MEPs seek to scrap competition among bourses

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Opening competition between stock exchanges for clearing and listing non-equity financial instruments is likely to be a core dispute today (19 June) when MEPs discuss amendments to the Markets in Financial Instruments Directive (MIFID II).

MEPs representing political groups in the economic and monetary affairs committee are set to debate proposed amendments to MIFID II, and eight MEPs – from across the political spectrum – have asked to scrap provisions requiring stock exchanges to open to competition in clearing and listing procedures.

Currently bourses take advantage of loopholes and insist that instruments traded on their lists are also cleared and settled through the same exchange.

Provisions in a regulation attached to the directive would require exchanges to allow competition in this process, but eight MEPs have asked for the provisions to be scrapped in Parliament’s version of the paper.

Fragmented markets

They claim that the move would create fragmentation of the listed exchanges and unsettle financial markets as a result. Although the MEPs represent the main parties in the Parliament, only the Socialists and Democrats group has decided on it as policy. The Alliance of Liberals and Democrats for Europe wants the provisions for competition to remain in the paper.

The outcome will thus depend on what position if any is reached within the Parliament’s largest group, the European People’s Party.

Centre-right rapporteur Markus Ferber will refer on an issue that closely affects his native Germany, since the Deutsche Börse is one of the stock exchanges affected.

Meanwhile, a planned new breed of Organised Trading Facility (OTF) platforms is also likely to be the focus of a heated debate as the economic and monetary affairs committee meets to discuss amendments.

The new OTF model was designed in MIFID II for trading contracts currently handled between banks, and under the current draft would be limited to non-equities, meaning mainly derivatives and commodities.

High-frequency trading set for curbs

This would force shares currently traded off an exchange to move onto bourses or similar platforms that are likely to be more heavily regulated than OTFs, a development welcomed by stock exchanges.

But the Socialists and Democrats group want the planned OFTs scrapped altogether, in an attempt to force trading of derivatives to be conducted through conventional exchanges.

MEPs are likely to agree with Ferber’s proposal. In his first report presented in April, he proposed a tougher crackdown on high-frequency trading than the one outlined in the original Commission draft.

High-frequency trading is seen by some policymakers as having an unfair advantage over other investors. Fast computerised trading also played a role in the "flash crash" when Wall Street blue chips briefly went into freefall in 2010.

Drawing lessons from the 2008 financial crisis, the G20 agreed at the 2009 Pittsburgh summit on the need to improve the transparency and oversight of less regulated markets – including derivatives markets - and to address the issue of excessive price volatility in commodity derivatives markets.

In response, the European Commission has tabled proposals on 20 October 2011 to revise the Markets in Financial Instruments Directive (MiFID). These proposals consist of a Directive and a Regulation and aim to make financial markets more efficient, resilient and transparent, and to strengthen the protection of investors.

In force since November 2007, the original MiFID governs the provision of investment services in financial instruments (such as brokerage, advice, dealing, portfolio management and underwriting) by banks and investment firms and the operation of traditional stock exchanges and alternative trading venues ( so-called multilateral trading facilities). While MiFID created competition between these services and brought more choice and lower prices for investors, shortcomings were exposed in the wake of the financial crisis.

The new framework would increase the supervisory powers of regulators and provide clear operating rules for all trading activities. Similar discussions are taking place in the United States and other major global financial centres.

  • 19 June 2012: Economic and Monetary affairs committee to discuss amendments to MIFID II
  • 10 July 2012: Final Parliamentary position on MIFID to be agreed

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