In for a Penny, in for a Pound

Pan-European multilateral trading facilities (MTFs) based in London are either headed for a liquidity windfall or a technological headache, and it all depends on the Financial Services Authority (FSA), which will soon decide whether to enforce the short-selling ban introduced by the market regulators of France, Italy, Spain and Belgium.

Since the introduction of the Markets in Financial Instruments Directive (MiFID) and its “passporting” rules allowing national markets to trade instruments listed in other EU member states, a number of pan-European markets have popped up.

The major problem in these markets is that although they trade issues from many markets, they are only regulated by the nation in which they are located.

I suspect the FSA will instruct all UK-based markets to observe the various bans put in place by other national regulators in order the address the systemic risk. But do they truly need to?

The global economic crisis has exposed the weakness of the EU’s governing model. If you set up supra-national market regulators, you must be sure they have the proper tools to do their jobs. But few nations are willing to cede such core power and responsibilities.

In the meantime, industry participants are left twiddling their thumbs as more confusion is added to already volatile markets, which is the last thing they need.