WALLS are going up around the EU’s financial markets, with monitored gateways only allowing access to agreed participants, according to critics of the Markets in Financial Instruments Directive (Mifid2) proposals, which were published yesterday.
Commissioner Michel Barnier told a press conference that the EU is willing to negotiate with other countries on financial rules, particularly in derivatives markets. Approved institutions from complying nations would then be issued a “passport” granting access.
Earlier drafts indicated very tough equivalence rules, which have been toned down to allow countries like the US to gain access to EU capital markets, though Barnier expects “reciprocity” in negotiations.
However, Tamasin Little, a partner in SJ Berwin Financial Markets Group warns the rules still severely restrict access in and out of the EU for emerging markets.
“They are unlikely to comply with stringent EU rules, and so will not be allowed to advertise their services in Europe,” she told City A.M. “As London is the major financial centre in Europe, investors and firms based here will be affected most.”
Key proposals are geared toward moving over the counter (OTC) derivatives trading onto exchanges. The stated aim is to boost transparency in terms of price information and standardise rules across the EU to improve competition.
However, PwC’s Munib Ali fears the main impact will be one of additional costs to market participants.
“The burdensome transaction and trade reporting requirements will squeeze trading margins, while proposals to move derivatives onto regulated venues and central clearing will make it more difficult for companies to sell bespoke solutions to clients,” he said. “Enhanced collateral requirements could further contribute to the decline of OTC trading.”
MIFID 2 | WHAT’S IT ALL ABOUT?
● Companies coming into European derivatives markets from outside the Union will need a passport. They will need to come from countries whose regulations pass an “equivalency” test showing they are equal to EU rules.
● Firms from non-EEA countries must set up a branch in the EEA if they want to provide services to retail customers, the proposal states.
● If MiFID or national rules are broken, previously national rules vary as to the extent of any punishment. EU fines could be over €5m for individuals or 10 per cent of worldwide turnover for companies.
● As much over-the-counter (OTC) derivatives trading as possible will be moved onto exchanges. The aim is to improve transparency for regulators and other market participants.
● It is not yet known exactly what criteria will be used in deciding which products are moved to exchanges.
● Limits will be placed on the number of directorships any one individual can hold, too. Bosses can hold a maximum of either one executive job and two non-executive directorships, or four non-executive roles.
● The market abuse directive (MAD), also unveiled yesterday, demands new powers to target insider trading and market manipulation. These are not expected to impact on the UK, but to extend legal cover of financial crimes to all EU nations.