LONDON Curbs on commodity speculation and ultra-fast share trading will be introduced across the European Union (EU) under an agreement reached on Tuesday on a broad reform of securities markets.
The measures will be implemented by the end of 2016 and aim to plug gaps highlighted by the 2007 to 2009 financial crisis, imposing tighter controls on the financial markets and catching up with advances in trading technology.
Representatives of member states and the European Parliament negotiated the deal in Strasbourg, France, that updates the EU's markets in financial instruments (MiFID) law.
"We have a deal," said Sharon Bowles, the British Liberal Democrat lawmaker who chaired the seven-and-a-half hour meeting.
Several elements of the package had already been settled in earlier meetings, such as slapping limits on how much share trading can take place anonymously in so-called "dark pools," away from public exchanges such as the London Stock Exchange (LSE) (LSE.L).
Banks hoping for last-minute changes were disappointed.
The British Bankers' Association said it remains concerned about the impact the new rules will have on the economy by limiting market liquidity and hurting the competitiveness of European companies.
New restrictions on high-frequency trading (HFT), when a dealer darts in and out of markets in a split second to exploit tiny differences in prices, had also been previously agreed.
HFT was blamed for exacerbating a plunge in shares on Wall Street in May 2010, known as the "flash crash." A U.S. report last month noted HFT posed potential financial stability risks that meant closer monitoring may be warranted.
"The new rules agreed today are undoubtedly a step forward for transparency and curbing damaging practices in investment markets such as HFT," said Sven Giegold, a German Green Party lawmaker.
The updated EU law will also usher in a new breed of trading platform, known as an organized trading facility or OTF, for trading bonds and contracts from the $640 trillion over-the-counter (OTC) derivatives market to improve transparency and record keeping.
HARD TO SPOT
Currently the OTC sector, which covers credit default swaps and interest rate swaps, is mainly traded bilaterally between the 15 top banks, but regulators say the sector's opacity made it harder for them to spot vulnerabilities during the crisis.
The OTF is the result of pledges world leaders made in 2009 to shine a light on all parts of the financial market and the United States has already begun authorizing its equivalent, known as a swaps execution facility or SEF.
The revision of MiFID will also bring in tighter supervision of commodity markets, by imposing curbs known as position limits to stop any one trader holding too much sway in the market.
"For the first time the EU will regulate commodities to tackle food speculation," said Arlene McCarthy, a British centre left lawmaker who took part in the negotiations.
The negotiations pitted the bloc's biggest countries against each other on the key issue of how to force exchanges to be open to more competition.
The revised law will allow a clearing house, which stands between two sides of a trade to ensure its completion even if one side goes bust, to clear trades from any exchange.
For example, LCH.Clearnet, majority owned by the LSE, would be allowed to clear trades executed on arch-rival Deutsche Boerse (DB1Gn.DE), though Germany and others argued this could fragment trading volumes.
Tuesday's deal will allow integrated exchanges to avoid opening themselves to competition for 30 months, renewable for another 30 months, subject to approval from national authorities.
Another contentious issue was whether physically settled derivatives on commodities including oil, coal, gas and electricity should be subject to position limits.
It was decided that all commodity derivatives, apart from gas and electricity, would be subject to MiFID's supervisory and data reporting requirements, but there would be a three-and-a-half year delay before margin and clearing requirements for oil and coal derivatives are introduced.
(Editing by David Holmes and Lisa Shumaker)