Institutional investors have lobbied European policy makers against proposals for overhauling the fixed income market in MiFIR, which they believe could severely impede their ability to source liquidity in size.
The concerns are specifically related to pre-trade transparency requirements that could make it costly and riskier for the sell-side to fulfil their role as liquidity providers in the bond markets. Representations to European regulators have been made via a number of channels, including UK buy-side trade body the Investment Management Association (IMA) and Quorum 15, which includes investment banks and money managers from across the globe.
MiFIR, the regulation that will accompany MiFID II, will require brokers and trading venues to publicly display quotes in fixed income instruments. While MiFIR does allow exemptions from the pre-trade obligations for trades over a certain size, the exact nature of this is yet to be determined.
“The MiFIR proposals on fixed income do not really take account of how trading takes place currently, in terms of pre-trade transparency,” Jane Lowe, director of markets at the IMA, told theTRADEnews.com. “One of the issues is that the requirement for dealers to publish and make firm quotes will apply to ‘average market-size’ trades, which is too vague and leaves market participants unsure as to how current arrangements will change.”
Lowe said she had presented the IMA’s position to the Council of the European Union, which comprises member states’ finance ministers.
At present, buy-side traders source bond liquidity by requesting quotes from their broking counterparts that act as market makers for specific instruments. The quotes offered by the sell-side are indicative and there is no obligation for brokers to publicly disseminate quotes. Bond trading venues – such as Tradeweb and MarketAxess – are pre-trade transparent but currently account for a low proportion of fixed income trading.
Risky experiment
According to Lowe, if pre-trade transparency requirements for brokers are too onerous, their ability to shoulder risk as part of their role as liquidity providers will diminish. This will make it harder for the buy-side to source liquidity and could increase market impact, particularly when trading more illiquid bonds.
“This is clearly not the time to be experimenting with the bond market, given the need for many sovereigns and corporates to raise capital via debt,” she said. “The Commission proposals in MiFIR are far too open with regards to pre-trade transparency. We do not want to be in a position where we are waiting for level two standards before we find out how pre-trade transparency will be applied.”
Other buy-side traders have also teamed up to help bring the issues related to pre-trade transparency in fixed income market to regulators’ attention.
This includes a joint letter to the European Parliament, Council of the European Union and European Commission via Quorum 15, an industry body that includes representatives from buy- and sell-side institutions across the globe.
“An inflexible regime towards pre-trade transparency could restrict
liquidity. One solution would be to use the liquidity of different bonds to
determine whether quotes need to be displayed pre-trade, and then possibly in
retail (small) size only,” said Paul Squires, head of trading at AXA Investment
Managers.
Squires added that he expects the buy-side to ramp up its lobbying efforts towards the end of the year, before the high level MiFID II and MiFIR texts are finalised.
The European Parliament and Council of the European Union are currently making adjustments to the initial MiFID II draft presented by the European Commission last October.
After the Parliament and the Council have reconciled their own versions of the text, with input from the European Commission, the European Securities and Markets Authority will be required to set out the accompanying technical standards, which at this point includes the levels at which pre-trade transparency should apply to fixed income trades.