Trillions in stock and derivative trades at risk over new EU rules

Trading in blue-chip stocks and trillions of dollars of derivatives could be thrown into turmoil by the European Union’s MiFID II regulatory overhaul unless the bloc acts fast to give financial firms full freedom to transact in foreign markets.

The European Commission, the EU's executive arm, is racing to determine whether the rules in countries such as the US, Switzerland and Singapore are as tough as those that start in Europe on Jan. 3.

Without such equivalence decisions, MiFID II could disrupt trading on platforms in those countries, fracturing global markets and potentially driving up costs.

“If it were interpreted overly rigidly, or equivalence didn’t come through, you’d have a form of financial nationalism on the part of the EU,” Tim Cant, counsel at Ashurst law firm in London, said in an interview about the effect on equity markets. “It’s a bit like fortress Europe and rolling back two or three decades of globalization.”

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The last-minute dash to avert market upheaval shows the global implications of the EU’s updated Markets in Financial Instruments Directive, a vast rewrite of financial oversight that seeks to boost investor protections and transparency in stocks, bonds, derivatives and commodities. It also underlines the difficulties regulators around the world face in aligning their responses to the 2008 financial crisis.

“There is still a lot to be done” before Jan. 3, Tilman Lueder, head of the European Commission’s securities markets unit, said in June at a conference of European exchange executives. “The biggest challenge between now and end of the year is how we deal with our international partners” on equities and derivatives, he said.

The European Commission is working toward adoption of the relevant decisions by the end of the year, according to a commission official. The law has been on the books for more than three years. Derivatives Clearing Arriving at an agreement on the equivalence of rules has never been a simple or speedy task. The commission spent about four years negotiating with the US Commodity Futures Trading Commission to get a deal on a separate issue, the clearing of derivatives. The EU’s equivalence process is also in the spotlight because it will play a role in determining what access UK-based firms will have to the single market after Brexit.

Equivalence allows companies that that don’t have their own regulated units in a market to do business there nonetheless. Lack of such a feature would require them to set up shop or expand their local offering. Many large companies have shares listed on exchanges around the world, but the new rules state that if a stock is traded on an EU-regulated platform, EU investment firms must do all their transactions there. Venues outside the bloc can be used only if the home country’s rules are deemed equivalent. So without an equivalence ruling, trading could be forced off platforms outside the EU, even if that’s where most activity occurs, and on to a smaller EU venue.

Bloomberg