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The European Commission will propose Thursday morning a sweeping set of financial regulation reforms that seek to rein in derivatives trading and increase oversight of high-frequency strategies.

The proposal is part of a global effort to turn opaque markets more transparent, after a commitment by Group of 20 nations in 2009.

It would require off-exchange brokers to meet the same reporting requirements as large exchanges to bring so-called "dark pools" into the light. It also scraps previous exemptions for derivatives and bonds, although different financial products will face different standards. It aims to push all liquid derivatives onto a regulated market and be cleared. The proposal seeks to minimize variations in market regulation among European Union countries, and impose minimum sanctions for rule breakers.

The legislation still requires approval by the European Parliament and EU countries, and several details have yet to be worked out. For instance, the pan-EU supervisor, the European Securities and Markets Authority, still has to assess when a derivative is eligible to be cleared.

In a concession to the U.K., the document clearly states that requirements would cover all financial instruments and not just those sold over-the-counter, which is the dominant method in the U.K.

The commission notes that the proposed merger between Deutche Boerse (DBOEF, DB1.XE) and NYSE Euronext (NYX) is not targeted by this proposal, and the review of the transaction is being carried out independently of this initiative.

"Financial markets are there to service the real economy--not the other way around," said Internal Market Commissioner Michel Barnier.

All algorithmic trading firms, which use computer-driven automatic trading formulas, will have to become "properly regulated" and provide national regulators with details of their trading strategies. There would be limits placed on the number of orders per transaction and how far trading venues can go to attract order flow. They would also be obliged to operate the algorithmic strategies non-stop during their trading hours "to reduce volatility," said the statement.

High-frequency trading firms would also be asked to adopt increased risk controls to be monitored by national authorities. All the new data will be gathered in one place, so that investors have an overview of all trading activities in the EU.

National regulators, in coordination with ESMA, would also be given new powers to ban certain investment products if financial stability is seen under threat. In light of the explosive growth in derivatives trading in recent years, the EU also proposes that regulators should be able to demand information on derivative positions from any person. Regulators would also be able to force traders to reduce a derivatives position and limit their ability to enter into commodity derivatives contracts.

In addition, portfolio managers would be prohibited from making or receiving third-party payments and would face rules on corporate governance.

The commission proposes a number of exemptions to the rules. These include companies engaged in genuine commercial or insurance activities, pension funds, central banks and those trading only for themselves.

As already reported, the commission will also present proposals for a uniform minimum criminal penalties for market manipulation, including insider trading.

-By Riva Froymovich, Dow Jones Newswires; +32 2 741 1489; riva.froymovich@dowjones.com

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