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Laughing in the face of Mifid II.
How would you describe bets where you might lose (or double) your stake every time the dollar moved by half a cent against the euro? Heroic, foolhardy, tempting or terrifying, perhaps. What about appropriate? They’re supposed to be, so far as European law is concerned. Online foreign exchange brokers aren’t running casinos, they’re selling complex financial derivatives to retail customers, which comes with a duty of care. The real question for a booming industry (and the regulators overseeing it) is whether that duty is fulfilled.
COMMENT AND CURIOS - The rise in US 10-year treasury yields is not just about the Fed. - Malcolm Gladwell on Albert O Hirschman and the power of failure. - Abenomics, Japan’s debt, and privatisation.
There are already guidelines in Europe for setting compensation in the financial sector so as not to encourage risk-taking that threatens the stability of the system as a whole. Now it’s time to discuss how pay packets can be structured in a way that doesn’t reward ripping clients’ faces off. Frankly, we think the easiest way to sort this out is to follow a cue from the online gaming community, but more on that later.
European regulators have proposed sweeping new rules on the trading of shares, bonds and derivatives in a move that echoes US action and could curb growth in superfast, high-frequency trading, reports the FT. The European proposal follows a push by US regulators to clamp down on opaque over-the-counter derivatives markets, via the Dodd-Frank Act, and tighten controls over equity markets after May’s “flash crash” on Wall Street, when automated trading triggered wild swings in share prices. Under European Commission proposals for reforming the Markets in Financial Instruments Directive (Mifid), banks’ private trading systems would have to be redesigned as formal trading venues, with prices posted publicly at the end of each day. OTC derivatives meanwhile would be largely be traded on exchanges.
Six banks operating a “dark pool” trading platform in Europe will on Monday pledge to publicise trading volumes on a daily basis in an effort to shed more light on such venues amid regulatory scrutiny, reports the FT. The move will be unveiled by the Association of Financial Markets in Europe, an umbrella group for banks and brokers. The move comes as regulators are scrutinising bank-run dark pools as part of a review of the Markets in Financial Instruments Directive (Mifid).
While the official launch of new European securities rules on Thursday has focused attention on exchanges, the most severe impact of the new regime may fall on the brokerages and investment banks that profit from trading. Mifid may ultimately lead to a shake-out in European banking, with a handful of top-tier banks the probable winners, argues an FT analysis. Citigroup is moving to secure its future in the competive world of share trading, rolling out a new high-speed electronic system that aims to sniff out the best price available for its clients on any of several competing exchanges. Thursday is not so much Big Bang as the start of a long-roll out, says an FT leader. This and the law of unintended consequences are reasons to keep the law under review. Lombard has a Mifid quiz – is it a trick or a treat?
Project Turquoise has been one response, from a group of Europe’s largest investment banks, to Brussels’ new “markets in financial instruments directive”, better known as MiFID, which will allow non-exchanges to compete for business and kicks off in November. Through what they promise will be an efficient, low-cost trading system enabling trading both on and off-exchange, Project Turquoise members are intent on grabbing business from existing exchanges.