Brussels, 20/09/2011 (Agence Europe) - In a month's time, EU Internal Market Commissioner Michel Barnier will unveil new legislation to deal with some of the negative impacts of allowing increased competition among stock exchanges. Learning from the financial crisis, the Commission will suggest that the revised MiFID (markets in financial instruments) directive (2004/39/EC) should ensure greater transparency about derivatives and other deals. High frequency trading will also be covered by the new EU rules and national supervisors will be given more teeth in coordination with the European Securities Markets Authority (ESMA), allowing them to restrict holdings.
The European Commission believes that three years into its application, the MiFID directive has forced new competition among stock markets and encouraged lower transaction costs, explains a draft document published in August 2011, which this newsletter has seen. New technology has allowed investors to have a wider choice of service suppliers and financial instruments, but problems have emerged, explains the report. Market segmentation due to competition has made the stock markets even more complex, particularly when it comes to collecting commercial information and also means that some areas of the directive are already out-of-date. The increasing complexity of deals and derivatives means that greater investor security is required.
The legislation will take the form of a regulation, which will enter immediate application in the EU to introduce uniform rules, and a directive to be transposed by all the member states. New rules will also be introduced to cover insider trading and market abuse in general (updating Directive 2003/6/EC).
The draft regulation aims to ensure that all stock market deals are carried out openly, whether on traditional stock markets or technology platforms like MTF and OTF. The same rules will apply to all deals when it comes to openness, both before and after the deal is done, but will differ in line with the type of security being traded (shares, bonds, derivatives or emissions quotas), explains the Commission. For each order, therefore, the price and volume offered for sale or purchase will be published, although this will not affect the waivers issued for large orders. The Commission is giving ESMA the power to issue binding decisions about whether national exemption systems comply with the MiFID rules, which aim to reduce the risks surrounding the “dark pools” of liquidity (less regulated trading platforms where deal are done anonymously with deals of prices only relayed after the deals have been done).
To deal with the segmentation of the information, the Commission is planning to introduce standardised information rules to increase competition amongst the providers of information. All stock exchanges will have to publish post-market information a quarter of an hour after deals are done and will have to keep all information for at least 5 years for supervisors to access as and when.
MiFID II will increase supervision powers. In coordination with ESMA, national supervisors will be able to ban certain products and deals in line with certain criteria and will also be able to set upper trading limits. ESMA will have the power to take this type of decision independently, but only for a temporary period.
High-frequency trading. To cover all the options provided for by new technology, the Commission says that the potential threat of high-frequency and algorithmic trading need to be dealt with. The draft directive will cover businesses doing this type of business and will require supervisors and trading places where such firms trade to carry out proper controls of the risks involved.
The updated MiFID directive raises the question of whether the type of deals available is suitable for the type of investors buying them. The classification of clients (retail or professional) in the initial MiFID directive still applies, in the Commission's view, but there are manifold examples of local authorities and municipalities that invested out of their depth, using taxpayers' money to buy over-complex derivatives that they did not understand. The classification of collective investors needs to be clarified.
The draft directive requires markets where commodity derivatives are traded to set limits on commodity deals and provide supervisors with standardised information about the holdings per type of derivative and per trader. A detailed procedure is introduced for firms registered outside the EU to enable them to trade on any EU market(s). (MB/transl.fl)