Financial Regulatory Framework for the European Union

By Dinos Stasinopoulos, formerly with the European Commission

The financial markets are currently undergoing an upheaval due to the financial crisis. Since its EU-wide implementation in 2007, The Markets in Financial Instruments Directive (MiFID) has changed the environment and structure of market equity trading in Europe. A new landscape is emerging one which is characterised by tighter regulation and a shift from a principles based approach towards more rules-based philosophy.

At the same time other developments such as the new capital higher requirements of BASEL III, the creation of new supervising authorities for banks, insurance firms and securities markets and new US financial and banking regulations are also shaping the new framework.

Under the old paradigm, which applied until the 2007, competition was a primary consideration. It was felt that competition increases efficiency and innovation in financial markets. . A shif from market efficiency to preserving stable, transparent and sound markets can be noted..

Under the new framework being implemented, efforts are made to reorient the financial sector to fulfil a serving function to the real economy. Several studies by think-tanks demonstrate that changes in financial structures are bringing more competition financial trading and allowing liquidity to move freely across trading venues. Pan-European trading has grown more than it would have in the absence of the new regulatory developments. Regulation has also shifted from London, Frankfurt , Paris and other capitals to Brussels. Computer generated exchange order and high-frequency trading, trading off-exchanges, short selling etc are other issues currently being debated in Europe.

It is rather unfortunate that this new European financial framework has received a scant attention by the economic press in Greece probably because of the immediate and urgent need to meet the severe requirements of the “Mnimonio” in cutting expenses and reducing the public debt. Active participation by policy makers and financial sector representatives in the European fora is needed to help the Greek financial sector prepare better for the necessary changes and maximise the positive impact to the economy at large.