EU Bond Rules, HFT Perks, EU Online Deletion: Compliance

The biggest transformation in the history of Europe’s $11.4 trillion corporate bond market has kicked off with dealers and investors asked to adopt changes even stricter than those that prompted upheaval on Wall Street more than a decade ago.

In its efforts to prevent a repeat of the financial crisis, the European Union is seeking to make the credit market more transparent by publicly disclosing bond-trading prices. Dealers are concerned they will suffer the fate of their U.S. counterparts after the introduction of the Trade Reporting and Compliance Engine, or Trace, bond-price reporting system in 2002, when a study found $1 billion in commissions were wiped out in the first year alone.

Dealers, traders and investors were hit with almost 1,000 pages of proposed rules last month after two years of policy haggling. The goal is to give all participants equal access to real-time data, eliminating dealer advantage.

The proposals echo the introduction of Trace in the U.S. and strive for greater transparency. Regulators in Europe plan to go a step further and require traders to post prices and amounts of trades before deals are completed as well as afterward.

Compliance Policy

High-Frequency Perks Said Focus of CFTC Review Cited by Virtu

The Commodity Futures Trading Commission is seeking information on the incentives that U.S. derivatives exchanges such as CME Group Inc. and IntercontinentalExchange Group Inc. offer to spur trading, according to a person familiar with the matter.

The CFTC wants to know who gets trading fee discounts, how much money they save and whether programs to reward early adopters of new futures contracts ever end, according to the person, who asked to not be named because the review is private. Attracting firms to a new product such as a financial or agricultural future is profitable for exchanges since once established, they often don’t gain momentum in other venues.

High-frequency trader Virtu Financial Inc. publicly revealed the examination in March, without giving specifics.

Spokesmen for CME Group and Virtu declined to comment. Representatives of ICE and the CFTC didn’t immediately respond to requests for comment.

The agency is hosting a public meeting this week to help determine whether high-frequency traders harm the market.

Patent Overhaul to Shift More Disputes to Europe, Law Firm Says

A new system for filing and enforcing patents in Europe, which is expected to be implemented in 2016, may bring more intellectual property cases to the region rather than the U.S. or Asia, a law firm said.

About three-fourths of the companies that hold patents in Europe and responded to a poll by London-based Allen & Overy LLP said they expected the new unitary patent system and the Unified Patent Court would benefit them. About half plan to use the new system, according to the survey.

A single European court could provide an alternative to the U.S., where Congress and the courts are looking at ways to curb patent litigation and new procedures make it easier to challenge the validity of patents. Suits in the U.S. rose 12 percent last year to 6,092, according to a separate study by Lex Machina, a legal analysis company.

The new system will enable applicants to seek a single patent in Europe and bring disputes to a centralized court.

The cost of litigation in Europe is at least five times lower than in the U.S. and the consumer market in Europe is almost double the size at about 600 million people, making it a more attractive venue, the firm said in the study.

Compliance Action

Google Moves to Comply With EU Right-to-Be-Forgotten Ruling

Google Inc. is moving to comply with a May 13 decision from the European Union’s top court that backs the right of citizens to be forgotten online.

Google devised an online form that Europeans can fill in to request deletion of their online information and created a committee of Internet experts to advise on the decision. The ruling allows people to ask a court or agency to step in if companies don’t comply with their privacy requests.

Interviews/Commentary

Muni-Bond Buyers May Overpay on Trades, SEC’s Gallagher Says

Retail investors buying municipal bonds may overpay for their trades because brokers aren’t always required to disclose their commissions, U.S. Securities and Exchange Commissioner Daniel M. Gallagher said in a speech in Washington May 29.

Brokers who acquire bonds to fill an immediate customer order should be required to disclose how much they mark up the securities at sale, Gallagher said. The rules currently only require the broker to trade with customers at a “fair and reasonable” price, he said.

His comments underscore regulators’ focus on the $3.7 trillion municipal-bond market, where retail investors constitute the majority. The Municipal Securities Rulemaking Board is weighing a proposal to require brokers to seek the most favorable prices for clients in the municipal-bond market, which lacks a centralized exchange.

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