24 November 2011

Speech by Jean-Pierre Jouyet at the AMF Annual conference

Mr Jouyet said it is too early to draw any conclusions as to the regulatory reforms currently underway, but it is possible to judge what has been completed and what remains to be done in market regulation and financing the economy.

Review of market regulation reforms

The progress that has been made is undeniable. An impressive regulatory edifice is taking form on the European level. Credit rating agencies, hedge funds, European financial regulation system, boosting bank equity, trader remuneration, regulating short selling: the reforms are many. In parallel, other efforts are also ongoing. I am thinking in particular of regulation of OTC derivatives markets with transaction registration and clearing requirements that should be on the way soon.

Of course, these projects are not moving forward as quickly as we would like, and the result of these impressive efforts is not always tangible to public opinion. The reason is simple. The timescales of reflection, negotiation (especially on the European level) and democracy are not the timescales of the markets.

But above all, regulation of the markets themselves is only beginning. We are missing the key piece in the jigsaw with the revision of the Markets in Financial Instruments Directive. The European Commission presented its first draft on 20 October. The stakes of this revision of the Markets in Financial Instruments Directive are simple: its purpose is to reassert the role of transparent multilateral markets as a price formation tool at the service of financing the economy and businesses. This first draft placed on the table by the Commission provides a sound basis to be worked on, in that it asks the right questions and asserts once again that markets must operate around the three pillars of transparency, efficiency and integrity. Unfortunately, the answers it provides are not always up to addressing these issues.

Transparency

The draft text envisages the creation of new facilities referred to as OTF. The idea may seem an attractive one: the aim is to bring the order matching systems currently known under the name of crossing networks within a clear regulatory framework, in the hope of increasing market transparency. The most logical consequence of the creation of these OTF could well be to continue the switch of markets towards less transparency and discretionary trading methods.

The solution is clear.

• First, we must provide an incentive to trade on the most transparent facilities. It is unreasonable to place the different categories of platforms provided by the Directive on an equal footing. It would be strange if the revision of MiFID were to lead to progress in derivatives market transparency and a step backwards in stock market transparency.
• Secondly, the transparency requirements for trading facilities must be reinforced. As an example of this, the exemptions from the principle of pre-trade transparency provided in the draft text leave plenty of room for dark pools in coming years.
• And thirdly, we must ensure that post-trade information on the transactions that are made is consolidated. The current text provides no guarantee whatsoever that all this data will be consolidated by a single body. It only provides a very partial response to the current fragmentation of information.

Efficiency

What is the role of security trading facilities? It is not to finance businesses, for that is the role of the primary markets. It is to provide liquidity to holders of financial securities on the one hand and much needed price references for the working of the primary markets on the other. In a word, their role is to give investors confidence that they will be able to sell their stock in an orderly manner and at foreseeable prices when the need arises.

High-frequency trading techniques are flooding markets with short-lived orders, reducing market depth and therefore undermining investor confidence in the prices that are shown and in the very mechanisms of order matching. A secondary market that is deemed to be erratic or unpredictable by investors is a secondary market that will become useless little by little and which will have a negative effect on the dynamism and quality of the primary market.

To remedy this situation, the ESMA must have the possibility to set precise market operating rules, in particular regarding latency and the fees applied by the facilities. It is to this effect that the Commission’s proposal must be enhanced.

Integrity

Unfortunately, the current draft does not provide for any obligation for facilities to transmit their order books, which represent essential data for detecting any price manipulations there might be. Europe is lagging behind in this, as I have observed that the SEC has proposed to introduce much more exhaustive reporting.

Full speech

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