Saturday, January 21, 2012

UK Finance Minister Cautions that Transparency and Position Limit Reforms Must Be Calibrated for Derivatives Markets

Transparency and market position reform of the derivatives markets must proceed deliberately based on rigorous impact assessments to fully understand the costs and benefits, said UK Finance Minister Mark Hoban in remarks to the London Stock Exchange. While greater transparency has clearly had a positive effect in equity markets, he noted, the same measures may not be directly transferrable to the derivatives markets.

Derivative markets are considerably less liquid than equity markets, he said, and extreme care is needed to ensure that transparency requirements are carefully designed to work for each asset class. For example, while the component bonds that make up Markit’s iBoxx bond indices are some of the most actively traded bonds in Europe, a review of over 9000 of these bonds revealed that only 52 percent actually traded at least once in a six month sample period in 2010.

The European Commission must also undertake a rigorous analysis when it comes to updating MiFID to reflect changes in the commodities market. He urged the Commission not to succumb to knee jerk reactions which may only serve to increase costs for EU citizens.

The Minister emphasized that it is vital to remember that the commodities derivatives market serves a critical economic function in allowing end users to mitigate commercial risk. That is why the Minister is skeptical about blanket position limits across all markets, while acknowledging that they have a role to play in defined circumstances. In his view, active position management by exchanges and authorities will be much more effective in tackling market abuse, and will also provide a more rigorous approach. He said that it is incorrect to think that blanket limits will enable governments to control prices, as some would seem to suggest.

More broadly, he urged the Commission to resist pressure to use the ongoing MiFID reforms to raise barriers against third countries seeking to trade with the EU. Across EU dossiers there has been an increasing and worrying tendency to try to implement strict equivalence or reciprocity provisions through EU legislation. The Minister cautioned that this approach could effectively close EU financial markets to third country firms.

For instance, it seems that no third country would meet the standards as set out under the current MiFID proposal. From the moment that it is passed and until equivalence decisions are taken, it would close the EU market entirely to any new third country firm. Barriers would also be placed in the way of outward investment flows, for example restricting access to emerging markets. At a time when it is vital to attract more investment both within and without the EU, it is an approach that undermines growth.

1 comment:

MiFid said...

Although MiFID was intended to increase transparency for prices, the fragmentation of trading venues has had an unanticipated effect. Where once a financial institution was able to see information from just one or two exchanges, they now have the possibility (and in some cases the obligation) to collect information from a multitude of multilateral trading facilities, Systematic Internalisers and other exchanges from around the European Economic Area. This results in an additional amount of work to benefit from the transparency that MiFID has introduced.