European market regulators have not properly assessed the cumulative effect of new regulations on market liquidity, which could be seriously impacted by the unintended consequences of new rules, a conference has heard.
Panellists at the Association of Financial Markets in Europe’s European Market Liquidity Conference in London today warned the combination of MiFID II, the European market infrastructure regulation (EMIR) and Basel III could seriously impede liquidity in the region.
Speaking on the market structure panel, Petra De Deyne, senior manager, CIB regulatory affairs for BNP Paribas, said the volume and pace of regulatory change in Europe would create unpredictable outcomes for market liquidity.
“If you look at every piece of regulation separately it makes sense, whether its EMIR on clearing or MiFID on transparency, but if we put that all together not knowing where we are heading or having any impact assessment whatsoever, I think that is very scary,” De Deyne said.
Her comments were mirrored by Sachin Gupta, executive vice president, portfolio manager for institutional investor PIMCO Europe, who voiced concerns about further fragmentation of European markets in the wake of the financial crisis.
“The sheer barrage of regulations and the speed with which markets and investors have to digest them will have a fairly unbalanced and unpredictable impact,” Gupta said, adding that the effect of the rules on financial deleveraging could also have serious negative effects.
“For regulatory reasons banks are going back to their domestic markets and this fragmentation will essentially impact the real economy and issuers’ ability to raise capital – the more fragmented the market the less liquidity and the less capital there will be for issuers,” he said.
Another concern facing market participants is the ongoing concern relating the extraterritorial reach of some regulations, which De Doyne believes has already limited buy- and sell-side firms’ ability to operate internationally.
“Already we see certain market players refraining from doing business in Asia or the US because of regulatory or legal uncertainties,” De Doyne said.
New rules under EMIR are expected to be ratified by Brussels legislative bodies this month and will be phased in from this year, while MiFID II is currently under negotiation at the Council of the European Union. Basel III, which requires banks to hold more high-quality collateral, will be phased in until 2019.