Pensions demand trading venue choice

Pension funds have asked Brussels to consider their position when constructing new trading guidelines.

By None

Pension funds have asked Brussels to consider their position when constructing new trading guidelines.

Increased transparency on trading could put pension funds at a disadvantage and should be approached with caution, a European body representing the retirement sector has said.

In response to a call to review the Markets in Financial Instruments Directive (MiFiD), the European Federation for Retirement Provision (EFRP) said pension funds should be able to choose between all trading venues to allow them equal access to efficient markets.

However, the EFRP demanded special dispensation to allow these large investors to be able to hide their trades to prevent speculators from ‘front running’.

The EFRP asked the European Parliament to consider pension funds as long-term investors who stabilise the market and should therefore be allowed consideration separate to other market participants with a shorter-term view.

The body said long-term institutional investors handled block orders which laid them open to abuse by speculative traders looking to gain from others selling or buying such large quantities.

Enhanced transparency, while welcomed by the EFRP could “offer trading venues the opportunity to take undue commercial advantage from pension funds’ investment activities. This commercial advantage would not be counterbalanced by any benefit for the trading activity of pension funds, and hence for their members. Therefore, it would only represent an unjustified cost for pension funds, affecting the returns on investments and, ultimately, the contributions paid to workplace pension beneficiaries”.

As such, the EFRP called for a tailored regulatory approach that would treat long-term investors, such as pension funds, differently from other market participants.

The EFRP has called for the waiver on institutional investors having to reveal large orders to apply to any smaller orders that would make part of the total holding. This would help avoid short-term speculators using the information to detect and ‘front-running’ a potential larger order, the body said.

Equally, information on positions being used by pension funds as a hedge should be aggregated and issued anonymously to avoid speculators using it to exploit these longer term investors’ interests.

“Market participants may use pension funds’ position data to plan their trades: this could be extremely harmful for hedging purposes, which are pursued by pension funds when trading derivatives. Once more, there might be a risk of front-running by market participants who would be aware of the large transaction to be carried out,” the organisation said.

Market participants have been asked to submit their views on new proposals which should help shape policy for MiFid II.

Reporting by Elizabeth Pfeuti, European editor, aiCIO, an Asset International publication