MiFID dark-trading loophole seen in EU deference to U.S. rules

This article is by Alexander Weber and Silla Brush for Bloomberg News. It appeared first on the Bloomberg Terminal.

European Union plans to allow traders to comply with MiFID II by trading on U.S. dark pools would “open up a large transatlantic loophole” in equity markets and undermine the law’s goal of increasing transparency, according to a leading lawmaker in Brussels.

Markus Ferber, the European Parliament’s top lawmaker on the law, said on Wednesday that current U.S. rules for so-called alternative trading systems are a “far cry” from EU standards that take effect in January, and that U.S. dark pools run by many of the world’s biggest banks would benefit as a result.

“If we do not want U.S. dark pools to become the big winners of MiFID II, this decision must be revisited,” Ferber said in an emailed statement. In a Nov. 20 letter, he urged the European Commission to reconsider and possibly postpone judgment “in order not to make a rushed decision we might regret later on.”

A spokeswoman for the commission, the EU’s executive arm, declined to comment. While Ferber doesn’t have formal power to contest the decision, as one of the most prominent lawmakers on the law his views could sway the debate in its final days.

The EU is rushing to put the finishing touches on an agreement that traders in the bloc can meet MiFID II by trading on U.S. exchanges and alternative trading systems. The draft decision, seen by Bloomberg News, grants equivalence to exchanges run by Nasdaq Inc. and Intercontinental Exchange Inc. as well as systems run in the U.S. by Deutsche Bank AG and UBS Group AG, among other firms.

Systematic internalizers

About 40 percent of U.S. equity market volume occurs off exchange on dark pools and other platforms, according to data compiled by Bloomberg.

Ferber has been one of the strongest advocates in the last year of ensuring the revised Markets in Financial Instruments Directive, or MiFID II, accomplishes its mission of improving market transparency. Lawmakers in Brussels moved earlier this year to close a loophole that was seen giving a price advantage to systematic internalizers, which allow unlimited dark trading, over traditional exchanges like Euronext NV and Deutsche Boerse AG.

“Granting equivalence status to ATS would open up a large transatlantic loophole and would go totally against all recent attempts to close intra-European loopholes with regards to SIs,” Ferber said in the e-mail.

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