European Union (EU) lawmakers clinched a deal to toughen thebloc's financial-market rulebook, backing sweeping measures that willput the brakes on high-frequency trading and curb speculation incommodity derivatives. The overhaul, which will push more activityonto regulated platforms, is designed to remedy deficiencies laidbare in the 2008 financial crisis. The accord ends more than twoyears of haggling over proposals from Michel Barnier, the EU'sfinancial services chief.

“These new rules will improve the way capital markets functionto the benefit of the real economy,” Barnier said in an e-mailedstatement after yesterday's agreement in Strasbourg, France. “Theyare a key step towards establishing a safer, more open, and moreresponsible financial system and restoring investorconfidence.”

The EU's bid to revamp its market legislation, known as MiFID,is a centerpiece of the 28-nation bloc's work to implementagreements reached by the Group of 20 nations in the wake of theturmoil that followed the 2008 collapse of Lehman Brothers HoldingsInc. Members of the European Parliament and officials from Greece,which holds the rotating presidency of the EU, resolved outstandingdifferences on the law over more than seven hours of negotiationsthat concluded late yesterday.

The accord must still be formally approved by the assembly andby national governments to take effect. While the law is set toapply two and a half years after it's published, some individualmeasures have longer transition periods.

“MiFID will dramatically reshape the way firms operating in thefinancial-services sector conduct their business,” Ed Parker, headof derivatives at law firm Mayer Brown LLP in London, said in ane-mail. For “the OTC derivatives market, there will be a seismicshift resulting in higher costs, tighter margins, and reducedflexibility when hedging.”

Key issues going into the final meeting included to what extentthe revamped law should cover derivatives linked to energy marketsand also what investor protection rules should be included in thelegislation.

Under the deal, some derivatives in the electricity and gasmarkets will be granted exemptions from MiFID rules on the groundsthat they are covered by other EU legislation. The accord alsogrants a temporary waiver for some coal and oil derivatives fromrequirements that trades go through clearinghouses.

Curbing Speculation

The rules for commodity derivatives include an “effectivesystem” of position limits that will “curb speculation and helpdecrease price volatility and inflation,” Arlene McCarthy, a U.K.lawmaker in the parliament's Socialist group, said in an e-mailedstatement.

Under the agreement, it will fall to the European Securities andMarkets Authority (ESMA), an EU agency in Paris, to provideguidance to national regulators on how to calculate the positionlimits.

“We won't know what the real impact will be until the regulatorsdecide the fixed position limits, and whether any onerous approachwill limit liquidity,” Mayer Brown's Parker said.

One of the parliament's victories in the negotiations was tosecure “a more European approach” to the setting of positionlimits, with a bigger role for ESMA, Markus Ferber, the lawmaker incharge of the parliament's work on MiFID, said in a phoneinterview.

Points on which the assembly didn't managed to win included abid to bolster protection for investors in insurance products, hesaid. Parliament was also unable to go as far as it sought insetting up a common system on non-EU firms' access to investors inthe bloc, he said.

The deal “marks a good start in tackling 'gambling' on foodprices, which are a matter of life and death to millions in thedeveloping world,” Marc Olivier Herman, Oxfam's EU policy adviser,said in a statement. “The agreement introduces limits onspeculating in spite of attempts by the U.K. and other governmentsto block any meaningful reform.”

Rules in the draft legislation on high-frequency trading, whichinclude a so-called tick size regime limiting the minimum size ofprice movements on financial markets, will “slow down the pace oftrading, increase transparency, and ensure [that] prices reflectcurrent market conditions,” McCarthy said.

The measures don't go as far lawmakers wanted. A minimum for theamount of time that orders must be left on the market—to reduce therisk of manipulation—wasn't part of the final deal.

Other issues resolved last night were rules on howclearinghouses can get access to trade-feed data from rival serviceproviders, and conditions for how non-EU based companies can offerservices in the bloc.

'Smooth Application'

“Transitional rules will ensure the smooth application” of theprovisions on trade-feed data, the European Commission said in astatement. Exchanges will have two and a half years on top of thestandard MiFID timetable to comply with these rules, which alsocontain safeguards to protect financial stability, and foreseespecial treatment for newly established venues.

The access measures were the subject of a split between theU.K., which strongly supported the measures, and Germany, which wasopposed.

The deal also links market access for non-EU based firms toassessments by the European Commission of whether countries applyregulations that are as rigorous as those enforced in the bloc.

Still, nations would have the option of continuing to enforcetheir own market-access procedures rules for three years after thecommission carries out its assessments. Also, the EU approach wouldapply only to investment services targeted at institutionalclients, with rules on access to retail clients to remain innational hands.

Once adopted, the revised rules will update legislation from2004. This earlier law focused mainly on the equities markets andmeasures to break down monopolies enjoyed by nationalexchanges.

The legislation creates a new type of platform known as anOrganized Trading Facility, which is intended to soak upderivatives transactions taking place in so-called dark pools.

The law also scales back provisions in current EU legislationthat allow some equity trades to escape normal EU transparencyrules. Specifically, lawmakers and officials agreed to limit use ofan exemption from pre-trade transparency known as a reference pricewaiver.

The deal on the MiFID rules may aid the commission in its talkswith the the U.S. Commodity Futures Trading Commission over theglobal reach of U.S. swaps rules, which the EU has warned couldleave its banks, trading platforms, and other financial firmsfacing extra costs and incompatible requirements.

The U.S. is still developing its regulations in some areascovered by MiFID, including for high-frequency trading. In others,such as position limits for commodity derivatives, it already hasmeasures in place.

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