EU Lawmakers Seal Deal

Accord reached on financial-market rules overhaul for high-frequency trading and commodity speculation.

European Union (EU) lawmakers clinched a deal to toughen the bloc’s financial-market rulebook, backing sweeping measures that will put the brakes on high-frequency trading and curb speculation in commodity derivatives. The overhaul, which will push more activity onto regulated platforms, is designed to remedy deficiencies laid bare in the 2008 financial crisis. The accord ends more than two years of haggling over proposals from Michel Barnier, the EU’s financial services chief.

“These new rules will improve the way capital markets function to the benefit of the real economy,” Barnier said in an e-mailed statement after yesterday’s agreement in Strasbourg, France. “They are a key step towards establishing a safer, more open, and more responsible financial system and restoring investor confidence.”

The EU’s bid to revamp its market legislation, known as MiFID, is a centerpiece of the 28-nation bloc’s work to implement agreements reached by the Group of 20 nations in the wake of the turmoil that followed the 2008 collapse of Lehman Brothers Holdings Inc. Members of the European Parliament and officials from Greece, which holds the rotating presidency of the EU, resolved outstanding differences on the law over more than seven hours of negotiations that concluded late yesterday.

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

“MiFID will dramatically reshape the way firms operating in the financial-services sector conduct their business,” Ed Parker, head of derivatives at law firm Mayer Brown LLP in London, said in an e-mail. For “the OTC derivatives market, there will be a seismic shift resulting in higher costs, tighter margins, and reduced flexibility when hedging.”

Key issues going into the final meeting included to what extent the revamped law should cover derivatives linked to energy markets and also what investor protection rules should be included in the legislation.

Under the deal, some derivatives in the electricity and gas markets will be granted exemptions from MiFID rules on the grounds that they are covered by other EU legislation. The accord also grants a temporary waiver for some coal and oil derivatives from requirements that trades go through clearinghouses.


Curbing Speculation

The rules for commodity derivatives include an “effective system” of position limits that will “curb speculation and help decrease price volatility and inflation,” Arlene McCarthy, a U.K. lawmaker in the parliament’s Socialist group, said in an e-mailed statement.

Under the agreement, it will fall to the European Securities and Markets Authority (ESMA), an EU agency in Paris, to provide guidance to national regulators on how to calculate the position limits.

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

One of the parliament’s victories in the negotiations was to secure “a more European approach” to the setting of position limits, with a bigger role for ESMA, Markus Ferber, the lawmaker in charge of the parliament’s work on MiFID, said in a phone interview.

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

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

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

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

Other issues resolved last night were rules on how clearinghouses can get access to trade-feed data from rival service providers, and conditions for how non-EU based companies can offer services in the bloc.


‘Smooth Application’

“Transitional rules will ensure the smooth application” of the provisions on trade-feed data, the European Commission said in a statement. Exchanges will have two and a half years on top of the standard MiFID timetable to comply with these rules, which also contain safeguards to protect financial stability, and foresee special treatment for newly established venues.

The access measures were the subject of a split between the U.K., which strongly supported the measures, and Germany, which was opposed.

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

Still, nations would have the option of continuing to enforce their own market-access procedures rules for three years after the commission carries out its assessments. Also, the EU approach would apply only to investment services targeted at institutional clients, with rules on access to retail clients to remain in national hands.

Once adopted, the revised rules will update legislation from 2004. This earlier law focused mainly on the equities markets and measures to break down monopolies enjoyed by national exchanges.

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

The law also scales back provisions in current EU legislation that allow some equity trades to escape normal EU transparency rules. Specifically, lawmakers and officials agreed to limit use of an exemption from pre-trade transparency known as a reference price waiver.

The deal on the MiFID rules may aid the commission in its talks with the the U.S. Commodity Futures Trading Commission over the global reach of U.S. swaps rules, which the EU has warned could leave its banks, trading platforms, and other financial firms facing extra costs and incompatible requirements.

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

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