Cameron’s EU speech: a battle of wills
UK Prime Minister David Cameron gave a speech earlier this week in which he promised to hold a referendum on UK membership of the EU by 2018, if he is re-elected. The speech reflects pressures not just in the Conservative party, but fundamental differences in Europe as a whole over how to approach financial markets and the wider economy.
On the one hand, there are those who believe that the local market knows best, that regulators should take a light touch, and that the final say should rest with market operators and participants. In the opposing camp, there are those who firmly believe that the authorities should intervene wherever necessary and do whatever it takes to make markets work as smoothly as possible.
Whether we are talking about the EU and the extent of its powers over a national government, or debating the powers of an EU-appointed financial regulator such as ESMA over exchanges in London or Frankfurt, it makes little difference. The fundamental concept is the same. Some people think that more rules will guarantee a better world; others mistrust authority and place their faith in free competition.
This divide surfaced spectacularly earlier this month, when a heated argument broke out between Philippe Guillot, executive director of the markets directorate at French regulator AMF, and angry representatives from the Federation of European Securities Exchanges, UK law firm Speechley Bircham and Swedish regulator Finansinspektionen at a London discussion panel organised by SunGard.
For Guillot, the details of exactly how Europe’s trading venues work are too important to be left to market; for some of his fellow panellists, the prospect of a regulator meddling in “minutiae” represented an intrusion too far. William Garner, solicitor at Speechley Bircham, interrupted Guillot and strongly objected to “excessive” regulatory intervention; Richard Gardiner, policy advisor at FESE added rhetorically, “Isn’t it for venues to decide how to run their own markets?”
The argument runs to the heart of the entire market structure debate in Europe’s capital markets. Equity trading volumes have declined sharply in recent years – from €1.4 trillion in January 2008 to just €485.5 billion in December 2012 – and many long-term investors are deeply unhappy about the way markets operate, claiming that they are disadvantaged by a lack of clear post-trade data, fragmentation between tens of different trading venues, and the presence of aggressive, predatory high-frequency traders on the lit markets.
In response to these changes, the European Commission’s MiFID II is supposed to set out prescriptive rules covering everything from tick sizes to trading venues and the obligations of market makers; however the rules have attracted such criticism and political intervention that they have been locked in a quagmire of endless debate and revision for years, to the point where several EU nation states are increasingly losing patience. MiFID II is still not expected to take effect until 2015 at the very earliest, according to the latest estimates. Such indecision has motivated Germany’s parliament to prepare its own measures, including controls on HFT, that would be implemented much sooner. Senior buy-siders have expressed support for the move on the basis that it should lead to a more even playing field, but even here disagreement looms between those who favour action now and those who fear that pre-empting MiFID II could undermine the entire pan-European project and risk regulatory arbitrage.
David Cameron still may not get his referendum on the UK’s EU membership. He cannot guarantee that he will win the UK general election in 2015; even if he does, the result cannot easily be predicted. But whether he wins or not, one thing seems certain: regulators, exchanges, brokers, market makers and asset managers will still be arguing about who has the right to decide what trades take place where and how they should be executed.
