EU Regulators to Focus on Asset Management

Terry Flanagan

Sharon Bowles, chair of the committee on economic and monetary affairs in the European Parliament said the systemic risk from asset managers will be a heavy focus for regulators.

Bowles has chaired the committee, which is responsible for financial services, competition and tax, since 2009 and led its negotiations on the final text of the revised Markets in Financial Instruments Directive. She is stepping down next month after the European elections.

She said at the MarketAxess European Capital Markets Forum in London: “Going forward a huge focus for European regulators will be the global systemic risks from asset management.”

Andrew Haldane, the Bank of England’s executive director for financial stability, said in a speech last month that regulating investment funds was the “next frontier for macro-prudential policy” as they could be too-big-to-fail and pose a systemic risk to the global financial system.

At the forum Bowles described the debate over MiFID II between the priorities of the European parliament, council and commission as “trying to ride a bucking bronco while on a high wire.”

Bowles said the battle over dark pool trading was particularly hard fought.

MiFID II sets a cap of 8% on the total consolidated amount traded in any stock during each day in dark pools and 4% of total trading per stock on a single dark venue which Bowles said was not a great solution.

“If we had more time an Australian-style price improvement regime might have won out,” she added. “I am not sure how the double cap will work but it was the least bad solution.”

Australia introduced dark pool regulations that require them to provide material price improvement over lit venues.

The dark pool caps will also be difficult to implement as Europe does not have a consolidated tape. MiFID II has asked the industry to set one up.

Bowles said: “If the industry does not come up with a solution that works, then one will be imposed. There is a review clause which we worked hard to get in.”

The COBA Project, a registered UK company, has already tried to establish a pan¬-European consolidated tape but gave up in 2013 due to the lack of industry support.

Mifid II has been criticized for not mandating open access to clearing. Bowles said the requirement for open access had initially been removed but the negotiations gave the option of allowing their exchanges up to five years to open up competition in clearing.

“The delay may be annoying to some but in the long run we will get to the right place,” she added.

MiFID II also imposes controls on high-frequency and algorithmic trading. including requiring firms to disclose their strategies to regulators, implement controls to halt trading in the case of high price fluctuations, to test all algorithms on venues and to put in controls around direct market access.

Bowles said the committee would like to have gone further and included order resting times and and requirements for liquidity provision.

“We have not killed HFT or dark pools,” she added. “There are opportunities for venues to use additional controls as a selling point and the buy-side can refuse to use venues that does do not do this.”

A Mifid II consultation paper is likely to be released at the end of May and Bowles said it is important for the financial industry to explain the impact of regulations on the real economy and provide data in a way that can be easily understood.

Featured image via Xuejun li/Dollar Photo Club

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