Stephen Foley: EU makes its bid to tame the speculators, and it comes not a moment too soon

 

Outlook European Union officials are about to launch a new attempt to tame financial weapons of mass destruction and curb the speculators – and it seems not a moment too soon. A draft document circling among City law firms shows planned extensions to the EU's "markets in financial instruments directive", or Mifid for short, and the upshot is that it profoundly changes the balance of power between regulators and traders.

This Mifid II, a smorgasbord of proposals that have been finalised after much lobbying from banks and investors, will be published imminently and put out for a final consultation, but it is already clear there is much to like.

The proposals that have produced the most howls of rage so far are those that hand regulators power to set position limits on certain traders, when such limits are needed to bring market volatility under control. The City, represented by the UK Government, has largely lost out in its hope of limiting the draconian power of regulators to force speculators to sell their holdings on 24 hours notice.

The implementation of these new powers will take some hashing out, and even their adoption by EU member states is not yet guaranteed, but the need for them becomes more apparent by the day. The volatility of financial markets has been creeping up again, and it is not just because of the uncertainties over the economy and eurozone banks.

As the "flash crash" that afflicted the US market last year demonstrated, a new breed of high-speed trading computers hold sway, and because they operate across fragmented and often illiquid trading platforms, they are prone to causing mayhem. Mifid II also takes aim at these high-frequency traders, putting new requirements on them to keep running even through periods of market turbulence, if they want the privileges that come with being designated market-makers.

The most important change with Mifid II, though, is not in any specific set of proposals, but from its guiding principle, which is an insistence on transparency. New position reporting and data collection requirements, though expensive for the traders, are a prerequisite if regulators are to get a handle on our increasingly complex financial markets. This way, traders will no longer be able to run rings round the people who are supposed to control them for us.

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