Press Release: New rules for more efficient, resilient and transparent financial markets in Europe

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Series Details IP/11/1219 (20.10.11)
Publication Date 20/10/2011
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Brussels unveils tougher Mifid proposals
By Philip Stafford
Financial Times, 21 October 2011

Brussels has unveiled a series of wide-ranging and tough measures designed to crack down on high frequency trading and extend its regulation of the equities, commodities and vast off-exchange derivatives markets.

The European Commission, which crafts laws for the European Union, published on Thursday long-awaited proposals through which it aims to tighten regulation of the region’s financial markets in the wake of the 2008 financial crisis, and amid a regional debt crisis.

The Commission wants to increase transparency in trading and give strengthened powers to regulators and said that super-fast and automated trading posed “possible systemic risks”. However the measures were given a lukewarm response by banks, brokers and financial institutions, who warned that they could potentially damage important daily market functions and ratchet up overall banking costs.

The proposals will look to build on the original Mifid directive of 2007, which aimed to benefit and safeguard investors, especially retail investors. The new proposals – mirroring the US Dodd-Frank Act – will also look to incorporate pledges made by the G20 group of leading nations to reform the world’s vast over-the-counter derivatives market by introducing more transparency and securities clearing.

“Financial markets are there to serve the real economy – not the other way around,” said Michel Barnier, commissioner for internal market and services. “The crisis serves as a grim reminder of how complex and opaque some financial activities and products have become. This has to change. Today’s proposals will help lead to better, safer and more open financial markets.”

The Commission has proposed regulating a new type of trading venue, the organised trading facility (OTF). It defined such platforms as “currently not regulated but are playing an increasingly important role” in trading as standardised derivatives contracts were increasingly traded on these types of venues.

By introducing the OTF category, the Commission aims to improve the transparency of trading activities in equity markets, including so-called “dark pools”, where trades are executed off-exchange and prices published after completion.

The Commission proposed to continue to allow dark pools but “only as long as they do not cause competitive distortions and reduce the overall efficiency of the price discovery process”.

Simon Lewis, chief executive of the Association of Financial Markets in Europe, a financial services lobby group, said some of the proposals could affect customer choice, services and costs.

“Blanket transparency obligations across non-equity markets are not the correct starting point, as these fail to take account of the high levels of transparency that already exist and are likely to damage liquidity, “ he said. “The definition of organised trading facility needs to be carefully considered so it does not unduly restrict various types of important market making and trading activities.”

The Commission also wants to force all algorithmic traders to become properly regulated, to provide appropriate liquidity and wants rules to prevent them from adding to volatility by moving in and out of markets. Computerised trading has proved to be highly controversial. It relies on efficient software and super-fast connections to trade securities in fractions of seconds. Critics have questioned the utility of the practice, but supporters argue it reduces volatility and lowers spreads in the market.

The Commission estimated the Mifid review would result in one-off compliance costs of €512m-€732m per year, with annual costs of between €312m-€586m.

“Our fear, however, is that the costs of implementing this regulation have been significantly underestimated and come at a time when financial institutions are already under enormous regulatory, profitability and cost pressures,” said Giles Williams, co-head of KPMG’s regulatory centre of excellence in Europe.

Copyright The Financial Times Limited 2011

Mifid II proposals: early reaction
By Philip Stafford
Financial Times, 21 October 2011

A round-up of the initial reactions from market participants to the publication of the proposals to update the Mifid directive governing European financial markets

The European Commission on Thursday unveiled a series of wide-ranging and tough measures designed to shake-up financial markets, crack down on high frequency trading and extend its regulation of the equities, commodities and vast off-exchange derivatives markets.

Michel Barnier, commissioner for internal market and services, European Commission
“We want to be reducing and mastering the risk” and “put an end to the reign of over-the-counter and opacity.” The proposals will “increase EU credibility” “and make sure others internationally can follow us.”

Dominique Cerutti, president and deputy chief executive of NYSE Euronext
“Trust in financial markets has continued to deteriorate. The legislative proposal tabled today goes a long way to restoring transparency and we broadly welcome the proposals made by the European Commission.”

Andreas Preuss, deputy chief executive of Deutsche Börse and chief executive of Eurex
“We support the goal to design rules on organizational requirements, transparency and authorization of organised trading facilities (OFTs) such that there are no loopholes to achieve the desired outcome of more organized trading of over-the-counter derivatives (OTC).”

“The higher the degree of organized trading, the higher the likelihood that these products can be facilitated by central clearing and trading infrastructures and the lower the degree of systemic risk,” he added.

Guy Sears, director, wholesale at the Investment Management Association
“We wanted a Mifid review because there was unfinished business. Certainly on the consolidated tape, definitely on just how some of the transparency works and the different market structures compete with one another. The proposals are very broad in their approach, there is no detail on the transparency. In terms of the agenda that Mifid’s set and the issues it’s coveting it’s very welcome, they haven’t shied away from anything.”

For ordinary investors: “There could be improved costs certainly with the [consolidated] tape and the data. If they get this right that may lead to reduce costs and better visibility of the market.”

Simon Lewis, chief executive of the Association of Financial Markets in Europe
“For pre-trade reporting, blanket transparency obligations across non-equity markets are not the correct starting point, as these fail to take account of the high levels of transparency that already exist and are likely to damage liquidity.”

“The definition of organised trading facility needs to be carefully considered so it does not unduly restrict various types of important market making and trading activities.”

Conrad Voldstad, chief executive of International Swaps and Derivatives Association
“The EC’s stance on organised trading of OTC derivatives goes well beyond the spirit of the September 2009 G20 commitment that OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate.”

“If you want to protect end users’ ability to access these markets, then you need a suitable range of venues on which to trade; limiting what you class as an eligible trading platform for OTC derivatives is not a good move.”

Matthew Fell, Confederation of British Industry, director for competitive markets
“Businesses of all sizes rely on the financial markets to raise finance and to manage their risks and balance sheets. It’s important that new regulations provide businesses with the right level of protection and help maintain a well-functioning and efficient market. But they must not affect firms’ ability to raise funds from the market or access the products and services that they need.”

Munib Ali, director at PwC
“The burdensome transaction and trade reporting requirements will squeeze trading margins, while proposals to move derivatives onto regulated venues and central clearing will make it more difficult for companies to sell bespoke solutions to clients. Enhanced collateral requirements could further contribute to the decline of OTC trading.

“Investment banks, particularly their fixed income businesses, will feel the effects of Mifid II the most. Severe strain will also be placed on the business models of high-frequency trading and commodities firms, who will incur higher implementation and operating costs in order to meet the heavy control and reporting requirements. High-frequency trading firms will be particularly concerned by having to provide liquidity on an ongoing basis like market makers, revisiting their trading strategies and sharing these with the regulators.

Oscar Reyes, Carbon Trade Watch
“Treating carbon as a financial instrument is a welcome recognition of the problems in this market, but it is no panacea. Emissions trading has not driven investments in cleaner energy and there is no sign of it meeting environmental goals, as the latest carbon price slump shows. The exemptions remain too broad to really rein in speculation, particularly by the energy firms that are the main traders on this market. Emissions traders also got off lightly when it comes to the setting of position limits.”

Peter Green, partner, capital markets practice, Morrison & Foerster law firm
“Mifid II is the “quiet man” of the regulatory response to the financial crisis. Its tentacles will reach into every corner of financial markets. Notably, the draft retains most of the major changes proposed by the EU Commission in the previous consultation paper, some of which are a cause for deep concern in the market.

“The move to regulate OTFs is a huge shift as it will put a wide range of broker crossing systems under the spotlight and significantly extend the scope of Mifid over certain financial transactions. A politically charged proposal which is likely to be hotly debated is that clearing houses must accept trades executed on any venue. Equally, trading venues will be required to provide open access to any central counterparty that wants to clear financial transactions executed there, breaking provider strongholds on both sides.”

Damian Carolan, regulatory partner, Allen & Overy
“Whilst choice and competition in execution venues may be encouraged in some respects, that choice may come at the cost of flexibility. There will be far less scope for market users to decide how and where to execute their business most effectively.”

Fragmentation of liquidity and pricing sources, which was an unintended consequence of Mifid the first time round, must continue to be a concern as Mifid II adds yet more classes of regulated venue (the new OTF) and applies regulated trading structures to more markets. Integrated vertical trading and clearing silos are best placed to profit from the push towards regulated trading, even if attempts to force open up access survive in the final legislation.”

Imogen Garner, senior associate at Norton Rose
“It’s definitely worth noting that some very significant powers are being given to ESMA, and we’re seeing this in much of the financial markets legislation coming out of Europe at the moment. At the same time, national regulators are seeing their freedom and flexibility to govern their domestic markets reduced.”

Matteo Cassina, president, Citadel execution services
“The original objective of Mifid was to protect the retail investor and we believe that the latest draft of Mifid has fallen short of this goal. While the principle of best execution is reiterated in Mifid II, it is not included in Mifir which means that once again best execution is a principle, not a rule and therefore open to interpretation at the national level.

What is important is that the cost of pan-European data does not remain beyond the reach of ordinary retail investors and thus continue to prevent them from understanding whether best execution is being achieved.”

Alex McDonald, chief executive of Wholesale Market Brokers’ Association
“The central Iimit order book method inherent in regulated market and MTF environments is inadequate to protect the hedging and risk management needs of end investors. The WMBA fully supports the ability of its customers to serve the institutional and investor communities by preserving current hybrid execution methods.

Sharon Bowles MEP, chair of the European Parliament’s Economic and Monetary Affairs committee
“When it comes to transparency, you have to keep in mind - who is it for? Accordingly, I welcome the sensible proposals to exclude large-in-scale operations from pre-trade transparency requirements because if these were to be imposed, there would be detrimental effects on trading and liquidity in the markets, which is not a good
outcome for anybody.”

Copyright The Financial Times Limited 2011.
In recent years, financial markets have changed enormously. New trading venues and products have come onto the scene and technological developments such as high frequency trading have altered the landscape. Drawing lessons from the 2008 financial crisis, the G20 agreed at the 2009 Pittsburgh summit on the need to improve the transparency and oversight of less regulated markets – including derivatives markets - and to address the issue of excessive price volatility in commodity derivatives markets. In response to this, the European Commission has tabled proposals to revise the Markets in Financial Instruments Directive (MiFID) in October 2011.

These proposals consist of a Directive and a Regulation and aim to make financial markets more efficient, resilient and transparent, and to strengthen the protection of investors. The new framework will also increase the supervisory powers of regulators and provide clear operating rules for all trading activities. Similar discussions are taking place in the United States and other major global financial centres.

Source Link Link to Main Source http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/1219&format=HTML&aged=0&language=EN&guiLanguage=en
Related Links
ESO: Background Information: Memo: Commissioner Michel Barnier welcomes trilogue agreement by Council and Parliament on new rules for short selling and Credit Default Swaps http://www.europeansources.info/record/memo-commissioner-michel-barnier-welcomes-trilogue-agreement-by-council-and-parliament-on-new-rules-for-short-selling-and-credit-default-swaps/
Deutsche Bank Research: Talking Point, 19.10.11: MiFID 2 – The script for part two of the integration of European markets in financial instruments http://www.dbresearch.de/servlet/reweb2.ReWEB?addmenu=false&document=PROD0000000000279716&rdShowArchivedDocus=true&rwnode=DBR_INTERNET_EN-PROD$NAVIGATION&rwobj=ReDisplay.Start.class&rwsite=DBR_INTERNET_EN-PROD
EurActiv, 21.10.11: Financial regulation plays catch up with crisis http://www.euractiv.com/euro-finance/financial-regulation-plays-catch-news-508464

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