The European Union is seeking limits on commodities derivatives and curbs on high-frequency trading as part of proposals to overhaul the region’s financial-market rules.
Today’s plans, which also include a crackdown on so-called dark pools, are aimed at reducing market volatility, increasing regulatory oversight and promoting competition. Specific measures include requiring national regulators to either cap the number of commodity derivative contracts that traders can enter into, or make “alternative arrangements” with the same effect.
“The crisis serves as a grim reminder of how complex and opaque some financial activities and products have become,” Michel Barnier, the European commissioner responsible for the proposals, said in an e-mailed statement today. The plans “will help lead to better, safer and more open financial markets.”
French President Nicolas Sarkozy has demanded steps to curb commodity derivatives speculation, which he blames for driving up world food prices. He has made the issue a priority of France’s presidency this year of the Group of 20 nations. The Institute of International Finance, an association representing global lenders, said last month that there was “little convincing evidence linking financial investment with trends in commodity prices and volatility.”
Governments and lawmakers at the European Parliament must now agree on the final version of the proposals before they can take effect.
Under the plans, the EU would have the power to set position limits for commodity derivatives across the entire region if it decided that curbs put in place by national regulators weren’t working. National supervisors would also be empowered to impose similar restrictions on other kinds of derivatives.
High-frequency traders came under increased regulatory scrutiny following the so-called flash crash in May of last year, during which the Dow Jones Industrial Average briefly lost almost 1,000 points.
The EU measures include requiring firms that offer high frequency or algorithmic trading services to prove that they have sufficient risk controls in place and to ensure that clients with direct access to the markets are properly qualified.
The safeguards include requiring trading venues to have “robust controls against problems such as disorderly trading, erratic price movements, and capacity overload,” the commission said. “Limits will be placed on how many orders per transaction participants can place as well as on how far venues may compete in attracting order flow.”
The EU is seeking to push some dark-pool trading through a new form of regulated platform known as an “organized trading facility.” Dark pools, or private venues that don’t display prices in advance, have been probed by regulators in both the EU and U.S. because of concerns that their lack of transparency increases price volatility.
The “seeming eradication” of dark pools is one reason why investment banks are “one of the clear losers” from the proposals, Harry Eddis, counsel at law firm Linklaters LLP, said in an e-mail. The EU’s plans will also increase such banks’ costs, he said.
To promote competition, the proposals would require exchanges to provide rival clearinghouses with the data they need to process trades. They would also mandate non- discriminatory access for clearers and trading venues to indices and other benchmarks used to determine the value of financial instruments.
The proposals to overhaul the EU’s Markets in Financial Instruments Directive, or Mifid, were adopted in tandem with others to toughen sanctions against market abuse.
Firms that take part in practices such as insider dealing would face maximum penalties of at least ten percent of annual sales, with individuals risking top fines of at least 5 million euros ($6.8 million). Criminal sanctions may also be used against traders, the commission said.
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