EU Reins In High-Frequency Traders to Commodity Speculators

(Bloomberg) — European Union lawmakers clinched a deal to toughen the blocs financial-market rulebook, backing sweeping measures that will put the brakes onhigh-frequencytrading and curb speculation in commodity derivatives.

The overhaul, which will push more activity on to regulated platforms, is designed to remedy deficiencies laid bare in the 2008 financial crisis. The accord ends more than two years of haggling over proposals from Michel Barnier, the EUs financial services chief.

These new rules will improve the way capital markets function to the benefit of the real economy, Barnier said in an e-mailed statement after yesterdays agreement in Strasbourg, France. They are a key step towards establishing a safer, more open and more responsible financial system and restoring investor confidence.

The EUs bid to revamp its market legislation, known as Mifid, is a centerpiece of the 28-nation blocs work to implement agreements reached by the Group of 20 nations in the wake of the turmoil that followed the 2008 collapse of Lehman Brothers Holdings Inc. Members of the European Parliament and officials from Greece, which holds the rotating presidency of the EU, resolved outstanding differences on the law over more than seven hours of negotiations that concluded late yesterday.

Formally Approved

The accord must still be formally approved by the assembly and by national governments to take effect. While the law is set to apply 2 1/2 years after its published, some individual measures have longer transition periods.

Mifid will dramatically reshape the way firms operating in the financial-services sector conduct their business, Ed Parker, head of derivatives at law firm Mayer Brown LLP in London, said in an e-mail. For the OTC derivatives market, there will be a seismic shift resulting in higher costs, tighter margins and reduced flexibility when hedging.

Key issues going into the final meeting included to what extent the revamped law should cover derivatives linked to energy markets and also what investor protection rules should be included in the legislation.

Under the deal, some derivatives in the electricity and gas markets will be granted exemptions from Mifid rules on the grounds that they are covered by other EU legislation. The accord also grants a temporary waiver for some coal and oil derivatives from requirements that trades go through clearinghouses.

Curb Speculation

The rules for commodity derivatives include an effective system of position limits that will curb speculation and help decrease price volatility and inflation, Arlene McCarthy, a U.K. lawmaker in the parliaments Socialist group, said in an e-mailed statement.

Under the agreement, it will fall to the European Securities and Markets Authority, an EU agency in Paris, to provide guidance to national regulators on how to calculate the position limits.

We wont know what the real impact will be until the regulators decide the fixed position limits, and whether any onerous approach will limit liquidity, Mayer Browns Parker said.

One of the parliaments victories in the negotiations was to secure a more European approach to the setting of position limits, with a bigger role for ESMA, Markus Ferber, the lawmaker in charge of the parliaments work on Mifid, said in a phone interview.

Points on which the assembly didnt managed to win included a bid to bolster protection for investors in insurance products, he said. Parliament was also unable to go as far as it sought in setting up a common system on non-EU firms access to investors in the bloc, he said.

Good Start

The deal marks a good start in tackling gambling on food prices, which are a matter of life and death to millions in the developing world, Marc Olivier Herman, Oxfams EU policy adviser, said in a statement. The agreement introduces limits on speculating in spite of attempts by the U.K. and other governments to block any meaningful reform.

Rules in the draft legislation onhigh-frequencytrading, which include a so-called tick size regime limiting the minimum size of price movements on financial markets, will slow down the pace of trading, increase transparency and ensure prices reflect current market conditions, McCarthy said.

The measures dont go as far lawmakers wanted. A minimum for the amount of time that orders must be left on the market — to reduce the risk of manipulation — wasnt part of the final deal.

Other issues resolved last night were rules on how clearinghouses can get access to trade-feed data from rival service providers, and conditions for how non-EU based companies can offer services in the bloc.

Smooth Application

Transitional rules will ensure the smooth application of the provisions on trade-feed data, the European Commission said in a statement. Exchanges will have 2 1/2 years on top of the standard Mifid timetable to comply with these rules, which also contain safeguards to protect financial stability, and foresee special treatment for newly established venues.

The access measures were the subject of a split between the U.K., which strongly supported the measures, and Germany, which was opposed.

The deal also links market access for non-EU based firms to assessments by the European Commission of whether countries apply regulations that are as rigorous as those enforced in the bloc.


Still, nations would have the option of continuing to enforce their own market-access procedures rules for three years after the commission carries out its assessments. Also, the EU approach would apply only to investment services targeted at institutional clients, with rules on access to retail clients to remain in national hands.

Once adopted, the revised rules will update legislation from 2004. This earlier law focused mainly on the equities markets and measures to break down monopolies enjoyed by national exchanges.

The legislation creates a new type of platform known as an Organized Trading Facility, which is intended to soak up derivatives transactions taking place in so-called dark pools.

The law also scales 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.

Dark Pools

The deal on the Mifid rules may aid the commission in its talks with the the U.S. Commodity Futures Trading Commission over the global reach of U.S. swaps rules, which the EU has warned could leave its banks, trading platforms and other financial firms facing extra costs and incompatible requirements.

The U.S. is still developing its regulations in some areas covered by Mifid, including forhigh-frequencytrading. In others, such as position limits for commodity derivatives, it already has measures in place.