European Union negotiators reached a breakthrough on how much equity trading can occur on private platforms known as dark pools, as talks advanced toward overhauling the bloc’s financial market rulebook.
EU lawmakers and diplomats brokered a tentative deal to curb a waiver that traders use to conceal some details of their activities, Markus Ferber, a German member of the European Parliament, said in a phone interview. They also agreed on rules for a new type of trading platform, known as an organized trading facility, he said.
“We agreed on limitation mechanisms for dark trading,” said Ferber, who’s leading the assembly’s negotiations with Lithuania, which holds the rotating presidency of the EU. “A lot of further discussions have to follow at a technical level to make this functional,” he said.
The measures are part of an overhaul of the EU’s financial market rules, known as Mifid, that Michel Barnier, the EU’s financial services chief, has said is needed to rein in “speculative trading activities” and implement agreements reached by the Group of 20 nations.
Global regulators in the International Organization of Securities Commissions have also called on regulators to “take steps to support the use of transparent orders rather than dark orders.”
Negotiators at today’s meeting in Strasbourg, France, agreed on measures to scale back provisions in current EU legislation that allow some equity trades to escape normal EU transparency rules.
Specifically, lawmakers and officials agreed to limit use of an exemption from pre-trade transparency known as a reference price waiver.
The waiver allows trading venues to avoid disclosing details of some transactions before they are completed, and was intended to encourage traders to use regulated platforms rather then resort to over-the-counter trading.
Under the agreed plan, which only concerns equities trading, the use of the waiver for a particular stock will be limited by two caps, one set as a percentage of trading of that stock on an individual venue, the other set as a percentage of overall trading of that stock in the EU, Ferber said.
Further work will be needed to determine the thresholds at which these caps should be set, Ferber said.
The European Commission has said that the creation of organized trading facilities, or OTFs, would capture some trading that currently takes place outside the scope of regulatory oversight, while curtailing pre-trade transparency waivers will also make it harder for traders to escape scrutiny.
OTFs are part of its strategy for meeting a G-20 commitment to push trading in standardized forms of derivatives onto regulated markets.
The creation of the OTF category of trading venue in the EU law is intended to capture dark platforms “which are currently not regulated but are playing an increasingly important role” and to subject them to “the same core requirements for the operation of a trading venue as other existing platforms,” the commission has said.
Among the tentative compromises brokered today are an agreement that only assets other than stocks, such as derivatives and bonds, will trade on the OTFs, Ferber said.
EU parliament lawmakers and some national governments have called for such a limitation in a bid to prevent an unintended shift in trading away from more regulated platforms such as multilateral trading facilities, or MTFs.
Negotiators also agreed that proprietary trading by financial firms running OTFs will only be allowed for illiquid sovereign debt, Ferber said.
So-called matched-principle trading, a practice in which the OTF manager facilitates a trade between two different counterparties, will be allowed, subject to “very restrictive rules,” Ferber said.
The EU plans must be agreed on by the parliament and by the Council of Ministers, an EU institution representing national governments, before they can take effect.
Negotiators are racing to reach a political deal by the end of the year, so that the legislation can be adopted before parliament goes into recess for elections in May.
“We have these cornerstones, now we have to finalize the legal work,” Ferber said.
More meetings will be needed to secure a full deal on the legislation, Ferber said. Outstanding issues include how far the EU should go in seeking to boost competition in central clearing of derivatives trades, and what steps it should take to curb speculation with commodity derivatives.
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