Brussels, 20/10/2011 (Agence Europe) - Four years on, the EU rules on financial instrument investment services (brokerage, consultancy, negotiations, portfolio management and subscription) have increased competition and contributed to financail integration within the EU, but need to be updated to match the rapidly changing and complex business world (see EUROPE 10456). The updating of the MiFID Directive (2004/39/EC) is intended to increase transparency and encourage industry stakeholders to take a more responsible, ethical attitude, explained EU Internal Market Commissioner Michel Barnier on Thursday 20 October. Draft legislation has been unveiled that would introduce into EU rules the possibility of prosectuting those responsible for serious abuse of the market such as insider dealers and price fixers (see EUROPE 10476).
The regulation and directive to update the MiFID rules will introduce fair legislation across the board because there is no reason to take a harder line with some than with others, explained Barnier, who wants to avoid conpanies shopping around for the most advantageous legal system within the EU. A new category of negotiating platforms has been introduced, which will be subject to the same requirements as traditional stock markets. Organised negotiating systems play an increasingly important role in the standardised derivatives trade.
Setting up a new category of platforms is intended to boost transparency. The disclosure system for shares will be expanded to other financial products like bonds and derivatives and will be adjusted to fit. This means that for the first time, the price and volume of stock to buy or sell will be published for each order. Market information will be centralised so that investors can have an overview of negotiations.
“Dark pools”. The European Commission wants national supervisors and the European Securities Markets Authority (ESMA) to examine current exemptions for “dark pools” of cash, alternative, largely unregulated trading platforms that process masses of anonymous orders without any indication of prices until deals have already gone through. There are exemptions, for example, for investors wanting to sell large volumes of shares because publicising details in advance could reduce prices. Platforms that use business banks to process their clients' orders will be subject to the new rules, explained the commissioner.
High-frequency trading. When it comes to technological innovation, the new MiFID II rules cover algorithmic trading whereby orders are placed automatically with very little human intervention. This includes high-frequency trading which is blamed for causing a mini-stock market crash in the United States in 2010. The Commission says that such trading is a danger to the entire system because it vastly increases the speed of deals, and safeguard measures are to be introduced. Operators will be regulated and will have to hold sufficient liquidity and refrain from adding to volatility by unjudicious purchases and sales. The actual trading platforms will have to monitor any breakdown or disfunction on the markets such as erratic price fluctuations and halt trading were necessary.
The Commission wants to encourage the integration of market infrastructure and boost competition. As with the derivatives regulation (see EUROPE 10468), MiFID II includes measures on access to platforms covering all financial instruments, which should be welcomed by the United Kingdom and its concerns about the competitiveness of the City of London with the merger negotiations between Deutsche Börse and NYSE Euronext. Encouraging financial integration, but not at any old price. National supervisors will be allowed to ban products, services and practices that weaken financial stability.
G20. The MiFID II rules are Europe's way of meeting its commitments to the G20, providing the EU with credibility so that it can look its partners in the eye and ask them what they are doing. Barnier said he was working closely with the G20, particularly the United States, to ensure fair rules at global level. The new rules, for example, will focus on surveillance of commodity derivatives, a subject close to the heart of the current head of the G20, France (see EUROPE 10306). Positions held by each category of operator must be declared, for example, so that supervisors can assess the role of speculation in price-fixing. The national authorities will have the power to intervene on commodity markets any time they like, introducing upper limits on holdings, for example. If the transparency measures do not suffice, then national supervisors will be allowed to work with ESMA and introduce limits, said Barnier, recommending rules like those on the other side of the Atlantic.
Rules will be introduced to boost protection for investors in complicated financial products. To prevent conflicts of interest, consultants and portfolio managers will not be allowed to provide third parties wth perks. Barnier wants to make it easier for SMEs to drum up capital on the money markets. The European Commission says the cost of the MiFID changes are between €523 million and €732 million and the annual cost of respecting the rules between €312 million and €586 million. (MB/transl.fl)