The European Commission’s proposed phase-in approach for bond market transparency rules will have little impact and could undermine the primary objective of the regulations, one of Europe’s chief regulators has warned.
Steven Maijoor, chair of the European Securities & Markets Authority, said Commission proposals to limit revised regulatory technical standards (RTS) for bond market transparency to just the first stage of a four-year phase-in would carry a high administrative burden, requiring an annual legislative process to expand the scope of the RTS over the implementation period.
“We support the cautious approach, but we suggest the phase-in should be included in the RTS,” Maijoor said at the Reuters Financial Regulation Summit on Wednesday. ”In our view it is a technical assessment and it is very labour intensive every year to go through changes to technical standards.”
The Commission’s proposals for new rules that require trading venues and market participants to disclose bid/offer prices and the depth of trading interest on liquid bonds, would capture less than half of the debt securities deemed liquid by ESMA. Under the Commission’s plan, more instruments would be added each year following a liquidity assessment and corresponding change to the RTS.
But ESMA wants an automatic phase-in with all stages prescribed in the RTS. It would include an annual liquidity assessment that could result in amendments if necessary.
The regime for non-equity transparency is one of three out of 28 MiFID II rules submitted by ESMA that the Commission sent back last month for revision.
Its demands for a staggered implementation reflect concerns surrounding potential risks that pre- and post-trade transparency requirements could have on already-scant liquidity.
Concerns about bond market liquidity have been heightened in response to new capital and leverage rules under Basel III that have forced banks to step back from the traditional market-making model of warehousing debt securities. Data from the Federal Reserve Bank of New York show that dealer holdings of corporate bonds fell to just US$13bn in April from a 2007 peak of US$285bn.
At the same time, asset managers have more than doubled their holdings of fixed income assets and monetary authorities have swept up trillions of dollars worth of debt securities as part of their asset purchase schemes aimed at kick-starting growth.
“I don’t think the current discussions on liquidity should haul us back from moving on with bringing more transparency to the bond market in a carefully managed way,” said Maijoor.
He said while the ratio of trading to outstanding debt instruments has reduced dramatically, the impact on bid/offer spreads has been mixed at best.
“The liquidity characteristics of bond markets have changed, but it’s much more difficult to say that there is a liquidity problem,” he said.
ESMA determines whether a bond is liquid - and therefore suitable for the transparency regime - based on the number of daily trades, volume of trades and how many days a year there is trading in the instrument.
The regulator deems bonds that trade at least twice a day to be liquid, capturing around 2,600 instruments - or around 5% of the 54,000 debt securities in issue.
Under the phased approach, only those bonds that see at least 15 trades a day – 1,100 instruments, according to ESMA calculations - will be subject to the transparency requirements when MiFID II is implemented in January 2018. That will increase to 1,500 in year two as the threshold drops to at least 10 trades a day and 1,900 in year three when the threshold falls to at least seven trades. Full implementation of all liquid bonds will occur in year four.
ESMA also proposed a more cautious regime for newly issued corporate and covered bonds that would see issuance size thresholds increased for the liquidity determination.
ESMA earlier this month proposed changes to position limits rules. An opinion on the third RTS on ancillary activities is being finalised.
