The CEPS paper explores whether MiFID (Markets in Financial Instruments Directive) and Reg NMS (Regulation National Market System) could be accepted as being equivalent by regulators on both sides of the Atlantic, and urges the Commission to conduct a detailed study into the similarities of and differences between the two regulations.
Both pieces of legislation came into force at around the same time, observes Lannoo, and both are aimed at updating regulation to reflect technological changes and market developments. At the heart of each regulation, he adds, is the concept of best execution.
The similarities between the two regulations are too great to be a coincidence, the author claims. Following the opening of the first transatlantic exchange – with a second soon to follow – integrated transatlantic trading floors will soon emerge, he predicts, facilitating the execution of trades under the most favourable regime.
The most significant similarity between the two measures is the fact that the main purpose of both is the enforcement of best execution in equity trading. Moreover, both MiFID and Reg NMS are expected to provide markets with a strong incentive to innovate and adopt technologies that allow them to be more responsive to the speed of execution and thus market efficiency.
However, there are also many differences, such as in the definition of best execution, the structures of the markets and the role and powers of supervisory authorities, the author argues, pointing out that the Reg NMS protects the incumbent stock exchanges against competition from alternative markets, whereas MiFID increases competition for exchanges.
Lannoo highlights a recent change in direction in the US, in that the Securities and Exchange Commission has shown an interest in selective bilateral mutual recognition to adapt to the growing international portfolio diversification of US investors. He believes that the MiFID – Reg NMS conundrum could be a test-case for this new approach.
Lannoo advocates the principle of "substituted compliance" – comparable to the mutual recognition approach but bolstered by minimum harmonisation. He points out that it has already been experimented with in the context of the EU-US regulatory dialogue, and that MiFID and Reg NMS have not yet been discussed in detail in this context.
The CEPS paper concludes that the coming into force of MiFID provides a unique opportunity for the EU to negotiate a mutual recognition agreement with the US. This would allow reciprocal access to exchanges and broker-dealers, and thus give European exchanges and banks much better access to the US market, the author adds.