SECTION II - INTERMEDIARIES. Definition of investment advice

Transcription

1 BME SPANISH EXCHANGES COMMENTS ON THE CONSULTATION PAPER CESR/ ON THE SECOND SET OF MANDATES REGARDING CESR S DRAFT TECHNICAL ADVICE ON POSSIBLE IMPLEMENTING MEASURES OF THE DIRECTIVE 2004/39/EC ON MARKETS IN FINANCIAL INSTRUMENTS Bolsas y Mercados Españoles (BME) integrates the companies that direct and manage the securities markets and financial systems in Spain. It brings together, under a single activity, decision-taking and coordination unit, the Spanish equity, fixed-income and derivatives markets and their clearing and settlement systems. With respect to the CESR Consultation Paper CESR/ CESR s Draft Technical Advice on Possible Implementing Measures of the Directive 2004/39/EC on Markets in Financial Instruments" on the second set of mandates from the Commission, we have the following comments: SECTION II - INTERMEDIARIES Definition of investment advice Question 1.1 Do you agree that advice on services, such as recommendations to use a particular broker, fund manager or custodian, should not be covered? Response: We agree with CESR not to include the advice on services in the scope of the concept of recommendation when defining investment advice. However, we find that the eventual assessment of whether to address the orders to a RM, MTF or systematic internaliser should be covered by the definition of investment advice. Suitability test (art. 19.4) The envisaged transaction may be considered as unsuitable for the client or potential client, inter alia, because of the risks of the financial investments involved (e.g. derivatives), the type of transaction (e.g. sale of options), the characteristics of the order (e.g. size or price specifications) or the frequency of the trading. (Box 8, point 7). Derivative instruments are considered unsuitable for the client because of their risks, when providing investment advice or portfolio management. Nevertheless, from BME s point of view, this statement does not take into account that derivatives are often used to cover a position in portfolio management and therefore, the above mentioned paragraph would result in a very simplified and limited approach. 1

2 Particularly, it seems that suitability is not a concept related to the safety of the investment, but to the client s knowledge and experience in the investment field relevant to the specific type of product or service. Consequently, the criteria for assessing suitability should not be exclusively focused on the characteristics of the financial product, but directly and expressly related to the client profile. Execution only (Article 19(6)) Definition of non-complex instrument (Box 10, page 51) The advice of what is meant to be a non-complex instrument, establishes the fact of being a non-derivative instrument as a necessary condition to be covered by the definition. In this article, the MiFID excludes those bonds or other forms of securitised debt that embed a derivative. However, the reason for this exclusion does not seem to be the derivative itself but the complexity of an instrument that has a different nature than the initially defined or considered. This latter approach would be more realistic rather than excluding a priori all derivative products. SECTION III MARKETS Display of client limit orders (Article 22.2) We welcome CESR s accurate analysis regarding the consideration of easy access as linked to both visibility and accessibility concepts. In particular, we believe that it is very suitable that accessibility is described as the greatest possible opportunities for the limit order to be rapidly and easily executed as soon as permitted by market conditions. Question 7.1: In your view, what types of arrangements other than RMs and MTFs could be considered as complying with article 22.2? Response: We understand that according to the Directive, a priori, investment firms comply with article 22.2 obligations by transmitting the client limit order only to a RM and/or MTF, not to other types of arrangements. Pre-trade transparency - Systematic Internalisers (article 4 and 27) Definition of Systematic Internaliser Question 8.1 Do consultees agree with criteria for determining systematic internaliser? Should additional/other criteria be used and if so, what should these be? Response: The definitions of organised and systematic for determining systematic internaliser are appropriate in our view. 2

3 BME welcomes the qualitative approach taken by CESR as well as the fact that the existence of a technical platform is not a necessary condition to be considered as an indication that the investment firm is a systematic internaliser. Question 8.2 Should the criteria be fulfilled collectively or used separately? Response: We believe that any of these criteria should be considered separately as a clear indication that the investment firm is a systematic internaliser. Question 8.3 Should CESR set criteria for the term frequent? If so, do consultees support the setting of numeric criteria or do they believe that a more flexible approach would be useful? What should these criteria be? Response: We agree with CESR that if a firm has put in place the necessary means, methods, infrastructure required to internalise orders, it should be considered a systematic internaliser, taking into account that the amount of business internalised will depend strongly on market conditions, inventory of own positions and the principle of best execution. We support again a qualitative approach rather than a quantitative one. Question 8.4 Do you agree with the proposed obligation to disclose the intention to cease systematic internalisation? Should CESR propose more detailed proposals on this and if so, what should be the appropriate notice period? Response: We agree with the necessity that the systematic internaliser must disclose his intention to cease in this activity. The announcement should be done as soon as possible and disseminated in a way that guarantees that all interested parties and the market in general receive it. The use of the quotes channel does not seem to be enough. Scope of the Rule (Article 27.1) Question 8.5 Should liquidity be measured on an EU-wide or national basis? Response: Liquidity should be measured on an EU-wide basis in order to achieve an equal treatment for all markets irrespective of their size. Nevertheless, to avoid smaller markets to be excluded, a minimum level or percentage of representativeness of each market should be guaranteed. This would be a combination of absolute and relative approaches. Question 8.6 Do consultees have a preference in favour of setting predetermined criteria or using a proxy approach? 3

4 Response: Even if proxies such as indices have the advantage of simplicity, the concerns raised by CESR seem in our view correct. Their methodology, objectives and search of representation would not fit appropriately the accurate definition of liquid share independently of their national or EU-wide characteristics. Therefore, we suggest the use of pre-determined criteria. Indices could be used as complementary measures for criteria. Question 8.7 Regarding the different criteria described above, do consultees agree with the analysis of each of them, and are there other methods which should be evaluated? Response: Regarding the criteria described we have the following comments. Daily turnover: In our view this is the most relevant criteria. Turnover, as a monetary amount, makes instruments with different price level comparable. Furthermore, it eliminates the possible misunderstanding between trading volume and number of shares. Additional criteria could be the size of the spread, the trading activity and the average number of trades per day in descending order of relevance. Trading Activity: This criteria should be more flexible (i.e % of days traded instead of 100%) Average Number of trades per day: It could be appropriate as an special and complementary criteria used after others more general, such as the turnover one, in order to let the inclusion as liquid stocks of those that comply with it. It should never be the only criteria used. Size of the spread: This is one of the main criteria to measure liquidity. It can be calculated considering the associated volumes or the market depth and it can also be calculated as an average over a long period of time that would reflect the market situation of a share over that period and not only in a certain moment. Nevertheless, for instruments with low price, the spread can be misleading because of the usual existence of a minimum tick. Question 8.8 Is it possible and/or appropriate to use for the purposes of article 27 a combination of absolute and relative criteria to define shares as liquid? Response: As described above (questions 8.5 and 8.7) we think that a combination of absolute and relative criteria should be used. In particular, Daily Turnover could be combined with a minimum percentage of total trading in a particular market. Question 8.9 Do consultees consider the proposed figures (i.e. 480 trades per day and 95% of total trading) as appropriate? If not, and where no figures are suggested what are the appropriate figures in your opinion? 4

5 Response: Proposed figures seem appropriate as a special criteria to be used subsequently after other in order to allow the inclusion of stocks that may meet the proposed figures, as already mentioned in question 8.7. Question 8.10 Do consultees agree with the analysis of the relative merits and drawbacks of using proxies such as indices? Response: See question 8.6 Question 8.11 Which criteria would best accommodate the needs of different markets within the EU? Response: See question 8.7 and 8.8 The determination of the Standard Market Size / Classes of shares (27.1 and 27.2) As for the definition of the classes in which liquid shares should be grouped as well as the criteria for its revision, we think that the number of classes must be studied with volumes traded in the EU Markets. This number must be enough to detect differences in liquidity and orders volume average and limited to facilitate the use of this system. We prefer a semi annual revision (as in the main indices in Europe). We agree with CESR on the use of a unified block concept or regime along the Directive. As we suggested in previous consultations, the volume of the large order/block order must be calculated in relation with the daily turnover or with the average executed order. We consider that an order of more than 5% of the daily turnover can be considered as a large order. This system should be combined with a minimum amount in euros (i.e ) for less liquid shares. The Standard Market Size can be 10 times lower than the order large but must also have a minimum level to preserve the concept of pre trade transparency. The system will need to be modified during the periods where extraordinary events take place: IPOs, takeover bids, mergers, increases of capital and other events that change dramatically the liquidity of the share. It is very important to define what is a large order not to be taken into account for the calculation of the average order. It also should be made very clear that the volumes have to be calculated single counted. The competent authorities should coincide in the revision period and publish at the same time the class of share to which each share belongs. Question 9.1 Do you agree with CESR s approach of proposing a unified block regime for the relevant provisions in the Directive or do you see reasons why a 5

6 differentiation between Art.27 MiFID on the one hand and Art.29, 30, 44, 45 MiFID on the other hand would be advisable? Response: We agree with CESR. Question 9.2 Would you consider a large number of SMS classes, each comprising a relatively small bandwidth of arithmetic average value of orders executed, as problematic for systematic internalisers? Response: Number of SMS classes will be defined according to the characteristics of instruments considered. All participants in the market will have to adapt theirs systems to these characteristics. Question 9.3 In your opinion, would it be more appropriate to fix the SMS as monetary value or convert it into number of shares? Response: We think that SMS must be fixed as a monetary value. The conversion into number of shares could have an impact on the accuracy of the SMS because of possible corporate actions, such as splits, between revision periods. Question 9.4 Do you consider subsequent annual revisions of the grouping of shares as sufficient or would you prefer them to be more frequent? Should CESR make more concrete proposals on revision? In particular, should the time of revisions be fixed at level 2? Response: We think that a semi-annual revision would be more appropriate and subject to eventual special revisions as indicated for the SMS. Question 9.5 Do you support the determination of an initial SMS by grouping the share into a class, once a newly issued share is traded for three months, or do you consider it reasonable to fix an initial SMS from the first day of trading of a share by using a proxy based on peer stocks? Response: An initial SMS from the first day of trading of a share based on peer stocks must be fixed. This initial SMS could be revised once the share has been traded for three months. Question 9.7 Do you agree on the proposal on publication of the classification of shares? Would you prefer the establishment of a single contact point (at level2)? Response: The publication of the classification of shares by the competent authority seems a reasonable first step. 6

7 Obligations of the Systematic Internaliser The Directive states that systematic internalisers shall make public their quotes on a regular and continuous basis during normal trading hours. The quote shall be made public in a manner which is easily accessible to other market participants on a reasonable commercial basis. As the wording is practically identical to that of article 22.2 of the Directive, we believe that there should be a similar approach for article 27 to the one made when tackling article 22.2 in the sense that accessibility means visibility and executability, and it requires that orders must be given the greatest possible opportunities to be rapidly and easily executed as soon as permitted by market conditions. Moreover, there are several references to article 22 obligations along this article 27. Question 10.1 Do Consultees consider that there might be specific regulatory issues and specific provisions needed where a systematic internaliser is the trading venue with the largest turnover in a particular share falling within the scope of Article 27? If a systematic internaliser is the trading venue with the largest turnover in a particular share, the systematic internaliser s performance should be subject to a close follow-up in order to guarantee that all the regulatory issues of the Directive are respected. Question 10.2 Do consultees agree that the availability of quotes during 100 % of normal trading hours of the firm is reasonable and workable requirement for on a continuous basis? We agree with CESR s view. Question 10.3 Do consultees think that publication of quotes solely on the firm s own website meets the easily accessible -test? Response: Publication of quotes solely on the firm s own website does not meet the easily accessible -test. As CESR concludes, investors would have to search through a large number of websites with the associated risk of information fragmentation. In addition, we refer to the above comments regarding the concept of accesibility given by CESR for the article 22 purposes. Question 10.4 Do you agree with the proposed general criteria for determining when a price or prices reflect market conditions or do you think that more 7

8 specific criteria should be added? In the latter case; which criteria do you think should be added? Response: We agree with the proposed general criteria. Question 10.5 Do you prefer either of the criteria defining exceptional market conditions, and should those criteria be supplemented by an open list of exceptional market conditions? Response: We prefer to link the decision of a Regulated Market (or competent authority) to suspend trading and the capability of internalisers to withdraw their quotes, so that they do it only when trading is suspended on a Regulated Market. The reason is explained below (question 10.6) Question 10.6 Are there exceptional market circumstances where a systematic internaliser should be able to withdraw its quotes even though a trading suspension has not been called by the regulated market. In the latter case, which market conditions should be added to an open list? Response: Given that exceptional market circumstances as related to a share (or events on that share) affect all the markets or trading venues where that share is traded or available, we do not see thus any exceptional market circumstance that might affect only a concrete systematic internaliser, entitling him to withdraw its quotes. Question 10.7 Do you agree that the proposed approach to the updating of quotes is acceptable or would you prefer more specific criteria? In the latter case, which criteria could be added? Response: The proposed approach seems acceptable. Handling of client orders and executing the orders Question 11.1 Do consultees agree that it is unnecessary for CESR to provide additional advice in respect of the handling of client orders where a systematic internaliser publishes multiple quotes? Response: We agree that it is unnecessary, as we understand that the details of the way in which orders are executed must be included in the order execution policy established by the firm and made available to clients. Question 11.2 Would there be any benefit to CESR making more detailed recommendations concerning how a firm should set the number and/or volume of orders that represents the norm? If so, what form should they take? Response: We agree with CESR s view but we think that the systematic internaliser should include in its communications on internal policy to clients not 8

9 only information concerning quantitative data, as provided in CESR advice, but also some indication of possible situations where the right to limit the total number of transactions from different clients executed at the same time could apply. Question 11.3 Do consultees agree with the definition of a transaction where execution in several securities is part of one transaction? In particular, is there a need to specify a minimum number of securities and if so, what should the number be? Response: The definition must include a maximum time interval for the introduction of the orders related to the transaction. Question 11.4 Do consultees agree with the approach to "orders subject to conditions other than current market price"? Response: We think that the advice should define in advance the details of the types of orders subject to those different conditions, by giving a list of them. Notwithstanding, the list could be revised periodically in order to include new types of orders. Question 11.5: Should the size be based on a EU-wide criteria or would national approaches be preferred? Response: On EU-wide criteria. Question 11.6: Do consultees prefer having a fixed threshold for all shares, or should the size be linked to the grouping of shares (and subsequently to the SMS of each class) or to some other factor? If so, which? Response: We agree with CESR that a fixed threshold for all shares in the same class is simpler but our experience is that setting the threshold as a fixed percentage of daily average turnover, it can be easily implemented Question 11.7: If a threshold is set, how should it reflect the different sizes around the EU, i.e. should it be the highest retail size, the lowest or something in between? Response: It should be fixed at the highest retail size in order to protect retail investors interests. Madrid, January 21 st