While transparency in the financial markets is a worthy goal, European regulators are going about it the wrong way and are allowing national interests to dictate policy, according to leading regulation experts.
Speaking in London at the TradeTech Architecture conference, Anthony Belchambers, chief executive officer of industry body the Futures and Options Association, lambasted European regulators for failing to adequately address the problems which led to the 2008 global financial crisis.
“Financial regulators did not stay focused and in their desperate attempts to cover all bases, regulation has grown out of hand,” said Belchambers. As a result, investment firms would suffer and end-customers would pay the price for the “exorbitant” costs of implementing regulation.
“There has been a shift in economics such that the burden of regulation has been placed on the market, which will make the cost of raising capital more expensive,” said Belchambers. “This will not foster the economic growth Europe desperately requires. In fact, it will stem growth.”
Diego Valiante, research fellow at the Centre of European Policy Studies, a Brussels-based independent think tank, feared regulators had lost momentum after the global financial crisis. “It is important regulators now tackle the prolonged uncertainty at the market level,” he said.
In Valiante's eyes, regulatory responses had not been strong enough in addressing the problem of misaligned incentives, such as the securitisation processes in the pre-crisis sub-prime mortgage market. Financial watchdogs had been “much too focused” on market infrastructure, rather than the underlying problems in market behaviour.
Valiante believed an example of this failure was Europe's latest treatment of broker crossing networks (BCNs). In a bid to improve market transparency, Europe has proposed the creation of a new category of trading venue, organised trading facilities (OTFs), which would include a sub-category for BCNs, defined in the current draft of MiFID II as “a hybrid between a facility to assist execution of clients' orders and a multilateral system that brings together orders”. The proposal states that a BCN which crosses with its own proprietary flow will be considered a systematic internaliser, while those which allow third-party access would be reclassified an MTF. Valiante claimed the new rule was borne out of European regulators' uncertainty on how to adequately supervise BCNs.
“The European Commission formed this new legal definition of OTFs instead of providing guidelines clarifying how market participants should behave,” he said. “Regulators are substituting their failure to supervise participants with rules intended to mitigate risk mitigation.”
However, Burçak Inel, deputy secretary general of trade organisation the Federation of European Securities Exchanges, claimed that regulatory responses had been correct and largely harmonised across the various financial watchdogs around the world.
“European responses – such as short selling bans and the European market infrastructure regulation (EMIR) – are helping Europe recover from the global financial crisis of 2008 whilst not taking an eye off the goals of pre-crisis initiatives – such as the Markets in Financial Instruments Directive (MiFID) – aimed at levelling the playing field and providing greater transparency,” she said.
But Belchambers sensed a fundamental shift in regulatory focus over the past four years. He said before the financial crisis, the drivers of financial services policy were enlarged choice, reduced costs and enhanced competition. “These are all ideals both the industry and the public agreed were worthwhile,” Belchambers said. “But now policy is dominated by a ”safety first' mentality that is dispassionate of choice, cost and competition.”
While safety first was a commendable notion, Valiante asserted regulators had become “scared” and unable to adequately respond to the needs of the market post-crisis. He believed this had left a vacuum for national interests to infiltrate the dialogue. “The European regulation debate has been reduced to a fight amongst member states trying to assert self interest rather than creating an effective, competitive environment,” he said.
Valiante said he was unconvinced a current European proposal which forced the clearing of over-the-counter (OTC) derivatives through central counterparties (CCPs) was a solution to any perceived opacity. Rather, it had become a bargaining chip between countries with opposing interests in the trading and clearing of derivatives.
European finance ministers yesterday agreed a common position on EMIR that fosters competition in the OTC derivatives market but rules out an extension of the regulation to listed derivatives. The opposing views of the UK and German governments have been seen as driven in part by the interests of their respective primary exchanges.
“Such a framework does not solve the issue of risk mitigation but opens a Pandora's box of problems,” Valiante said. “It is not a functional approach to the problem. It is a competition to see who can avoid being regulated.”