RegTech Intelligence 
JWG analysis.
With many of the regulations that have come into force since the 2008 financial crash, the rules may appear simple enough, but the devil is very much in the detail. MiFID II is no exception.
With MiFID II looking to enhance transparency within the industry, firms that currently provide RFQ services must consider the wider implication of new rules on their models and, as a result, determine whether or not their current practice fits under the new regime.
MiFID I versus MiFID II
Under the current rules of MiFID I, the buy-side trader can call over the phone to request a price. However, as this price is only indicative, it may change if the order is placed some minutes after requesting the quote. Under the new rules, these quotes are required to be ‘firm’ and, under certain circumstances, public.
In order to support the request for greater transparency within these markets from the G20, MiFID II goes on to state that venues “would be required to make their quotes both in terms of price and volume available to the public”.
Reading between the lines
The new rules may sound simple enough but – as previously mentioned – the devil is in the detail.
Unless the RFQ meets the criteria for a trading venue to use one of the transparency waivers, all details are required to be published. This would include bids, offers and also volumes. This level of transparency means that other firms would then be able to use that information, potentially for their own gain.
Many would agree that greater transparency is very much needed within the industry. But transparency that results in liquidity draining from the market and possible front-running is not. Blackrock has stated that the MiFID II rules put “RFQ systems at a significant disadvantage compared to other types of trading system, and risks liquidity moving to other types of trading system which may not otherwise be most appropriate to achieve best execution”.
Others have noted that there is some legal uncertainty surrounding the RFQ model. The model is essentially bilateral and, therefore, raises questions as to whether it would fit under the multilateral trading regime of Regulated Markets or Multilateral Trading Facilities.
As the RFQ model has proven to be effective for trading in less liquid markets, ESMA should be sensitive when applying the pre-trade transparency requirements. There has been a degree of criticism from the industry, with suggestions that changes be made to the publication requirements as they are. Recommendations include limiting publication to a composite average of the quotes received within certain volume bands or establishing a system with built-in delays.
Before considering any of the suggested approaches, there are other rules within MiFID II that have implications feeding into this model that will also need to be considered. Overall, it seems that ESMA has some work to do in trying to fit different rules, established workflows and RFQ models into the same puzzle.