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UPDATE 1-EU's Barnier warns about softening new bond trading rules

Huw Jones
Thursday, 31 Oct 2013 | 10:34 AM ET

LONDON, Oct 31 (Reuters) - European Union rules being finalised to regulate derivatives and bond trading are too light-touch and will leave markets in the dark, EU financial services chief Michel Barnier has said.

Barnier has told Markus Ferber, a German member of the European Parliament who is leading negotiations on the new rules, he was concerned about how they are evolving.

Parliament and EU states are finalising a revision of the bloc's Markets in Financial Instruments Directive or MiFID to apply lessons from the financial crisis, such as the need for greater transparency.

The vast majority of trading in derivatives takes place among wholesale market participants - banks and trading companies - through voice trading systems.

EU states and parliament have proposed exempting this type of trading from stricter transparency requirements so that most derivatives would continue to be traded in the dark, Barnier said in his letter dated Oct. 30 and seen by Reuters.

"The same principles that apply to derivatives apply equally to bonds: like derivatives markets, bond markets are dominated by dark trading which hinder effective price formation and this opacity protects from competition a handful of brokers."

"In the same way as for derivatives markets, the current drafting would simply keep the status quo by allowing these markets to continue working in total opacity," he said.

Ensuring that bond trading moved to electronic platforms open to all would broaden investor choice, Barnier said.

Unless changes to the texts were made, the EU would not be meeting pledges it and other members of the Group of 20 leading economies made to improve transparency in markets, he said.

"Should the transparency regime, as finally approved, lead to an increase of trading of derivatives instruments on dark venues this would completely defeat the objective of the G20 commitment and undermine our common efforts to render the EU financial sector more stable and solid," Barnier said.