Representatives of the UK’s Financial Conduct Authority (FCA) were shown data on the percentage bond trades rejected against prices advertised on Bloomberg as work on the electronification of the fixed income market continues.
It happened at an off-site visit by a specialist FCA team who saw first-hand the frequency with which trades were rejected, despite buy-side traders offering to match advertised prices on Bloomberg.
It comes amid strong resistance to some of the changes that have been proposed under the Markets in Financial Instruments Directive II (MiFID II), which are aiming to enhance transparency in Europe’s fixed income markets.
However, in March, the European Commission’s financial services director general Olivier Guersent wrote to the European Markets and Securities Authority calling on it to take a ‘more cautious approach’ in its radical revisions to fixed income regulation.
Delegates at The Trade’s MiFID II event in Frankfurt on 10 May called on regulators to do more to understand the pressure points in the market.
Chris Bowie, partner at TwentyFour Asset Management, explained how his firm invited the FCA to see how trading fixed income is significantly different to trading in equities.
He said: “We invited the FCA to show them what, in their view, is the most liquid market. They saw the offer prices on screen, but all banks rejected the trades.
“There was a look of horror on the regulators’ face. In their view, the screen price is a real price so there must be liquidity, but that simply isn’t the case.”
Bowie added: “Regulators seem reluctant to change, but they want to look at Bloomberg’s data on rejected offers in fixed income.”
The FCA confirmed that technical specialist Felix Suntheim and Matteo Aquilina, a manager in the FCA’s chief economist’s department, visited TwentyFour Asset Management and looked at the data from Bloomberg.
A spokesperson at the FCA said: “Following the publication in March of an economic paper on liquidity in the UK’s corporate bond market the two FCA economists who wrote the paper took up the offer to visit TwentyFour’s office to discuss their findings. The aim of the meeting was simply to share insights.”
Christoph Hock, head of trading at Union Investment and a panelist at the Trade’s MiFID II event in Frankfurt, said: “With information handed down to regulators [from Europe], it is a common issue that regulators are dislocated from this.”
Global concerns about liquidity in the bond market have been well documented in the financial media in recent years, but fixed income has been further impacted by the prospect of harsher regulation to enhance transparency, according to delegates.
Bowie argued: “Transparency without liquidity is a bad thing – four investment banks learnt what I wanted to do, without giving me any liquidity.”
Bond trading has seen multiple industry initiatives recently to accommodate investors seeking new approaches, with many focused on trading the securities electronically in a similar way to equities.
Union Investment’s Hock concluded: “Electronification is the result of new regulation and we will see fragmentation in fixed income markets, it’s a matter of fact that this will happen.”
Bloomberg was not available to comment at the time of publication.
This story was updated at the request of the FCA and Bloomberg - initially The Trade understood that data had been requested from Bloomberg, however, this did not occur.