May 22, 2014 / 11:55 AM / in 4 years

Banks, exchanges set to jostle over EU securities reform

* ESMA publishes 800 pages of draft securities market rules

* 2-month consultation for finance firms to push for changes

* Dark trading and data provision likely contentious areas

By Huw Jones

LONDON, May 22 (Reuters) - European Union regulators have published 800 pages of draft rules for a sweeping reform of the bloc’s securities markets, sparking a race among banks and exchanges to try to change any proposals that might damage their profitability.

The 28-country bloc approved a new securities law this year to better protect investors and apply lessons from the 2007-09 financial crisis. Its markets watchdog, the European Securities and Markets Authority (ESMA), spelt out on Thursday how elements of the law will be implemented by early 2017.

“These changes are key to restoring trust in our financial markets,” ESMA Chairman Steven Maijoor told reporters.

The rules flesh out a revision of the EU’s Markets in Financial Instruments Directive (MiFID) that widens the existing regulatory net beyond shares to include commodities, bonds and derivatives in more depth.

Many of ESMA’s draft rules are highly technical, but exchanges and banks will be jostling during the two-month public consultation to tweak the final rules more in their favour as they impinge directly on profitabilty of their businesses.

“There are a lot of tricky issues and this is the market’s opportunity to make sure the final rules are workable,” said Christopher Bernard, a lawyer at Linklaters.

The draft implementing rules fall into two main categories: investor protection, which includes EU powers to ban harmful retail financial products for the first time; and changes to how securities are traded to increase transparency.


ESMA’s deliberations will pitch banks against exchanges over how new volume caps to reduce anonymous, off-exchange trading of shares will work in practice so that most trading takes place on exchanges.

“In terms of reopening battles such as on volume caps, it’s going to be difficult, if not impossible,” Linklaters’ Bernard said.

So-called dark trading will be limited to 8 percent of a stock’s volume across the EU but at present there is no easy system for totting up trading in the same stock, which can take place on many exchanges.

“Right now the data you will be relying on is very fragmented. How you are going to get EU wide data to base a volume cap on is going to be very difficult,” Bernard added.

ESMA sets out how it will collect data from all the trading platforms for publishing each month to check whether the cap has been breached, an event that automatically triggers a six-month ban on dark trading in that stock.

“The amount of dark trading will be reduced,” ESMA’s Maijoor said.

Big investors have criticised steps to limit off-exchange trading. Arjun Singh-Muchelle, a senior advisor at Britain’s Investment Management Association, said cutting dark trading reduces choice, with higher costs ultimately falling on the end investor.

ESMA will also wade into another sensitive issue of forcing exchanges to make available their trading data on a “reasonable commercial basis” so that a single or consolidated pan-EU tape of share prices can be created.

“I would say this is a new area for us as securities regulators. This is on the edge with competition regulation,” ESMA’s Maijoor said.

ESMA will look at different approaches, such as a limit on the amount of revenue an exchange can get from data versus other revenues, or excluding fixed costs to focus more on the marginal cost of providing the data, Maijoor said.

Such a tape, long in existence in the United States, would make it easier to police volume caps and spot abuses.

Not all the changes are significant to all EU states.

Many of the investor protection rules, such as a pan-EU ban on commission for selling some financial products to avoid an incentive to sell costlier and unsuitable products, is already in place in Britain. (Editing by Mark Potter)

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