. It is important to note that breach of the best execution rule is unlikely to be able to be sued upon by an investor as it is an obligation to have and follow a process - and not, for example, to secure the best price.

7.2.7. Execution quality and best execution (109) What is your opinion about requesting execution venues to publish data on

execution quality concerning financial instruments they trade? What kind of information would be useful for firms executing client orders in order to facilitate compliance with best execution obligations? Please explain the reasons for your views.

Our members spend a lot of money on transaction cost analysis. We would imagine that

whatever will publish by any individual venue, firms will still want to ensure that there is independent verification.

(110) What is your opinion of the requirements concerning the content of execution

policies and usability of information given to clients should be strengthened? Please explain the reasons for your views.

Execution policies do not really assist the buy side in determining whether to use a sell side firm. They are generally merely prosaic restatements of the MiFID obligations. Very detailed analysis and enquiries are sometimes made of firms had to be as regards their automated trading and broke crossing networks. A better base description of how execution occurs could be provided in some circumstances. We note the proposed principles of IOSCO in relation to dark pools and support principle five in this regard.

7.2.8. Dealing on own account and execution of client orders (111) What is your opinion on modifying the exemption regime in order to clarify that

firms dealing on own account with clients are fully subject to MiFID requirements? Please explain the reasons for your views.

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(112) What is your opinion on treating matched principal trades both as execution of

client orders and as dealing on own account? Do you agree that this should not affect the treatment of such trading under the Capital Adequacy Directive? How should such trading be treated for the purposes of the systematic internaliser regime? Please explain the reasons for your views.

As regards 111 and 112, where a firm is dealing with a client in order to facilitate a trade in circumstances in which the client is relying on the firm, then a service is being provided and the obligations to protect investors under MiFID should apply. This should occur whether or not it can also be said that in a legal sense of firm is dealing on own account. This would cover matched principal trades and some other own account dealing. It is important that the legislation looks at the reality of the trade and does not allow an inadequate definition to exempt a firm from meeting obligations that can be expected of it.

As regards the application of the capital adequacy directive, this is a more complex question. We do think such a change to MiFID should be seen as altering the current treatment under the Capital Adequacy Directive. We have no comment about the systematic internalising regime in this regard.

7.3 Authorisation and organisational requirements 7.3.1 Fit and proper criteria (113) What is your opinion on possible MiFID modifications leading to the further

strengthening of the fit and proper criteria, the role of directors and the role of supervisors? Please explain the reasons for your view.

We support such modifications. It is already the case that firms authorised by the FSA must follow such requirements and the industry accepts them as an appropriate part of their regulation and obligations.

7.3.2 Compliance, risk management and internal audit functions (114) What is your opinion on possible MiFID modifications leading to the

reinforcing of the requirements attached to the compliance, the risk management and the internal audit function? Please explain the reasons for your view.

This strengthening of these functions seems reasonable. We presume that the requirement that they be able to report to the board means that while their normal reporting line could be elsewhere, they could, if they see fit, require direct access to the board.

7.3.3 Organisational requirements for the launch of products, operations and services (115) Do you consider that organisational requirements in the implementing

directive could be further detailed in order to specifically cover and address the launch of new products, operations and services? Please explain the reasons for your views.

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(116) Do you consider that this would imply modifying the general organisational

requirements, the duties of the compliance function, the management of risks, the role of governing body members, the reporting to senior management and possibly to supervisors? The Commission offers no evidence to indicate that the current high level framework is deficient in any way. We suggest that it would be proportionate for this to be left in place and firms be required to organise their own resources and business activity to meet the framework requirements.

7.3.4 Specific organisational requirements for the provision of the service of portfolio management (117) Do you consider that specific organisational requirements could address the

provision of the service of portfolio management? Please explain the reasons for your views

We support this proposal. The requirements listed in this section are already implemented by all UK firms, given the way in which the FSA has implemented MiFID and its own, pre-MIFID, rules. The suggested changes would, though, add a burden of extra paperwork. It must be noted that for most institutional mandates the portfolio manager does not determine issues such as asset allocation and clients may use other advisers to oversee their interests. Any legislation must not presume all these matters are left by institutional clients to the discretion of the manager. However, we do agree that a firm should be able to evidence that a mandate was followed.

7.3.5 Conflicts of interest and sales process (118) Do you consider that implementing measures are required for a more uniform

application of the principles on conflicts of interest?

It is important that issues such as conflicts are subject to a harmonised approach for equivalent economic activities whatever their legal structure. If ESMA proposes guidelines for supervisors to ensure uniform approaches this too would be welcome.

7.3.6 Segregation of client assets (119) What is your opinion of the prohibition of title transfer collateral arrangements

involving retail clients' assets? Please explain the reasons for your views. We would not object to this. The question is whether clients understand the risks and

conflicts involved. (120) What is your opinion about Member States be granted the option to extend the

prohibition above to the relationship between investment firms and their non retail clients? Please explain the reasons for your views.

We do not think that professional clients need necessarily to be protected by introducing

a prohibition on title transfer collateral arrangements. It carries risks, the professional clients can have these explained to them, and their use may at times be appropriate.

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(121) Do you consider that specific requirements could be introduced to protect retail clients in the case of securities financing transaction involving their financial instruments? Please explain the reasons for your views.

You offer no view on this proposal; those firms engaged in this market will be better positioned to address it.

(122) Do you consider that information requirements concerning the use of client financial instruments could be extended to any category of clients?

Information should be fair clear and not misleading and that should cover the terms of use of financial instruments. Conventionally in the institutional space clients will deal with these issues direct with their custodian. Where a firm does not itself hold client assets it should not be required to provide information that another firm providing services to the common client should provide.

(123) What is your opinion about the need to specify due diligence obligations in the

choice of entities for the deposit of client funds?

We have no issue with these proposals. 7.3.7 Underwriting and placing (124) Do you consider that some aspects of the provision of underwriting and

placing could be specified in the implementing legislation? Do you consider that the areas mentioned above (conflicts of interest, general organisational requirements, requirements concerning the allotment process) are the appropriate ones? Please explain the reasons for your views.

We have attached by separate pdf the report from the Rights Issue Fees Inquiry in the UK which was published under the auspices of the Institutional Investor Council. We consider it shows that thought should be given to the disclosure of fees, conflict management and disclosure and the barriers to entry to the sub underwriting market which may be caused by regulation. This is an important issue on which we would welcome further engagement with you.

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8. FURTHER CONVERGENCE OF THE REGULATORY FRAMEWORK AND OF SUPERVISORY PRACTICES 8.1 Options and discretions 8.1.1. Tied Agents (125) What is your opinion of Member States retaining the option not to allow the

use of tied agents? (126) What is your opinion in relation to the prohibition for tied agents to handle

clients' assets? (127) What is your opinion of the suggested clarifications and improvements of the

requirements concerning the provision of services in other Member States through tied agents?

(128) Do you consider that the tied agents regime require any major regulatory

modifications? Please explain the reasons for your views. We have no comments on these proposals as our members do not use tied agents.

8.1.2 Telephone and electronic recording (129) Do you consider that a common regulatory framework for telephone and

electronic recording, which should comply with EU data protection legal provisions, could be introduced at EU level? Please explain the reasons for your views.

We are generally in favour of harmonisation. Consistency and harmonisation across the EU is essential to drive down costs and achieve the aims of the Directive. However, extra costs should be imposed on industry only where these can be justified and are proportionality applied wherever appropriate.

(130) If it is introduced do you consider that it could cover at least the services of reception and transmission of orders, execution of orders and dealing on own account? Please explain the reasons for your views.

We agree with the proposed scope of application should the carve-out suggested in our answer to Q131 be adopted.

(131) Do you consider that the obligation could apply to all forms of telephone

conversation and electronic communications? Please explain the reasons for your views.

The introduction of telephone recording was discussed extensively in the UK when the FSA first proposed such a requirement. As part of that process the case for avoiding duplicate recording of calls was made and accepted by the regulator. This has avoided imposing an unnecessary burden on the portfolio management sector of the industry, thus avoiding the imposition of unnecessary expense, and costs for investors. Given the fact that all calls between portfolio managers and brokers/dealers will be

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recorded by the broker/dealer, we consider that an exemption for portfolio managers is proportionate. Requiring both buy- and sell-side firms to record telephone conversations and other electronic communications would be duplicative. Investment management firms are already required to keep records of when and with whom they have placed deals. As a result it should be straightforward to trace recordings of all conversations, and we do not believe that the benefits of the proposed rules would be reduced by this carve-out. We would ask that the Commission to include a specific carve-out in its directive exempting buy-side firms from recording communications that would be captured by the recording arrangements of sell-side firms. This might be achieved by exempting a discretionary investment manager, in respect of telephone conversations or electronic communications made with, sent to or received from a firm which the discretionary investment manager reasonably believes is subject to the recording obligation in respect of that conversation or communication.” We also consider a de minimis provision should be used where unrecorded conversations are made on an infrequent basis, and represent a small proportion of the total telephone conversations and electronic communications made.” This would avoid unnecessary confusion and ensure harmonisation across the EU.

(132) Do you consider that the relevant records could be kept at least for 3 years? Please explain the reasons for your views.

We have no comment to make on this.

8.1.3 Additional requirements on investment firms in exceptional cases (133) What is your opinion on the abolition of Article 4 of the MiFID implementing

directive and the introduction of an on-going obligation for Member States to communicate to the Commission any addition or modification in national provisions in the field covered by MiFID? Please explain the reasons for your views.

We support moves towards harmonisation. Consistency and harmonisation across the EU is essential to drive down costs and achieve the aims of the Directive. There is a question, though, whether Article 4 assists this overall. It is unclear whether the Commission has ever objected to an Article 4 notification, as reasons for accepting or rejecting are not published. If, however, there were no Article 4, we speculate as to whether that would cause some Member States to identify publicly their national differences less frequently.

8.2 Supervisory powers and sanctions 8.2.1 Powers of competent authorities 8.2.2 Sanctions (definition, amounts, publication) (134) Do you consider that appropriate administrative measures should have at least

the effect of putting an end to a breach of the provisions of the national measures implementing MiFID and/or eliminating its effect? How the

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deterrent effect of administrative fines and periodic penalty payments can be enhanced? Please explain the reasons for your views.

We have had regard to the Commission communication about sanctions as well.

Supervisors should ensure they have the full panoply of available powers as set out. (135) What is your opinion on the deterrent effects of effective, proportionate and

dissuasive criminal sanctions for the most serious infringements? Please explain the reasons for your views.

These are complex issues and we would draw your attention to the work of the Law

Commission in England and Wales on this very subject. There is of course a place for criminal sanctions even in the regulatory field.

(136) What are the benefits of the possible introduction of whistleblowing

programs? Please explain the reasons for your views.

It is essential that employees are protected in revealing information that assists identify serious non-compliance or criminality. Provision should also be made to provide an incentive to those who co-operate with enforcement action.

(137) Do you think that the competent authorities should be obliged to disclose to

the public every measure or sanction that would be imposed for infringement of the provisions adopted in the implementation of MiFID? Please explain the reasons for your views.

Not every measure or sanction should be made public. Competent authorities should always have the power to use private sanctions. The presumption should be that there is publicity for the wider good and it must be left to the regulator to determine whether in the particular circumstances that public good is outweighed by other damage.

8.3 Access of third country firms to EU markets (138) In your opinion, is it necessary to introduce a third country regime in MiFID

based on the principle of exemptive relief for equivalent jurisdictions? What is your opinion on the suggested equivalence mechanism?

(139) In your opinion, which conditions and parameters in terms of applicable

regulation and enforcement in a third country should inform the assessment of equivalence? Please be specific.

(140) What is your opinion concerning the access to investment firms and market operators only for non-retail business?

I. A regime providing exemptive relief for third country firms doing cross-border

business with clients and counterparties in the EU could bring positive benefits to investors, issuers and firms in a number of EU countries, by facilitating their access to a wider range of providers of products and services.

II. However, we do not consider that it is helpful or appropriate that this regime should exhaustively define the circumstances in which clients and counterparties in the EU can deal with third country firms. Underscoring the global nature of the

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European capital markets (in comparison to the more domestic characteristic of the U.S. capital markets), there are a broad variety of different circumstances in which investors, issuers and firms in the EU directly and indirectly interact with third country investment firms. In this respect, a simple exemptive regime will not be sufficiently flexible to address all the circumstances where it would be inappropriate to seek to restrict those interactions by imposing licensing requirements on the third country firm. It will be necessary to leave these additional issues to continue to be dealt with under national law or to develop a much more comprehensive and flexible EU solution.

III. We consider that the appropriate way forward is to introduce a uniform

exemption allowing third country firms that meet certain minimum standards to deal with EU investors and counterparties, at least for eligible counterparties and professional clients. Third country firms would not be required to meet an equivalence standard but they would be required to be authorized to do the relevant business in their home country (if that business is subject to regulation in that country), the country should not be on the FATF blacklist and a memorandum of understanding should exist with the local regulators. In addition, third country firms could be required to comply with certain high level principles as regards their business with local counterparties but not the full range of client facing conduct of business rules (but they would be subject for example to market abuse and general anti-fraud rules).

IV. Member States should be free to maintain their current approach to the licensing

of branches, as there is no evidence that this has proved problematic. In addition, they should also be able to maintain any other existing approach to cross border business, so that the new minimum exemption would operate as a form of minimum harmonization. In particular, Member States should continue to be able to exempt third country-firms from licensing:

With regard to business that does not involve the solicitation of clients in

their country; With regard to business with eligible counterparties; With regard to business intermediated by firms authorised under MiFID;

and Activities regarded as taking place outside their territory.

V. This would respect national experiences, be more consistent with the GATS

standstill (see the EU’s Understanding on Commitments in Financial Services obligation not to impose additional “conditions, limitations and qualifications” that would have the effect of denying “non-resident suppliers” the opportunity to supply relevant services (via Modes 1 or 3)) and provide a platform for further harmonization in due course if warranted.

VI. In contrast, we do not consider that the benefits of an exemptive regime for third

country firms and their clients and counterparties in the EU should be conditioned on an equivalence test as outlined in the Commission's paper, especially where the regime is restricted to dealings with EU clients and counterparties that qualify as professional clients. Professional clients in many cases can already choose whether to deal with third country firms and to trade on third country markets with differing types of regulation than those in the EU.

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VII. We are concerned that the effect of such a regime would be that cross-border

financial services between the EU and other regions around the world would be severely restricted. We consider that:

VIII. Liquidity between financial markets in different regions could be severely

constrained. This could result in serious challenges for the systemic stability of the global financial system; and

IX. The European financial industry could be significantly harmed on the basis that:

a. it is essential for European investors/firms to have the flexibility to access a wide range of third country firms; and

b. an inflexible EU licensing regime would threaten EU access to third country products/services and the EU’s role as an international financial centre.

X. The proposed third country regime is highly restrictive and seems to envisage that

third country firms must comply with a “strict equivalence” test to provide services to EU investors/counterparties. The “strict equivalence” test would require that the third country regime is equivalent to the European legal regime in areas covered by MiFID, the Market Abuse Directive, the Prospectus Directive and other European legislation and that appropriate Memoranda of Understanding exist between the EU and the respective countries. Third country firms would be subject to all client-facing conduct of business rules, including client money segregation rules. This is a standard that currently not even countries with very developed financial systems in third countries meet and it goes far beyond the standards usually required for European firms, which are usually able to access at least market counterparties in developed financial markets.

(141) – No question in paper

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9. REINFORCEMENT OF SUPERVISORY POWERS IN KEY AREAS 9.1. Ban on specific activities, products or practices (142) What is your opinion on the possibility to ban products, practices or operations

that raise significant investor protection concerns, generate market disorder or create serious systemic risk? Please explain the reasons for your views. This question raises substantial and wide-ranging issues. MiFID specifies how firms must take responsibility for investor protection and disclosure. Product regulation is already well developed in the UCITS regime, where many of our members already operate. Ex post banning of products on investor protection grounds does raise the issue of moral hazard. There will also need to be careful consideration of the impact on those who are already invested. Supervisors have wide powers to look at marketing materials, client categorisation and suitability tests. These powers provide a high level of protection for investors if exercised diligently. Again, the Commission’s work on sanctions may address many of the perceived problems. We do, however, acknowledge the protections suggested by the Commission, namely consultation and evidence. Regarding financial stability and integrity of financial markets, it is right that regulatory authorities have the powers to intervene. However, we think there are already wide powers to suspend trading in financial instruments – and the paper proposes their extension to OTC trades. Issues of financial stability probably do need more powers but this needs to be addressed in a more holistic manner involving the ESRB and not, we suggest, as a brief reference in the MiFID review.

(143) For example, could trading in OTC derivatives which competent authorities

determine should be cleared on systemic risk grounds, but which no CCP offers to clear, be banned pending a CCP offering clearing in the instrument? Please explain the reasons for your views.

(144) Are there other specific products which could face greater regulatory scrutiny?

Please explain the reasons for your views. Our members do not think that a derivative should be banned just because there is no

CCP willing to clear it. It may be that it is not commercially viable for any clearing house to do so, or there may be other valid reasons for it.

The absence of central clearing does not automatically equate to investor detriment. Indeed, investors’ interests may be damaged by not being able to negotiate a contract bilaterally in order to hedge risks or manage portfolios.

In addition, EMIR will result in a set of comprehensive rules about derivatives. It will

determine both clearing eligibility and rules on capital requirements for bilateral clearing. The comprehensive nature of EMIR should, in our view, address any systemic concerns. We are not convinced there would be any additional benefits in also including rules in relation to OTC derivatives in the MiFID review.

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9.2. Stronger oversight of positions in derivatives, including commodity derivatives (145) If regulators are given harmonised and effective powers to intervene during

the life of any derivative contract in the MiFID framework directive do you consider that they could be given the powers to adopt hard position limits for some or all types of derivative contracts whether they are traded on exchange or OTC? Please explain the reasons for your views.

We do not agree with the proposal to give regulators the powers to intervene in this manner. Those powers are too wide, and risk damaging the market in question. Moreover, we do not think that position limits are a particularly useful tool to curb market speculation.

We support the UK authorities’ views expressed in a paper entitled Reforming OTC derivatives markets (December 2009) that position limits would address the perceived problems.

Please also see responses in section 5. (146) What is your opinion of using position limits as an efficient tool for some or all

types of derivative contracts in view of any or all of the following objectives: (i) to combat market manipulation; (ii) to reduce systemic risk; (iii) to prevent disorderly markets and developments detrimental to investors; (iv) to safeguard the stability and delivery and settlement arrangements of physical commodity markets. Please explain the reasons for your views. As explained above, our members think that it should be left to regulated markets to determine the need for position limits for some contracts. It should not be a blanket power given to the regulators.

(147) Are there some types of derivatives or market conditions which are more

prone to market manipulation and/or disorderly markets? If yes, please justify and provide evidence to support your argument. We believe that contracts with a narrow supply need more intensive regulatory scrutiny (for example, platinum). Such markets may be more easily distorted.

(148) How could the above position limits be applied by regulators: (a) To certain categories of market participants (e.g. some or all types of financial participants or investment vehicles)? (b) To some types of activities (e.g. hedging versus non-hedging)? (c) To the aggregate open interest/notional amount of a market?

Regulatory focus should not be on certain types of market participant. There seems to be no evidence that only certain types of market participants are responsible for driving prices in these markets.