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Finance Watch: Most OTCs breach Mifid

Tuesday 6 December 2011 – by Karina Whalley

Industry experts have called for European regulators to more clearly define over-the-counter derivatives, warning that most are escaping regulation and exacerbating “dark pools”.

The European Parliament’s economic and monetary affairs committee met on Monday to discuss regulating investment services in the second Markets in Financial Instruments Directive.

Industry group Finance Watch’s secretary general Thierry Philipponnat gave evidence before the panel of MEPs and hit out at current OTC standards in Mifid, saying they are not stringent enough.

The directive proposes that only OTC derivatives traded in “large amounts” are to provide pre-trade transparency through organised trading facilities but Philipponnat said that, according to a Goethe University Frankfurt study, 48 per cent of OTC trades are under standard market size and 39 per cent are smaller than large size trades.

He said: “This means that over 87 per cent [of OTC trades] violate the spirit of pre-trade transparency that was essential for Mifid I.

“The vast majority of OTC trades breach the Mifid rules on transparency, harming price formation and the economic usefulness of markets.

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“We are witnessing today in the markets something very perverse. The dark side of the market is feeding itself from the light side of the market as a type of free-rider.”

Dark pools are block trades carried out away from central exchanges, where prices are not made public until after the transaction has taken place. European regulators are hoping to move most OTC trades onto organised trading facilities in order to clamp down on dark pools, but Philipponnat warned that without redefining OTCs, most would not move onto OTFs.

“What needs to be done is to strengthen the definition of OTC in Mifid. It is very weak,” he said.

NYSE Euronext’s deputy chief executive Dominique Cerutti, speaking at the same hearing, called for the definition of OTC to be clarified, saying this would move towards making it “legally enforceable” in helping to tackle loopholes.

He said: “We believe that the transparency of Mifid I is not being respected.”

Karel Lannoo, head of think tank the Centre for European Policy Studies, also gave evidence before the committee saying that ambiguities in Mifid need clarification but warned against over-regulation.

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