EU looks inward on financial markets reform after Brexit

Brussels won’t be ripping up its financial markets rule book to compete with the City of London.

That was the key takeaway as the EU unveiled plans on Thursday to revamp the structure of its stock markets, in the first major set of reforms to tackle the issue since Britain left the bloc.

The legislative package, the drafts of which POLITICO obtained last week, is pitched as part of an effort to build more liquid, deep U.S.-style capital markets in the EU — otherwise known as the capital markets union, or CMU.

EU Financial Services Commissioner Mairead McGuinness told journalists ahead of the formal release she didn’t see herself as “competing” with the U.K. after Brexit. Instead, the package is aimed at building up the resilience of the EU’s financial system.

“Brexit has had an impact on the whole financial system of Europe, because London was a financial center [that was] part of Europe,” the Irish commissioner said. “It is now in a third country. And that clearly has consequences both for London and indeed for the European Union.”

“In my view, it does mean that we need to work as quickly as we can and as effectively as we can to develop both our capital markets and indeed to advance banking union,” she added.

The review of the Markets in Financial Instruments Regulation (MiFIR), the EU’s core markets rules, forms part of Thursday’s package. It will first and foremost aim to tackle just how fragmented European capital markets are along national borders without London as a nexus.

Losing London

The EU’s fragmentation across multiple financial centers — like Amsterdam, Dublin, Paris, Frankfurt and Luxembourg — and different types of trading venues are the challenges driving the headline announcement of a consolidated tape for share prices.

Those problems stand in stark contrast to the City of London, which over decades has pulled in more and more financial services business, creating large pools of liquidity.

The Commission thinks the ticker tape of public trading data will help overcome the disparate markets landscape by giving investors better information on where the best price and depth of trading is located. It’s also proposing a new data hub for company information for similar reasons.

“On the consolidated tape, and the European Single Access Point, when they come to fruition, it will be such a decisive moment to have that access to information for all parties to transactions,” said McGuinness. “It may not seem much today, and it will take time for these to develop, but it’s hugely significant.”

As the EU revises its rules, one hotly disputed area is the role of dark pools, the subject of Michael Lewis’ best-selling book “Flash Boys,” which investigates high-frequency traders in the U.S.

The EU will be keeping one eye on the U.K. in this debate because London already relaxed its rules on all forms of stock trading. Brussels is gingerly heading in the other direction by placing new transparency obligations on “systematic internalizers” — investment banks’ systems for trading directly with clients — to limit their ability to execute smaller trades.

“[We want] to ensure that what we call dark trading, [or] trading that’s not transparent, really only happens when it is useful and needed,” said an EU official.

Matei Rosca contributed reporting.

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