♪ nejra: breathing room. the sec gives a 30-month reprieve on mifid research rules. mifid ii creates opportunities for exchanges and the level of preparation is well advanced. and, the castle walls are about to come down for european banks. we break down how traditional

lenders will have to share their data with best in tech rivals. welcome to "bloomberg markets: rules and returns." i am nejra cehic. "rules and returns" is where we tune into the regulatory challenges and opportunities for the markets around the world. we will speak to the top newsmakers, regulators, and market participants shaping and reacting to a new generation of rules. first, to the top story, the sec says firms can accept payments from eu clients. they gained a 30-month reprieve on the research rules coming to effect in january with mifid ii. ben from our financial regulation came in washington d.c. joins us now. ben, you have been all over this story from the very beginning. why did the sec decide to do this? was it the result of lobbying from the industry? ben: thanks a lot. yes, the industry here in washington, large wall street brokerages have been pushing for months to get the sec to tell them they can essentially accept payment from their european clients and not have to register

as an investment advisor. they don't want to register as an investment advisor here in the u.s., because it carries new responsibilities and costs, essentially fiduciary duties. meanwhile, the sec relief that they announced today is limited to european clients so they can continue to bundle research with trading-execution services for their clients. nejra: yeah, and in your story, you described this as a major victory for u.s. brokerages and firms. it certainly takes away a level of uncertainty. does it give them any advantage over their european peers? ben: what has shaped up here over the last couple of weeks or months was a bit of a square off between the u.s. brokerages and their pension-fund clients. pension funds in the u.s. have, for the longest time, wanted a

system like we are about to get in europe, where you can pay for your research with whomever you want, and at the same time, go ahead and buy your trading execution services from someone else. basically an unbundling. by the sec stepping in today, they will essentially continue to have a situation in the u.s. where some firms will continue to bundle research and trading execution here for their u.s. clients. so, investor advocates and pension funds probably will not be very happy in the u.s. with this, but for wall street brokerages who have been pushing for this and do enjoy lucrative business from bundling research and trading execution, they will be happy about it. ok, brokerages happy. this reprieve is for 30 months, ben. what about after that? ben: they will take public comment over the next year and a half, or so. it is unclear what will happen. it is possible they will come

out and actually release a rule. it is worth noting, in the u.s., basically what the sec has done here, is provide some guidance around a 1940 law. the laws here in the u.s., the security laws, go back to the '30s and '40s. basically, we've had a lot of guidance from the sec since then, and firms have clear guidelines for what they can and can't do, not risk running afoul of those rules. it is quite possible that after 18 months or a couple of years, the sec could come back and say, let's pass a new rule. nejra: thank you so much. regulationinancial fromter reporting washington. now, let's dive right into dark pools, a subject that will be

impacted by the landmark mifid ii legislation. >> dark pools face a major overhaul once mifid ii regulations come into force. traders use dark pools to buy and sell large amounts of stocks or block trades without revealing the size of their orders. this keeps the items hidden from other traders who could bet against it. that has become more important with the rise of high-frequency traders who use algorithms to block orders. but hiding in dark pools stops the release of information that makes the public markets efficient at setting prices. and that is why the eu is setting limits. it will force most trading on public exchanges to use caps on transactions which would bar three quarters of european stocks from dark pools. traders determined to stay in the dark can switch to a new of market, an internalized network, or si. banks will be able to carry out unlimited dark trading as long as it is their own capital put at risk. so while there are ways around the rules, it remains to see where these displaced trades will go. regulators promise to keep tabs on this.

the only certainty is that europe's already-fragmented equity markets are about to become much more complicated. nejra: when it comes to preparing for the introduction of mifid ii, the london stock exchange is leading the pack. i spoke exclusively to group ceo xavier rolet about what the new rules will mean for his businesses and exchanges. i asked him about whether or not systematic internalizes might pose a problem for the organization. xavier: what i would say is the markets have a diverse range of needs. and as long as it is a level playing field, we should not inhibit particular forms of trading, because that could lead to the reduction of diversity in a successful market, which by the way, is not necessarily measured by aggregate volumes at

the end of the day, but by it's ability to satisfy the liquidity needs of investors. retail investors, large block traders, proprietary traders, it could be an institution, a bank, a sovereign fund. when diverse forms of trading converge in a single entity, you get that rich texture of liquidity which ensures the success of the market. nejra: you mentioned the fact that mifid ii is a christmas of opportunity for clients. how so? xavier: if mifid ii, and we think it can achieve greater transparency. the world needs for institutional liquidity can be matched with retail liquidity. we believe we offer a very competitive set of platforms. there is more than one. we think our customers will benefit, because one of the issues for many institutions or traders who require the transfer of risk in very large blocks.

one of the issues that came out of mifid i, as we've seen, it introduced competition in the world of exchanges. the technology was old, liquidity was not great. and there was a feeling at the time that without competition, their performance would not improve. competition was introduced, and it generated a very positive, i think, reaction to the market, that that competition forced deep thinking about how exchanges operated. it also highlighted one issue which we see today with the european proposal. it is that, if you fragment central liquidity, you can isolate pools of liquidity. that introduced the need for arbitrage activity that maintains synchronicity between many exchanges trading the same security. a race toward low latency,

itemization, a shrinking amount of average size transactions. so mifid ii gives us an opportunity to fix some of the things that were perhaps not completely thought through with mifid i, which introduces improved performance of exchanges by introducing fragmentation that created a lot of cost, a lot of optimization, a race towards latency, but itemization in particular, the london stock exchange, we saw go from 40,000 to 30,000. the same thing on the new york stock exchange. with mifid ii, the opportunity also accommodates large size block trading which is a need of certain constituents.

nejra: right , so those are some of the opportunities then, but how can mifid ii be made better for your business? there must be some risks you have highlighted and ways it can be improved. xavier: there are risks and challenges. there are a number of ways it could be improved. when you introduce legislation as encompassing and complex as mifid ii in a range of areas, it opens up a new framework that will break the old monopoly silos. the futures industry today very much operates on the line where the equity exchanges operated prior to 2007. we will see major changes in the breakup of the silos, i believe. but putting that aside, the challenge really is the range of the complexity of the changes that are going to be technically

put into force and action in the industry. that means a lot of coding, a lot of migration, a lot of systems. it means there are thousands of institutions, asset managers, brokerages, and exchanges that have to retool their systems. that is the main challenge today. will the industry, and the question we got yesterday, will you allow another extension of mifid ii? the answer was no. will the industry be ready in time for january? january 3, 2018. nejra: i keep asking those questions to people as well. there is some idea that there will be phasing after january 3. what will you do to members who are not mifid compliant at 8:00 a.m. on january 3? i understand you are allowed to bar them from the lse, would you? xavier: this is something that

is not always well understood. we are a commercial organization so we had of a contractual relationship with our customers. we do not have regulatory powers. we have contractual relationships with our customers, but we do not determine other than compliance with these contractual obligations that they have to us and we have to them. they are reciprocal. we do not have regulatory powers. that is a matter for regulators. but from what we can tell today, the level of preparation of our members, who tend to regard the exchange, essentially broker, dealer participants, is well advanced. nejra: up next, more from our exclusive interview with lsc ceo xavier rolet. we get his thoughts on the future of the saudi aramco ipo. this is bloomberg. ♪ ♪

nejra: welcome back to "bloomberg markets: rules and returns." let's get a round up of the rules on financial regulation. ed. ed: it is a big win for financial firms on capitol hill. the senate has voted to overturn a consumer financial protection bureau rule that would make it easier for consumers to sue banks. republicans have fought against the legislation since it was created after the financial crisis. passporting arrangements. brexit secretary david davis says he expects financial

services firms to keep existing passport rights, during two-year bridging period. goldman sachs group is considering bulking up its coverage of small to mid-cap companies. even though mifid ii is likely to lower trading volume in those two stocks. that is according to a person briefed on the conference call in which the issue was discussed. a goldman sachs spokesman declined to comment. the lender joins deutsche bank in making these announcements before the mifid ii deadline comes into effect in january. nordea is already a systematic internalize are in cash equities, and this will add cash bonds, and derivatives. that is your regulation news roundup. nejra: thanks, ed. the london stock exchange ceo xavier rolet has hit back at critics who say that rules were bent to pave the way's for one

of the world's largest ipo's. saudi officials plan to list up to 5% on one or two exchanges. but the u.k. investment association argues that 25% should be the minimum free flow level for any premium listed company in the u.k. rolet spoke exclusively to me, and he said that is simply not the case. xavier: some say there is a 25% liquidity rule as part of inclusion into the premium market. you know, i have read some of these comments. there isn't a 25% governance rule that mandates the minimum 25% liquidity. there is a liquidity test and in the past, there have been instances of companies which were extremely large that obviously would provide very substantial liquidity, and they were allowed to list on the premium markets with less than 25%. in fact, this happens in the united states all the time as well. so let's not confuse governance

in the case of the 25% test, in the case of the 25% threshold, and a liquidity test, which is ensuring that 25% is put on the market. and that there is enough liquidity to ensure smooth trading of the underlying security. nejra: got it. what is your reaction to recent reports that saudi aramco is considering shelving the international ipo? xavier: we couldn't comment on individual clients or putative clients. nejra: do you think london is becoming less attractive with brexit looming? xavier: if you look at this year's numbers, our business is up substantially. the number of ipo's, the funds raised, and not just the number of ipo's for u.k. companies but international companies. we have raised over 40 billion pounds of capital year to date, for companies not just in the

u.k., but around the world. if you look at any of the indicators in our listed markets, whether it is lsc -- by the way, the same applies to our partners and colleagues. the amounts, debt, and liquidity and range of ipo's is on the increase, and quite sharply. also, there is infrastructure debt, foreign currency, bonds, chinese insurance. we have had 16 u.s. listings so far this year. so, it is quite the opposite. the numbers tell us that liquidity is sustained. i cannot give you any more details. other than that, we will be publishing tomorrow, the third quarter imf. but the public data we have already released shows, in fact, we have been quite successful this year in helping many more companies and governments raise

more capital in our market than in the last couple of years. nejra: interesting. ls sees second largest shareholder is the qatar fund. given the recent risk between the saudis and qatar, i wanted to ask how you see that impacting your chances of winning the saudi aramco listing in london? you said you cannot comment on saudi aramco, but how vulnerable are listings in london from general, geopolitical risks, in a general sense? xavier: i would not talk specifically about any putative customers. although, if you will allow me this humble correction, the saudis are our number one shareholder, not the second-largest. the progress and our company the last eight or nine years has has moved convincingly to top tier of our industry. we think ultimately, it is about capital raising. they are all linked to one thing, performance. if you perform for your clients,

if you deliver the liquidity they need, if you deliver the service, if you inovate the lsc has been a fountain of innovation in the last eight or nine years. nejra: that was london stock exchange ceo xavier rolet. up next, we will talk disruptors in the banking industry and how psc two could mount huge challenges. this is bloomberg. ♪ ♪

nejra: welcome back to "bloomberg markets: rules and returns." i am nejra cehic at bloomberg's european headquarters in london. now let's talk the future of banking. mifid ii is not the only regulation that could shape the industry in the new year.

psd2, the payment services directive, could have wide ranging implications. it has the ability to break down bank monopolies on consumer data. people will be able to use third parties like amazon to make payments without being redirected through card providers. does this mean banks will no longer be competing solely against banks, but against everyone offering financial services? ed robinson from our financial team joins me now for more. ed, is this apocalyptic for the banks? ed: not necessarily. it is a big seachange for them. it is one that has been building in the marketplace over time, so it will not be a sudden break, but they will have to adapt to a number of new players coming out. they will no longer be able to dominate their markets in the same way they have. the most important element of that is they will have to share their customers' data with these little companies like the apples, amazons, and googles of the world who are moving into the payment space.

so it is creating an entirely new marketplace, by law. nejra: yeah, and in terms of regulation, this is different to what is happening in the u.s. does it put european banks at a disadvantage to u.s. banks? ed: i don't know. that's a really interesting question. at first glance, it would seem to be. you have regulation coming from brussels that mandates you shall do this, you shall open up and share all your data. the u.s. has nothing of the sort. the u.s. is all being shaped by the marketplace, so it is sort of this hodgepodge. by forcing the european banks to get with the program on digitalization, it could make them leaner, more responsive to their customers. i mean, that is kind of the ideal that the law is going for. perhaps those banks that have been dragging their feet going into this brave new world, now by law, they will have to get their act together. nejra: we will see banks come well out of it and other banks that won't. will we really start to see that

difference in the marketplace in europe? ed: yes. most experts who are looking at the marketplace, you will see a separation of those banks that are really out in front on this, trying to provide the best mobile banking app for their customers, allowing their customers to kind of aggregate all of their financial needs in one place, and realizing they have to do that to keep their customers. but then you will have laggards. you will have other financial institutions that don't really want to do this, they don't want to spend the money, they don't want to form the innovation teams that they need to put this together. you will see separation. nejra: does brexit matter in all this? ed: no. ironically enough, it is the u.k. setting the pace on what is called, generally, open banking. the u.k. has created an open-banking initiative, which

will standardize the way banks will share their data, with apple and so forth. and the other countries in the eu are catching up. the u.k. has bought into this and helped lead it. so, no, it will not be withdrawing from psd2 as a result of brexit. nejra: banks have new competition, not just with each other but with thin tech as well. what does this mean for consumers? ed: for consumers, it means a lot of choice. in fact, the market could become quite chaotic. so they will be kind of inundated with any number of apps that help them save money, help them make payments, help them manage their current account, their investments. i mean it is just kind of crazy, how chaotic the market will be. so increasingly, you are going to want apps that will gather this in one place and make sense of it for the consumers. nejra: fascinating. thank you so much, ed robinson. that is it for this edition of "bloomberg markets: rules and returns." if you have questions, comments, or feedback, you can drop the team an email at rulesreturns@bloomberg.net. this is bloomberg. ♪ is this a phone?

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♪ yousef: headlines from saudi arabia, the crown prince's power play as he goes away with anotanother reshuffle and accuss some of his ministers of corruption. >> and trumps four. the president begins his trip to asia. is it his biggest diplomatic test to date? >> meanwhile, the american later is urging saudi arabia to lift