OTC Derivatives Regulation - White Paper - Finance Watch - Investing not Betting, April 2012

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Investing not Betting

On April 24, 2012, Finance Watch, a Brussels-based international public interest group established in 2011 to counter financial industry lobbying, published a position paper that advocated a tough stance on MiFID II, and called for enhancements on the regulation of: [1]

In June 2012, the EDHEC-Risk Institute released a position paper titled "Who Sank the Boat?" as a sort of rebuttal to this paper. According to EDHEC-Risk, the Finance Watch paper "presents a number of assertions as self-evident truths, which one might take issue with, whether one is self-interested or not." To view the EDHEC-Risk Institute paper, click HERE.

Key Premises in the Paper

Finance Watch begins the position paper with ten central premises:

  1. MiFID should serve the real economy and society as a whole.
  2. Financial markets will not fulfill their core function without regulation.
  3. The utility role of market structures has suffered under the drive for venue competition.
  4. Investing is fundamentally different from betting.
  5. Liquidity should not be confused with volume.
  6. High-frequency trading damages liquidity.
  7. Excessive commodity speculation raises prices artificially and damages the market for real buyers and sellers.
  8. Dark trading below ‘large-in-size’ is detrimental to fairness and price formation.
  9. Most derivatives can be traded on MiFID 1’s existing trading venue categories.
  10. Protection of investors and employees go hand-in-hand.

Recommendations

  1. Maintain the ban on inducements in the case of independent advice.
  2. Ban inducements in the case where a bank or other financial institution advises products issued by a third party.
  3. Address the issue of inducements when a bank or other financial institution advises in-house products: detach sales targets from compensation and performance evaluation.
  4. Introduce competence requirements and related training obligations in relation to financial instruments and products at the level of the firm (to the benefit of employees and investors).
  5. Clarify the responsibility (and related application of sanctions) of both the employer and the employee in the avoidance of conflict of interest.
  6. Enforce supervision of conflict of interest and conduct of business rules in all Member States.
  7. Grant competent authorities and ESMA the power to temporarily or permanently ban or restrict products, practices and services, including on a precautionary basis, i.e. before such products, practices and services are marketed, offered, sold or enabled on the market.

Conclusion

"MiFID 2 is a great opportunity for European legislators and leaders to reassert the priority of the utility and stability of European financial markets. In these times of economic uncertainty, when citizens bear the cost of irresponsible behaviour in the financial system, arguments that defend the status quo must be challenged without complacency."

The position paper can be found below.

References

  1. Investing not Betting. Finance Watch. Retrieved on June 25, 2012.

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