Tilman Lueder
Tilman Lueder, the head of the securities markets unit at the European Commission, gave a comprehensive update on Day Two of the Fixed Income Leaders Summit of the current progress on a consolidated tape for fixed income in Europe, in which he urged for shorter deferral times and the inclusion of indicative pricing – something he said has generated surprisingly strong resistance from the market.
“Fixed income is a market, unlike equities, which is less frequently traded with often bulky transactions and high resistance to showing the prices while the trade is still on the books, so there is very little transparency on exact pricing,” he said.
“I do not believe that we will be done by the end of the year.”
The European Commission issued its proposal for a consolidated tape in November last year and Lueder confirmed that “negotiations are still in full swing,” but warned that “there are lots of open issues, and I do not believe that we will be done by the end of the year,” meaning that it will likely fall to the Swedish EU presidency incoming in 2023 to wrap up the issue.
The harmonisation of post-trade publication windows (known as deferrals) is, said Lueder, the crucial issue that needs to be tackled in order to achieve “meaningful market data consolidation” for fixed income – which is, according to the European Commission, the most urgent, the most-needed and the most achievable asset class for a consolidated tape.
The problem is that unlike shares, which are fungible and comparable, not every bond is compatible, which is why the Commission has defined two parameters: whether an issue is small or large, and whether the market in which it is traded is liquid or illiquid. The original proposal urged dramatically reduced deferral times: including immediate price publication for small trades of up to €3 million for high yield and €5 million for investment grade, along with 15 minutes for medium sized trades in liquid and illiquid markets (in the US these are published within one minute), and end of the trading day (EOD) for large trades in liquid and illiquid markets, while ‘extra large’ trades of €50 million and above were given a rather more relaxed timeline of days/weeks.
“In terms of value, the large liquid pocket is the most commercially relevant, followed by large illiquid, which is why we chose EOD for these,” said Lueder. “You can’t judge this market just by looking at the very small retail trades, you need to look at the big buys.”
“When do we reach a point when this tape doesn’t become commercially reasonable anymore?”
However, he bemoaned the gradual dilution of the original proposal, which has seen these deferral times significantly extended. The latest proposals suggest a price deferral period of 15 minutes for medium liquid trades, EOD for medium illiquid, one week for large liquid, and two weeks for large illiquid and extra large trades.
“We’ve lost considerable ground throughout the negotiations,” admitted Lueder. “When do we reach a point when this tape doesn’t become commercially reasonable anymore?”
Another sticking point is the debate on indicative quotes, which Lueder believes are necessary in order to give an accurate picture of where the market is heading.
“In our opinion, refusing indicative quotes is the wrong way to go.”
“I’m always amazed by the wall of resistance we meet on this,” he said. “Indicative quotes are deemed unreliable, pie in the sky, and we are hearing from the market that they don’t want them put on the tape. We are very surprised by that, because in the US we see exactly the opposite picture – indicative quotes from the big trading houses are very reliable, indeed far more so than prices from trades that are more than two days old. In our opinion, refusing indicative quotes is the wrong way to go.”
While the consolidated tape proposals currently only cover corporate bonds, Lueder revealed that the European Commission is currently reviewing the possibility of creating something similar for sovereign issues, while he also confirmed that they are involved in a live debate on whether or not to publish RFQ responses as a pre-trade element of the tape – a controversial subject that has long divided the market.
To conclude, however, he reverted back to the twin themes of deferral times and indicative pricing as the crucial elements for success.
“We believe transactions have to be published within an ambitious timescale, and we believe indicative quotes are needed because any trade more than two days old does not give as clear a picture,” he reiterated.