EU Trading Rules to Be Revised After Market Damage Warnings

  • Parts affecting non-equities, commodities to be rewritten
  • Rewritten regulations may lead to tighter position limits

European regulators will rewrite trading rules set to affect financial markets across the 28-nation bloc after industry and government warnings that aspects of the measures may be damaging.

The European Commission, the European Union’s executive arm, told the European Parliament on Thursday it had rejected proposals on transparency in non-equity transactions, position limits in commodities, and some exemptions, according to a statement from Markus Ferber, the lead lawmaker in the European Parliament for the MiFID II file. The rules had been sent back to the Paris-based European Securities and Market Authority to be revised, according to the statement.

“The latest drafts were far from being acceptable,” Ferber said in the statement. “The position limits regime urgently needs a comprehensive redrafting in order to effectively curb food speculation. So far, neither ESMA nor the commission have managed to deliver. The latest drafts were just not up to standard.”

Change Required

Lawmakers, member states and the financial services industry have all pushed for changes to the rules. On March 1, European Union lawmakers impatient with the pace of work on the market-rules overhaul told Jonathan Hill, financial services commissioner, to speed up and adopt the detailed, technical measures needed for MiFID II to take effect as soon as possible.

ESMA has received the letter from the commission and is “studying the contents and deciding on the way forward,” spokesman David Cliffe said in a statement.

The U.K. is among those that have criticized ESMA’s proposals on increased transparency, saying in a letter to the commission last month they may wind up harming markets in bonds, derivatives and other non-equities. The draft standards could damage liquidity and “may have a significant impact on the costs of financing and hedging risks.”

Tougher Standards

Industry pushback has come from the largest bank lobbying groups including the Association for Financial Markets in Europe and the International Swaps and Derivatives Association.

Returning the proposals to ESMA may bring stiffer standards in some cases, while offering a chance for the industry to have other measures rewritten in a way more to its liking, said Daniel Csefalvay, financial regulation partner at law firm Linklaters LLP in London.

“In the commodities space, the rules are likely to become tighter,” he said, predicting that position limits may shrink. In other cases, “the redrafting could provide an opportunity to calibrate liquidity in a way which is more consistent with the market’s view, especially given the Parliament’s concern that potentially too many illiquid instruments were inappropriately being classified as liquid.”

Apart from the three of the 28 standards mentioned by Ferber, the EU’s executive arm is “supportive of the overall approach ESMA has taken and intend to endorse the majority of the very substantial number of level 2 measures under MiFID II,” commission spokeswoman Vanessa Mock said in an e-mailed statement.

‘Fine Tuning’

“Given that parts of the new framework imply a rather substantial change compared to the current regime, we have asked ESMA to do some fine tuning in three specific areas in order to have a more cautious approach,” said Mock. “We intend only to endorse them provided that certain changes are made.”

The commission is under pressure to deliver after announcing a delay in February intended to provide clarity to financial firms as they prepare for the retooling needed to comply. A group of 17 finance ministries, led by Germany and the U.K., voiced concerns about the time needed to convert the EU rules into national law and the German Finance Ministry said the proposed delay doesn’t go far enough in giving nations and banks time to adjust.

It is instead calling for a set of deadlines tied to whenever the final rules take shape, according to a paper sent last week to negotiators from EU nations. The question now is whether the 12-month postponement until January, 2018, that has been agreed is sufficient, especially since the crucial implementing rules are still being developed.

“I expect ESMA to revisit those technical standards swiftly, thoroughly and to adapt them,” said Ferber. “However, the redrafting must not lead to further delaying the overall MiFID II timeline.”

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