EU Securities Revamp Risks Market Damage, Germany, U.K. Say

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Germany, the U.K. and France called on European Union regulators to modify proposed trade transparency rules to avoid damaging securities markets.

The European Securities and Markets Authority’s approach to determining the liquidity of securities that would see them covered by new rules for pre- and post-trade transparency could have an “unintended consequence,” according to the three countries’ finance ministries.

Many financial instruments that should be eligible for waivers or deferrals from the rules under EU law “may have inappropriate transparency requirements applied to them, with resulting significant negative implications for the proper functioning of these vital markets,” the ministries said in a letter to ESMA and the European Commission, the EU’s executive arm.

ESMA proposed in December to increase pre- and post-trade transparency requirements for bonds and swaps as part of work to implement EU financial markets legislation known as MiFID II that was approved last year. The Association for Financial Markets in Europe, which represents firms including Deutsche Bank AG and HSBC Holdings Plc, has said the plan’s definition of market liquidity would damage trading by applying the transparency standards too broadly.

ESMA chief Steven Maijoor said in June that only “a relatively small group” of bonds will be subject to the transparency rules. Final rules will be issued this year.

‘Conflict of Interest’

The German, British and French finance ministries also called on the European Commission to modify proposed rules on payment for investment research that have riled the industry. ESMA, which brings together national regulators in the 28-nation bloc, is seeking to boost the transparency of research payments to investment banks and other brokers as part of its work on implementing MiFID II. The U.K.’s Financial Conduct Authority has said the current system contains an “inherent conflict of interest.”

“The mechanism for the payment of research shouldn’t be overly prescriptive,” allowing flexibility for national supervisors, “as long as the outcome of investor protection and transparency is reached,” the ministries said in the letter, which was seen by Bloomberg.

Specifically, the ministries said that a “new ban on reception of investment research being paid out of trading commissions” in proposed implementing standards “was not foreseen” by legislators in their work on MiFID II, the Markets in Financial Instruments Directive, which was finalized last year. MiFID II and the accompanying Regulation on Markets in Financial Instruments become applicable in January 2017.

The commission, expected to issue final rules in the autumn, is aware of the three countries’ concerns, said spokeswoman Vanessa Mock.

“We are working closely with these countries and all EU member states to examine these issues and to balance the interests at stake,” Mock said. “We are discussing these implementing measures with member states’ experts and the European Parliament.”

Mock said that MiFID will play a “key role in making markets more open and transparent, and we agree that the calibration must be appropriate so as not to damage or disrupt markets.”