LONDON, October 20 (Global Risk Regulator) – Europe’s stance announced today on organised trading of over-the-counter (OTC) derivatives goes well beyond the spirit of the 2009 G20 commitment to reform, according to the leading derivatives industry trade body.
The International Swaps and Derivatives Association (ISDA) was commenting on the European Commission’s release today of proposals for tough new transparency rules in a new, more sweeping version of the European Union’s Market in Financial Instruments Directive (MiFID). MiFID, which deals chiefly with equities, has been the cornerstone of Europe’s single market in financial services since November 2007. ISDA said MiFID II, as the revision proposals are called, goes beyond the Group of Twenty (G20) leading economies’ desire that OTC derivatives contracts should be traded on exchanges or electronic platforms where appropriate.
A so-called “bootleg album” version of today’s EU proposals, which would give regulators powers to restrict trading in commodity derivatives and impose curbs on high-frequency trading, have been circulating since early September. Today’s announcement is expected to be the prelude to another prolonged battle over the shape of markets regulation in the EU (see “MiFID critics gear up to fight for changes” in the October issue of GRR newsletter). MiFID II is split into both a directive, which national legislatures can interpret, and a regulation that national regulators would have to apply as is. The Commission, the EU’s Brussels-based executive arm, also issued today proposals for a tougher market abuse directive aimed at curbing insider dealing and market manipulation.
The Commission said its MiFID II proposals responded to the 2009 Pittsburgh G20 leaders’ summit agreement on the need to improve transparency and oversight of less-regulated markets, including derivatives markets. The G20 also agreed at Pittsburgh to tackle the issue of excessive price volatility in commodity markets. The US, after much wrangling, announced moves to curb speculation in commodity markets earlier this week.
The Commission’s proposals “will help to lead to better, safer and more open financial markets,” said Michel Barnier, who as EU internal market commissioner is Europe’s top financial regulator.
“Financial markets are there to serve the real economy, not the other way round. Markets have been transformed over the years and our legislation needs to keep pace. The (global financial) crisis serves as a grim reminder of how complex and opaque some financial activities and products have become. This has to change,” Barnier said.
But ISDA said the Commission’s plans for certain restrictions on so-called organised trading facilities will hurt end-user choice and market liquidity. “These restrictions would, in essence, limit the types of trades that can be transacted on single dealer platforms and would adversely affect the ability of firms to effectively manage their risks,” ISDA said in a statement.
OTC derivatives trade infrequently, according to ISDA chief executive Conrad Voldstad. “For example,” he added, “only 3,600 interest rate swaps are traded each day globally and only half of these are sufficiently standardised to be cleared. In all, we think less than 1,000 interest rate swaps will be traded in Europe on organised trading facilities. Half of these may be interdealer trades and the balance will be divided across hundreds of infrequently traded contracts with different maturities. These trades depend on the ability of dealer firms to make markets, particularly given the large trade size of most interest rate swaps.
“If you want to protect end users’ ability to access these markets, then you need a suitable range of venues on which to trade; limiting what you class as an eligible trading platform for OTC derivatives is not a good move.” By way of comparison, around 1 million orders are executed every day on the London Stock Exchange, Voldstad noted.
The MiFID II and market abuse proposals now pass to the European Parliament and the Council of EU member states for negotiation and adoption.
Meanwhile, global securities market regulators today published recommendations aimed at promoting market integrity and reducing the risks posed to the financial system by the latest technological developments, including high-frequency and algorithmic trading.
The recommendations were developed by the Madrid-based International Organisation of Securities Commissions (IOSCO), the umbrella body for the world’s securities market regulators, in response to a G20 request in 2010.
(EU Commission: http://europa.eu. Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency – IOSCO, www.iosco.org)
David Keefe (email@example.com)