June 10, 2013 / 1:15 PM / 5 years ago

EU states face showdown over markets overhaul

* EU presidency to put 10th MiFID compromise to states

* Compromise covers clearing houses, trading venues

* Compromise proposes cap on dark trading in EU

By Huw Jones

LONDON, June 10 (Reuters) - EU officials are pressing Britain, Germany and France to agree a compromise over trading rules intended to plug gaps exposed by the credit crunch in the $630 trillion market for derivatives and other specialised products.

Such financial products have largely been traded off-exchange in bargains between individual banks, which means a lack of visibility to regulators of where risks could be accumulating.

Off-exchange trades also create risk in the financial system because they lack the guarantees which back trades on an exchange, which are underwritten by a clearing house whose role is partly to ensure the trade will be settled even if one side goes bust.

After nearly two years of attempts to reach agreement among leading member states on various sticking points, the EU’s sense of urgency has been heightened by moves in the United States, where regulators last month agreed rules for Swap Execution Facilities (SEFs).

“We have been doing this for two years, they are G20 commitments and the U.S. is moving on,” an EU diplomat said, noting the reform is a commitment made in 2009 within the G20 group of leading nations.

An update to the European Union’s markets rules, dubbed MiFID II, was proposed nearly two years ago, but divides the bloc’s members. EU president Ireland will put its 10th compromise to ambassadors on Wednesday.

Failing a deal, it will put its suggestions to finance ministers next week, who must debate the rules in public.

“The presidency considers that a delicate balance has been reached across the main issues and in relation to the text as a whole,” a presidency document for Wednesday’s meeting said.

“If agreement at council is to be reached, this will mean all delegations will be required to accept some difficult compromises,” the document obtained by Reuters added.

The compromise is effectively an attempt to bring Britain, Germany and France on board for others to fall behind.


The rules implement a pledge by G20 world leaders in 2009 to make interest rate and other swaps transacted largely among banks more transparent by trading them on electronic platforms.

The EU law originally proposed “open access” so clearing houses can clear trades executed on any venue.

Germany has opposed this for exchange-traded derivatives, as it could be negative for Deutsche Boerse AG, whose Eurex unit trades and clears large chunks of European exchange derivatives.

Britain backs more competition in swaps and on-exchange derivatives to give investors choice as they face mandatory clearing for their trades. It also sees open access as a “quid pro quo” for having to accept a planned cap on banker bonuses.

To bring the two countries closer, the presidency has proposed a review by regulators on the need for excluding exchange derivatives from “open access” for up to three years.

There are also splits among EU states over how much “dark” or off-exchange trading in shares should be allowed, and if there can be own or proprietary trading on new Organised Trading Facilities (OTFs), the EU’s answer to SEFs.

Ireland proposes a 4 percent cap on dark trading per platform and an 8 percent overall EU cap, lower than foreseen in a bid to persuade France to back a broad deal. Dark trading currently accounts for 4 percent of trading, diplomats say.

“The proposed double volume cap ... sends a clear message that the EU is leading the way in severely limiting dark pool trading,” the presidency document said.

Proprietary trading, seen by critics as banks betting on price moves, could only be allowed on an OTF to help complete orders in illiquid sovereign debt, Ireland proposed.

Agreement on Wednesday and endorsed by finance ministers would open negotiations with the European Parliament on a final text that would become law next year at the earliest.

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