New EU legislation casts uncertainty over fixed income liquidity

Fixed income market participants are unsure whether new EU legislation will improve or harm liquidity, a recent survey has found, and many are doubtful about the potential positive impact of MiFID II.

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Fixed income market participants are unsure whether new EU legislation will improve or harm liquidity, a recent survey has found, and many are doubtful about the potential positive impact of MiFID II. 

The survey of 200 senior buy- and sell-side practitioners at the European Capital Markets forum hosted by trading platform operator MarketAxess last month found 58& of institutional market participants believe there is not enough transparency in the European corporate bond markets. 

Most respondents backed more transparency in corporate debt capital markets, but many were not yet convinced whether the EU plans would make finding liquidity easier or harder. 

The incoming MiFID II regulations aim to improve transparency and market efficiency, yet 55% of respondents said they thought MiFID II would have a negative impact on liquidity. 

When asked about the likely impact of increased pre and post-trade transparency, a key blank of the revised directive, 46% felt it would diminish liquidity, with 41% believing it would improve liquidity. 

Rick McVey, MarketAxess CEO, said: “Transparency and the cultivation of more open, competitive markets are the primary aims of both regulators and market participants. But, transparency needs to be calibrated in a way which does not damage market liquidity.” 

McVey said the survey found that nearly two-thirds of market participants believed there was insufficient transparency in the fixed income market, and there needed to be a framework that did not harm liquidity.  

“This shows how carefully regulators need to progress the detailed ‘level two’ rules, and underpins the importance of the constructive work we have been doing with the industry on calibration of trade reporting,” said McVey. 

The burden on businesses of implementing MiFID was the major concern of a majority (63%) of respondents, and the technical challenges also posed a worry with 54% saying major system upgrades would be needed to meet new client classification and trading requirements. 

In addition, 79% of those polled did not believe the development of the detailed MiFID II’s level two rules would be completed within the next year.

MiFID II was passed by the European Parliament in April. The European Securities and Markets Authority is now consulting the market on the regulatory technical standards that will comprise the level two rules.

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