The Mifid and Internalisation

In this Chapter, we examine the new rules concerning the internalisation of trading orders by investment intermediaries included in the Directive on Markets in Financial Instruments (MiFID). We analyse, first of all, the interplay amongst different interest groups in the legislative process that led to the MiFID. We also try to assess the Lamfalussy regulatory architecture in the light of the MiFID and its formation. We argue, in particular, that the Directive went too far in formulating its core principles in the area of internalisation. For instance, the limit order 'display rule' and the 'quote rule' were specified in the MiFID rather than left to level 2 measures or level 3 actions by CESR. This marks a clear difference from the U.S. system, where similar rules were adopted by the SEC using its regulatory powers under federal legislation. On the whole, the MiFID resulted in substantial reregulation of securities trading systems, despite the abolition of concentration requirements as to exchange transactions in some countries. In fact, the introduction of detailed provisions was asked for by those constituencies, such as the incumbent exchanges and small-medium sized investment firms, which felt protected by national concentration rules and feared the consequences of further liberalisation of securities trading. By way of conclusion, we argue that the rules examined show that the Lamfalussy structure's main goal, represented by a flexible regulation for European securities markets, has not been reached. We also briefly suggest a new regulatory framework in which implementing rules should be adopted by an independent regulatory agency created at EU level. Along these lines such a body could have solely regulatory powers whilst enforcement should be left to national regulators coordinated by CESR