Buy-side turns up the heat on European fixed income proposals
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
“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
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.
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
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.