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Securities revolution

Amid delays and bourse protest, EU unites capital markets

By Victor Velek
Staff Writer, The Prague Post
November 14th, 2007 issue

Jan Přerovský/THE PRAGUE POST
Senior lawyer Radan Marek says the Prague Stock Exchange feels the new directive is biased against bourses.
Another set of barriers previously placed across the European Union has been dismantled, thanks to a common framework for securities trading that took effect this month.
The rules, introduced by the sweeping Markets in Financial Instruments Directive (MiFID), will make stock deals across the EU cheaper and easier while increasing competition in Europe’s investment industry, according to the European Commission (EC), the EU’s executive arm.
The anticipated adoption of the rules has shaken up the local investment industry and drawn criticism from the Prague Stock Exchange (BCPP), unhappy with its administrative burdens and what the bourse says is the directive’s bias.
“We are against the new rules,” said Radan Marek, the BCPP’s senior lawyer. “The MiFID is directed against stock exchanges.”
Perhaps fortunately, the bourse has time to prepare: While other member states have pushed to meet an EU-imposed deadline to fold the directive into their laws, the Czech Republic, along with Spain and Poland, is the country farthest behind in its plans to adopt the directive, according to the latest EC report.
The EC has launched infringement proceedings against the Czech Republic, along with other delinquent member states, which could ultimately result in large fines.
At the earliest, the regulations won’t become part of Czech law until early next year, according to Jakub Haas, spokesman for the Finance Ministry. After the MiFID bill becomes law, players on the capital market will be granted an adaptation period, Haas added, meaning the EU’s directive will hit after more than a one-year delay.
The EU’s deadline for transposition of the MiFID into national laws, set for Jan. 31 of this year, was met by only three member states. During the following nine-month period reserved for adopting the new rules, more countries folded the MiFID into law. Still, a dozen have failed to sign the directive into law so far.
That has created an unevenly regulated environment that will likely cause some problems in trading across borders. Transitional arrangements have been made to mitigate the unequal progress, but investment firms in the laggard member states will be damaged by their tardiness, according to finance experts.
Despite the delays, the MiFID directive will revolutionize the securities trading market, said Charlie McCreevy, the EU commissioner in charge of the internal market and services.
“It will transform the landscape for the trading of securities and introduce much needed competition and efficiency,” he said. “The cost of capital should go down over time, and this will have major benefits for the European economy.”
The new framework gives authorized investment firms, banks and exchanges the opportunity to operate on a unified capital market —  comprising the 27 EU member states, Iceland, Norway and Liechtenstein — while observing the regulations of their home states. By eliminating the difficulties of diverse jurisdictions, it should boost cross-border trading.
The rules will also increase investor protection. For example, the MiFID requires brokers to execute their clients’ orders for the cheapest possible price.
Free trading
Another important change arising from the directive will be the cancellation of some monopolies enjoyed by bourses. Currently, trades of Czech securities have to be executed at the Prague Stock Exchange. The MiFID will open a space for alternative trading platforms, ushering in fair competition between bourses, off-exchange platforms and banks, according to the EC.
While criticized by stock exchanges, this provision is eagerly welcomed by trading facilities such as the RM-Systém.
“Finally, we may become a regulated market, a stock exchange with all the advantages connected with it,” said David Hybeš, a RM-Systém board member.
While RM-Systém rejoices, the BCPP has leveled broad criticisms against the directive, with its added administrative burdens only the first complaint. The switch is costly and brings a lot of unclear issues, said the BCPP’s Marek.
Some basic ideas behind the MiFID were conceived in an era when exchanges were seen as inflexible juggernauts and multilateral trading facilities were praised as the future of the industry, he said.
“Now, the situation is quite different,” he said. “Bourses have changed, becoming more flexible and offering more services.”
Nevertheless, Marek is not afraid that the exchange’s abolished monopoly might mean a major threat to the BCPP. The dealers active on the bourse double as its shareholders, and are unlikely to trade elsewhere, he said.
One of those dealers, Patria Finance, is already poised to adopt the new regulations.
“To a great extent we are ready for the new rules,” said David Kuboň, a lawyer at Patria. Patria already partly follows the new regulations, as its partners in London and Germany pressured the company to comply with the rules, he added.
Even without the MiFID signed into law, some of its rules have come into effect by EU fiat. For example, investment firms must make public unexecuted client limit orders. This requirement is a great burden for brokerages, Kuboň said.

Victor Velek can be reached at vvelek@praguepost.com


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