Fixing Finance (Continued…)

by Shane Fitzgerald

After playing a strong role in negotiations over the ‘six-pack’ of economic governance legislation that has formed the core of the EU’s policy response to the Eurozone sovereign debt crisis, the European Parliament’s Economic and Monetary Affairs (ECON) Committee now turns part of its attention back to the no-less imperative task of financial regulatory reform.

On Tuesday the Committee reached a deal with the European Council on a regulation that toughens requirements for those engaged in short selling and trading in credit default swaps (CDS), practices that have been blamed in many quarters for exacerbating the financial crisis.

The new rules ban certain CDS trades so as to make it more difficult to speculate on a country’s default. They should also boost transparency, while increasing the powers of the European Securities and Markets Authority (ESMA).

Welcoming the ban, European Parliament rapporteur Pascal Canfin (Greens, FR) said that the rules “prove that the EU can act against speculation when the political will is there. Today’s compromise will make it impossible for a hedge fund to buy Greek or Italian CDS without already owning the bonds of those countries.” Many policymakers complained last year that such speculation by hedge funds had raised the cost of the EU’s efforts to rescue Greece.

Both the European Council and the full Parliament must now ratify the agreement.  A plenary vote in Parliament is expected to be taken in the third week of November.  The regulation is expected to enter into force in November 2012.

On Wednesday, the European Commission launched proposals to review the markets in financial instruments directive (MIFID) market abuse directive (MAD). The reviews are supposed to bolster transparency in financial markets in accordance with the G20 agenda, agreed by world leaders in 2009. They have already been attacked by various industry lobby groups.

The MIFID review in particular aims for an ambitious upgrade, as Internal Market Commissioner Michel Barnier takes aim at high-frequency trading (arguably an increasing source of volatility in the financial system), commodity speculation and so-called  broker crossing networks, which traders use to escape full regulatory scrutiny. It also seeks to empower ESMA to force traders out of positions if there is a threat to the “orderly functioning and integrity of financial markets.”

The ECON Committee is set to play an important role in shepherding both these proposals through to legislation. Markus Ferber (EPP, DE), rapporteur for the MIFID review, argued that the revised rules must reduce systemic risk, create more transparency and guarantee investor and consumer protection: “As rapporteur for the European Parliament I expect controversial discussions as we have to close all regulatory gaps in order not to have unregulated leftovers in the end.”

Arlene McCarthy (S&D, UK), rapporteur for the market abuse legislation, called the review “an important opportunity to strengthen European law on battling insider trading, market manipulation and other harmful practices in financial markets.”

We will continue to track these developments as they unfold over the coming months.

 This article was first published by the Institute of International and European Affairs. Access the original here.