EU securities reform may shine light on market's dark corners

* New rules come into effect in late 2016

* More detail to be thrashed out by regulators

By Huw Jones

LONDON, Jan 15 (Reuters) - Sweeping revisions to EU securities trading law agreed late on Tuesday mark the latest step in efforts to avert a repeat of the financial crisis, ushering in a new market landscape with major implications for banks and other participants.

Some were quick to complain that attempts to increase the transparency of trading in derivatives, currently carried out over the counter (OTC (Brussels: OTCB.BR - news) ) or away from official exchanges, would be seriously detrimental to that market.

"For the OTC derivatives market, there will be a seismic shift resulting in higher costs, tighter margins and reduced flexibility when hedging," Ed Parker, head of derivatives at law firm Mayer Brown, said on Wednesday.

Yet the derivatives reform - involving a requirement for these instruments to be traded through a new breed of platforms or OTFs - is a central part of EU efforts to plug gaps highlighted by the 2007-09 financial crisis and catch up with rapid advances in technology.

The derivatives reform, part of changes to the EU's Markets in Financial Instruments Directive (MiFID), was agreed between the bloc's lawmakers and member states and affects trading in stocks and bonds as well as derivatives.

The revised rules, known as MiFID II, will also have a wider scope to include commodities and introduce curbs on ultra-fast or high-frequency trading as well as OTC deals.

The changes won't come into effect until late 2016 but banks, brokers and bourses are already assessing who will be the winners and losers, and how to position themselves.

In general, established exchanges such as Deutsche Boerse (Xetra: 63DA.DE - news) , NYSE Euronext and the London Stock Exchange (Other OTC: LDNXF - news) have won over anonymous or "dark" platforms and the banks.

MiFID II creates a new breed of OTFs to improve trading transparency in bonds and swathes of the world's $640 trillion over-the-counter financial derivatives, a lucrative market dominated by top banks.

Yet banks will likely fight back and hang on to as much derivatives business as they can by setting up OTFs themselves or backing others, as they did with equities under the current rules with the creation of platforms like Chi-x, which went on to become the bloc's biggest cross-border trading venue.

"We will now start to see the evolution we have seen in equities ... so that in time we have more pools of liquidity for fixed income and derivatives," said Andrew Bowley, head of business operations at brokerage Instinet.

ONE STOP SHOP

The big "vertical silo" or one-stop shop exchanges offering services from trading to clearing, like Deutsche Boerse, won concessions to shield themselves from competition, albeit temporarily.

MiFID II will allow clearing houses to clear trades executed anywhere, but exchanges can put this off for up to five years.

Britain, the EU's biggest securities market, said this delay is anti-competitive, given investors must clear far more of their derivatives contracts.

"They were trying to find a compromise between forcing change and allowing vertical silos to adapt their business models. We are very keen to see as much competition as possible," Bowley said.

London, however, is likely to emerge a winner as home to OTFs, just as it is did to alternative share trading platforms.

Deutsche Boerse said it welcomed agreement on MiFID II. "This is an important step towards more transparency and integrity for European financial markets," it said in a statement. "We especially welcome that the derivatives market infrastructure is strengthened by the trading and clearing obligation for derivatives."

Tuesday's late-night deal also left big investors worried it will become more expensive to execute large trades, as no more than 8 percent of any individual stock across the EU can be traded off-exchange or anonymously in "dark pools".

Policymakers say such dark trading makes it harder for regulators to spot abuses, but big investors say it allows them to execute large orders quickly without the price running away from them.

"We remain concerned about the impact it will have on investors' autonomy to trade off-exchange to get best execution for our customers," the Investment Management Association, a UK trade body for big investors, said in a statement.

Commodities markets will also be directly supervised at the EU level for the first time, with curbs on how big a position an individual firm can hold to avoid undue influence on prices.

The aim is to stop what some policymakers see as speculation pushing up food prices.

"It's going to depend on how the limits are set. There is a way to go and it's really important we get them right as the debate about whether to have them is over," said Anthony Belchambers, chief executive of the Futures and Options Association, a trade body for commodity houses.