Plans to harmonise disclosure rules for large stock trades under the European Union's Markets in Financial Instruments Directive (MiFID) could end up reducing the transparency of the London stock market, says the UK's Financial Services Authority.
In its latest consultation paper on MiFID, which is due to take effect in November 2007, the FSA explains proposed changes to its own rules and sets out proposals for implementing the new regulations.
Citing research by the London Stock Exchange, the FSA says Mifid would have a mixed impact on block trades executed on the London stock market, and the visibility of trading by investment banks in some large blocks of shares may be obscured by the new rules.
Under current rules, investment banks buying large blocks of shares from institutions with the intention of selling them in the market are able to delay disclosure of the purchases to protect their identity as forced sellers of stock.
But under MiFID investment banks will be granted an even longer delay on reporting some large block trades, although in some cases the delay period will be reduced.
"If firms were to use the full delays permitted by MiFID, then the overall level of transparency could decline post-MiFID," says the FSA.
However while the transparency of the London market might be reduced under MiFID, in other parts of Europe such as Germany the proposed rules would be more transparent. According to press reports some investment banks have warned that this will make them less willing to buy large blocks of German equities.
The FSA's consultation paper also outlines changes that would occur to the current regime for alternative trading systems (ATS) following the implementation of MiFID.
The FSA says the directive will also result in transaction reporting being extended to include commodity, interest rate and foreign exchange derivatives contracts.
Hector Sants, FSA managing director of wholesale business, says: "This consultation paper is an important step towards introducing MiFID next year and follows extensive informal consultation with the industry on the key areas of change.
"We believe we have stuck to our commitment to minimise the burden on firms by adopting a proportionate approach to implementation."
The consultation is due to close on 31 October, with feedback to be published in January. The FSA will give its final estimate of the cost of implementing MiFID to the firms it regulates later this year.
The FSA's guidance follows news that investment banks have stopped work on planning for the implementation of MiFID because of practical concerns over proposals from the regulator for the possible introduction of price benchmarks.
The London Investment Banking Association (Liba) said last week that the benchmark proposal is "distracting scarce resources from the essential task of implementing Mifid on time".
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