EUROPE – The latest version of the proposed Investment Services Directive put forward by the European Parliament contains a new item concerning the efficiency of pension funds and over-the-counter, OTC, trading.

The new version is the latest stage in the directive’s controversial life. The European Council reached political agreement on the directive in October last year - although five countries voted against it.

At the time the parliament’s rapporteur for the ISD, Theresa Villiers, called the result “dire”. She said it had an “unclear and unworkable” text that would add huge costs to investment firms.

Villiers has now come up with a new version of the ISD, with 21 amendments. "There is a great deal more work to be done before we can reach a satisfactory conclusion on the ISD,” she said.

The new Recital 44a in the text says that dealing on own account outside of an automated system, including wholesale OTC trading is not within the directive’s definition of systematic internalisation.

“It is important that ordinary wholesale OTC trading is not disrupted by the new ISD,” said Villiers.

Villiers, a UK Conservative MEP, said OTC trading “provides services which are vital if institutional investors like pension funds and UCITS are to manage the savings of their customers in an efficient manner and maximise the returns for the thousands of retail investors who are their customers”.

Villiers argues that the text proposed by the Council would damage institutional investors’ ability to manage their equity positions to maximise returns for investors.

“That means a reduced savings income for consumers who invest in UCITS and pensions,” she said. “Institutional investors often seek an off-exchange solution because the central order book cannot always readily deliver the service they want – immediate execution of wholesale size orders at an agreed price.”