Investors should be better protected, and financial market trading made fairer, by draft EU rules voted by Parliament on Friday.
These rules would apply to all investment firms and to almost all financial instruments, from bonds to commodity derivatives. MEPs also tightened up proposed rules on high-frequency trading.
"This is the core of financial legislation: we regulate financial markets, rather than individual financial products, as we used to do in the past. All trading facilities must be subject to rules, which is why we established the organised trading facility category. We also want to have the clear rules on high-frequency trading, so as to curb speculation without harming the real economy. There is no risk-free financial market, but where there is financial trade, it should take place on regulated markets and be connected to the real economy", said lead MEP Markus Ferber (EPP, DE).
The new legislation would require any investment firm to act fairly, honestly and in the best interests of its clients when designing and selling investment products to professional or retail customers. Each firm would have to ensure that its product meets the needs of a defined category of clients.
Firms selling investment products should not remunerate or evaluate their staff's performance, in ways that might create conflicts between their interests and those of their clients.
Transparent trading rules
All market players and trading venue operators would be required to lay down transparent rules and procedures for executing orders efficiently and for determining which financial instruments may be traded via their systems. They should also be properly prepared to cope with disruptions of these systems.
MEPs decided that organised trading facilities (OTFs) should be reserved for non-equities (derivatives or bonds), so to bring them under the new rules.
Curbs on high-frequency trading...
MEPs also tightened up the Commission's proposal on high-frequency algorithmic trading, in which computers trade millions of orders per second, with little or no human intervention, by voting provisions to ensure that all orders are valid for at least 500 milliseconds, i.e. must not be cancelled or modified during that time.
All firms and trading venues would also have to ensure that trading venues are able to cope with sudden surges in orders or market stresses, and have "circuit breakers" in place to suspend trading if necessary.
...and on food and energy price speculation
MEPs also inserted provisions to regulate commodity derivatives trading, which is widely blamed for food and energy price volatility. These would involve imposing thresholds such as the maximum net position that traders can hold or enter into over specified periods of time.
The updated market in financial instruments directive and regulation (MIFID/MIFIR) together govern investment products, investment service providers, regulated markets, multilateral trading facilities (MTFs) and organised trading facilities (OTFs). The uniform rules on trading would apply to almost all financial instruments such as bonds, structured finance products or derivatives that can be traded on regulated markets, MTFs or OTFs.
MIFID: 495 in favour, 15 against and 19 abstentions
MIFIR: 497 in favour, 20 against, 17 abstentions
The plenary vote on this legislation gives Parliament's negotiators a strong mandate for fine-tuning it in three-way talks with EU member states and the European Commission.