Vertically integrated stock exchanges would be opened to competition under draft European Union rules that will please countries such as Britain but pose a threat to powerful operators like Deutsche Boerse AG.
The EU's executive European Commission is expected to unveil a draft law next month to toughen up and extend its markets in financial instruments directive (MiFID).
A draft of one part of the proposed changes, circulating in Brussels and seen by Reuters, maps out targeted by ambitious improvements to the original near four-year old law.
The Commission proposes tearing down barriers that prevent banks and investors from being able to choose where to clear or settle their securities transactions.
Member states shall require that investment firms from other member states have the right of access to central counterparty, clearing and settlement systems in their territory, the draft says.
Access should be granted on the same non-discriminatory basis as for local users.
Member states shall not prevent investment firms and market operators operating a multi-lateral trading facility from entering into appropriate arrangements with a central counterparty or clearing house and a settlement system of another member state with a view to providing for the clearing and/or settlement of some or all trades concluded by market participants under their systems, it added.
The proposals come at a crucial moment for the future shape of Europe's trading landscape.
Deutsche Boerse, which owns its own clearing and settlement systems, intends to merge with NYSE Euronext to create the world's biggest exchange. It will dominate on-exchange European derivatives trading and clearing in particular.
The Commission's plans would allow banks to use a rival clearing house, such as LCH.Clearnet in London, to clear derivatives traded on Boerse's Eurex trading platform.
Britain has been lobbying hard to ensure clearing choice if the merger goes ahead.
MiFID II also proposes that any suspension of trading shares on one platform should trigger a suspension on all platforms, the draft proposes in a move to end confusion when one venue is hit by a technical glitch.
EU states and the European Parliament have the final say on MiFID II with fierce haggling and changes expected.
HIGH FREQUENCY/BOARD ROLES
The MiFID draft is being used as a vehicle to clamp down on high frequency trading, a form of ultra-fast trading which has come to represent large chunks of volumes on exchanges but for regulators represents new risks and a forum for potential market manipulation.
In particular, the proposals aim to bring all entities engaged in high frequency trading into MiFID, the draft says. Tougher scrutiny of algos or the computerized trading programs is planned.
The draft MIFID II law creates a new Organised Trading Facility category so that OTC derivatives are traded electronically in a transparent way.
In line with the U.S. model, an OTF would have to allow third parties access and not simply be a continuation of the bilateral set up between banks as at present.
Corporate governance reforms have also been bolted on to MiFID II which proposes that board members at financial firms cannot combine more than one executive directorship with two non-executive roles to ensure they commit sufficient time to perform their functions.
The EU's Emissions Trading Scheme (ETS) would also be brought fully under MiFID and the separate, planned reform of the EU's Market Abuse Directive thereby comprehensively upgrading the security of the market.
MiFID II will extend its scope to commodity markets after pressure from policymakers who blame speculators for pushing food and energy prices to record highs in recent years.
It is therefore proposed that all trading venues on which commodity derivative contracts are traded adopt appropriate limits or alternative arrangements to ensure the orderly functioning of the market and settlement conditions for physically delivered commodities, the draft says.
Supervisors would also have powers to impose position limits on markets and trading venues will have to provide granular data on positions held on their markets.
For derivatives in general, supervisors would be given powers to intervene at any stage during the life of a derivative contract.
The draft also outlines tougher sanctions for breaking MiFID II rules so that maximum fines should not be lower than 10 percent of a firm's total turnover, or 5 million euros or 10 percent of a person's annual income, the draft said.
(Editing by David Holmes and Jon Loades-Carter)