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Campos Seeks to Harmonize NMS, EU's MiFID

SEC Commissioner Roel Campos supports the European Union's Markets in Financial Instruments Directive, or MiFID, and believes it will significantly change the regulatory landscape both in Europe and around the world. The directive is similar in many ways to Regulation NMS in the United States, noted Commissioner Campos. He called for the creation of a task force or working committee to consider ways to harmonize the two regulatory models as a step toward convergence and mutual recognition.

Regulation NMS and MiFID are "rooted in the same soil," Mr. Campos said. They each try to facilitate a fair, efficient and transparent market for investors. In addition, implementation of the two systems will increase competition in their respective markets.

There are also tremendous differences in the two models, Mr. Campos noted. MiFID is much broader in its goals and scope than Regulation NMS, while simultaneously not being very prescriptive, he said. Also, it is being applied in the European Union where there generally is one market in each country and very little fragmentation, unlike in the United States markets.

Mr. Campos reiterated his view that the SEC should work toward the development of a cooperative regulatory approach or mutual recognition with certain foreign jurisdictions. In this regard, he suggested that the European Union and United States should try to evolve Regulation NMS and MiFID into a largely converged system of mutual recognition. This is possible, in his opinion, because the two sets of regulations are largely in the same place and the development and implementation of MiFID is viewed with approval in the United States.

However, although there are no major barriers, he believes there are still a few areas that need attention to harmonize the two systems. The first issue is best execution, he said. He noted that MiFID's definition of best execution requires firms to connect to the trading venues in a manner that will ensure best execution for their clients by taking into account considerations such as price, cost, speed and the likelihood of execution and settlement when executing orders. In the United States, best execution is often a matter of best price, although factors such as speed can be the dominant consideration, he said.

MiFID contemplates that investors will enter into an agreement with their brokers to specify what is expected under best execution. In MiFID there is neither a trade-through rule nor the private electronic linkages that connect individual U.S. exchanges into a network of trading venues, he noted. Regulation NMS works in the United States because of the investment in linkage among the markets and the ECNs, he said, and establishing such linkages in Europe is an important matter.

The enforcement and self-reporting of best execution rules will be of critical importance to the future of MiFID, Mr. Campos said. There is no single utility like the Depository Trust and Clearing Corp. to perform clearance and settlement in Europe, so market participants should consider whether the choice of home country clearance will affect transaction costs and be a consideration in best execution. In addition, there is no provision for a consolidated tape and centralized quotes in Europe, he noted, so it is unclear what the impact will be on trading costs of the fees charged by individual banks.

A second issue that will need to be addresses is internalization, he said. In the European Union, firms that frequently internalize client orders will be required to make public firm quotes that they will only be able to price-improve in limited circumstances. In the United States, no such requirement exists, he noted. 

Mr. Campos compared the impact of the changes proposed in MiFID and Regulation NMS with IFRS-GAAP reconciliation. They both are attempts to eliminate barriers and to promote convergence of standards in the international arena, he said, and both are still works in progress. They strive to find common ground, he noted, which will only better serve investors globally.

Mr. Campos believes it is inevitable that regulators on both sides of the Atlantic will eventually need to cooperate in approving a common set of trading rules. It will not be easy, he acknowledged, but he thinks that in the future some type of regulatory agreement will be negotiated between the SEC and European regulators, assuming that the current trends toward the convergence of standards continue.