More light on bond markets, caps on "dark pool" or anonymous share trading, and limits on commodity holdings were the objectives of reforms put forward by European Union regulators on Monday to improve transparency for investors. The European Securities and Markets Authority (ESMA) unveiled its batch of 28 final rules to flesh out the Markets in Financial Instruments Directive II (MiFID II) law due to come into force in January 2017.
MiFID II is the biggest overhaul of EU securities rules in a decade, designed to apply lessons from the 2007-09 financial crisis and reflect advances in computerised trading technology. Current MiFID rules focus on share trading but the revisions will bring bonds and commodities into the net and move swathes of off-exchange trading onto electronic platforms where it should be less opaque.
ESMA Chairman Steven Maijoor said the rules will change the way Europe's secondary markets function. "The magnitude of this change should not be underestimated," he said in a statement. The new rules for bonds were hotly contested by banks and asset managers, with Britain's Investment Association trade body calling for a delay. It warned that increasing transparency in bond markets in the wrong way, especially before a trade takes place, would harm already uncertain liquidity at a time when the EU wants capital markets to raise more funds for economic growth.
Regulators will determine whether there is enough liquidity in each bond for it to be subject to the new transparency rules. Some 2,000 bonds, mostly government debt, out of 50,000 traded in the EU will face greater transparency, ESMA said. ESMA said it had decided on a bond-by-bond selection process rather than looking at classes of bonds. The Investment Association said on Monday it would have preferred the classes of bonds approach, but others said the approach chosen by ESMA will come as a relief to the market.
"There were genuine concerns about misclassification risk for individual bonds under a category-based approach," said Damian Carolan, a lawyer at Allen & Overy. ESMA also set out Europe's first set of position limits or caps on market share in a commodity, ranging from 5 to 35 percent. In addition MiFID II will cap how much trading in a stock can be done in a "dark pool" or anonymously and ESMA said the final rules make no major change to what it previously proposed.
High-frequency trading (HFT), which uses ultra-fast computers to place trades, will also be directly regulated, having been blamed by critics for accentuating volatility. ESMA's recommended rules will need endorsement from the European Commission before coming into force in January 2017.