17 June 2013

WSJ: EU agrees on tighter oversight of dark pools

European Union states reached a tentative deal to tighten regulation of derivatives markets that sets finance ministers on a collision course with the European Parliament, opening the prospect of months of haggling over a compromise deal.

The tentative deal comes almost two years after the European Commission, the EU's executive arm, first proposed the new law. EU finance ministers are expected to sign off on the compromise deal at a meeting Friday, opening the way for "trialogue" negotiations to begin with the Parliament.

The rules aim to extend regulators' oversight to "dark pools" by creating a new type of trading venue known as an Organised Trading Facility, or OTF. At present, dark pool trading sees brokers match buyers and sellers privately, away from public exchanges.

While Member States want all types of financial instruments to be traded on OTFs, the Parliament wants to exclude equities from the new trading venues. Europe's stock exchanges say that trading equities on OTFs would create a two-tier stock market by allowing brokers to give preferential treatment to clients.

Member States have dropped a proposal by the Parliament to introduce a half-second pause on all high-frequency trades to slow the pace of that market. High-frequency trading firms have said such a move would decimate their business.

The Commission's proposal also aims to boost competition among Europe's clearing houses by requiring them to clear trades executed on any trading venue. Member States want competition for the clearing of all financial instruments, a move that would favour independent clearing houses like LCH.Clearnet that aren't attached to a specific exchange. The Parliament, by contrast, wants to force clearing houses to compete for a more limited range of products. The UK is "pleased" that the Council "broadly endorsed the Commission's proposal to ensure there is open access between exchanges and clearing houses", which "will ensure that consumers have greater choice over where to clear and trade financial products", a UK government spokesman said on Monday.

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