ISDA has just released a white paper MiFID/MiFIR and Transparency for OTC Derivatives, which looks at the micro-structure (and liquidity formation ) process of OTC Derivatives markets.
The paper makes the case that different trading models suit different products, and that pre-trade price transparency rules, which are central to MiFID II, must be calibrated at the product and trading model level.
- Different trading models exist for different instruments.
- Pre-trade transparency differs according to the nature of a given trading model.
- Pre-trade transparency should be calibrated by trading model and should adequately accommodate Request for Quote trading systems.
- The systematic internalisation regime is inconsistent in respect of different asset classes.
- The systematic internalisation regime could undermine liquidity provision.
- Effective price formation can be supported through better targeted measures, specifically a requirement that firms establish quoting policies.
- Redraft or replace Article 7 of MiFIR to accommodate trading systems other than order book systems without relying on the waiver process.
- Remove the quote-sharing obligation from Article 17 and put in place measures that support competitive pricing.
Meanwhile, in the pro-Dodd Frank & Volcker Rule camp, the NY Times has today run a blog Paul Volcker vs. The Bank of Canada, (by Simon Johnson, former Chief Economist of the IMF) where he attacks the Canadian Central Bank for their opposition to the Volcker Rule (see earlier blog here). As part of his argument, Simon cites a lengthy paper by BetterMarkets, in support of the Volcker Rule.