As Brussels attempts to curb perceived adverse effects of high-frequency trading (HFT), a European futures trade association has started a reach-out programme for Members of the European Parliament (MEPs) to help them better understand liquidity and the issues that would arise from a lack of flow in the markets. A group of associations are also lobbying regulators to rethink their stance on third-country rules.
The Futures and Options Association (FOA), is planning to meet with MEPs and deliver information sessions on defining liquidity and how it affects pension funds’ and institutions’ ability to invest, and public companies’ ability to raise funds in capital markets.
While liquidity may be a concept well understood in the investment community, Kathleen Traynor, executive director, regulation, FOA, said it was important to discuss liquidity in terms which MEPs could understand and associate with the greater needs of their constituencies.
“Europe is still waiting on a number of important studies on HFT,” said Traynor. “But Europe is already taking legislative responses without all the evidence.”
Under MiFID II, algorithmic and high-frequency traders face mandatory continuous trading throughout the trading day, with liquidity to be provided on a regular and ongoing basis regardless of market conditions. But market participants have expressed concerns that an obligation to trade regardless of market conditions could be applied beyond electronic market makers to hedge funds and long-only asset managers that only use algorithms to execute orders from portfolio managers.
Markus Ferber MEP, the rapporteur responsible for the European Parliament’s Economic and Monetary Affairs Committee committee, is presently reviewing industry comment on some aspects of the commission’s MiFID II proposal.
Last month, pan-European securities watchdog the European Securities and Markets Authority unveiled its final automated trading guidelines, which will become effective by 1 May 2012. The guidelines are intended to create a comprehensive regime for the operation of electronic trading systems by trading venues and brokers, and will apply to automated trading of all financial instruments defined under MiFID II. The guidelines are motivated partly by the fact that MiFID II is not expected to take effect until late 2014.
Global attempt to reduce third-country regulatory arbitrage
The FOA has also teamed with other industry bodies from around the globe in a bid to curtail the effects of varying third-country measures which regulators are looking to sign into law. Seven associations from both sides of the Atlantic have jointly commissioned law firm Clifford Chance to investigate the merits of a mutual recognition regime between the EU and the US.
Both Europe and the United States are currently drawing up rules which would affect how firms from outside their jurisdictions could operate inside of their dominion or interact with local businesses.
In the US, the so-called Volcker rule, which bans proprietary trading by deposit-taking institutions, could have extraterritorial reach by prohibiting American firms from trading certain instruments, such as Canadian or British government bonds. The laws will also govern the international operations of US banks. Yet non-US banks may not escape the net of national measures as the rules apply to any banking entity – including foreign banks – which have a presence in the US or employ American residents.
In the EU, disparity in how third-country firms are treated in the single market presently exists in a number of regulations, including MiFID II, the European market infrastructure regulation and the Alternative Investment Fund Managers’ Directive. Brussels policymakers are poised to recommend an omnibus of financial regulation that would sit above all present legislative proposals, controlling criteria for third-country firms operating in the European Union (EU).
The coalition of investment lobby groups includes the American Bankers Association, Association of Financial Markets in Europe, British Bankers Association, International Swaps and Derivatives Association, Investment Industry Association of Canada, Securities Industry and Financial Markets Association, and the Swiss Bankers Association.
“To a growing extent, the rules and conditions under which customers do business is becoming more predicated on where they do business. It is time to reenergise that debate,” said Anthony Belchambers, FOA chief executive. “In Europe we have gone from strict equivalency to a more progressive phasing. What this means in real terms is not yet known.”
Presently MiFID II requires foreign firms not regulated by the EU to prove their home regulatory structure is equivalent to that of Europe.