The revamp of the EU’s financial market under Mifid II, finally unveiled on Thursday, brings with its substantive reforms but also fears for market players, writes Helena Walsh, regional director for Cicero Consulting in Brussels.
The European Commission’s intention in its Regulation on Market in Financial Instruments and Market in Financial Instruments Directive is to toughen up its rules on transparency and improve data quality and cost.
It is also designed to prohibit discriminatory practices, and ensure the effective supervision of products/commodities and positions.
With these in place, the objective to create a more transparent trading environment and particularly for OTC derivatives through reinforced transparency, conduct of business, market abuse and investor protection rules – will have been achieved.
So too will the 2009 G20 objective that “all standardised OTC derivative contracts be traded on exchanges or electronic trading platforms, where appropriate”. But none of this will be delivered by December 2012 which was the deadline set by the G20 in Pittsburgh 2009.
Given the substantive changes being proposed most industry stakeholders will welcome this lag in timeline which will give a much needed opportunity to seek amendments via the European Parliament and Council to the proposal currently on the table today.
One of the most substantial changes centres on the Commission’s objective to ensure nondiscriminatory access to clearing. The Commission is seeking to remove various other “commercial barriers” – i.e. removing vertical silos within exchanges.
This is a significant overhaul of the current framework whereby exchanges can control both the trading and clearing of instruments off their own platforms, which gives them a significant competitive advantage. This will not be welcomed by the exchanges.
From the European Commission’s perspective the latter activity was deemed to be highly discriminatory and opening up access to clearing flows will “lower investment and borrowing costs, eliminate inefficiencies and foster innovation in the European markets”. There is no doubt this will be a divisive point within the European Parliament and Council.
Another substantive reform is in the area of high frequency trading. High frequency trading has been within the focus of lawmakers since the flash crash in May 2010, which saw liquidity being zapped out of the market by many high frequency traders.
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