European policymakers have agreed to a series of regulatory reforms, including rules to oversee high frequency trading and an expansion of the duty to act in clients’ best interests.
The European Parliament and Council Of Ministers announced that negotiators have informally agreed to rule changes designed to close loopholes in the existing legislation, enhance investor protection, and regulate high-frequency trading (HFT), among other things. The details of these rules will now be developed in further technical meetings.
The new rules will apply to investment firms, market operators, and services that provide post-trade transparency in the EU. Under the new rules, the duty of firms that provide investment services to act in clients’ best interests would also include “designing investment products for specified groups of clients according to their needs, withdrawing ‘toxic’ products from trading and ensuring that any marketing information is clearly identifiable as such and not misleading.”
“Clients should also be informed whether the advice offered is independent or not and about the risks associated with proposed investment products and strategies,” it notes.
Parliament also introduced new rules on algorithmic trading that will require firms to have effective systems and controls in place. To minimize systemic risk, the algorithms used would also have to be tested, and authorized by regulators. Moreover, records of all orders, including cancelled orders, would have to be stored and made available to regulators.
Additionally, the rules aim to ensure that all trading venues are captured by the regulatory regime known as MiFID.
And, regulators would be empowered to impose position limits on commodity derivatives traders, given their potential impact on food and energy prices. Under the new rules, positions in commodity derivatives would be limited to support orderly pricing and prevent market distorting positions and market abuse.