As ESMA’s review of European Union’s post-trade transparency regime enters its final stage, European trade associations have stressed the importance of credit ratings in underpinning the success of the EU post-trade transparency framework for corporate bonds.
The trade associations – namely, the Association for Financial Markets in Europe (AFME), BVI (German Investment Funds Association), Bundesverband der Wertpapierfirmen (bwf), the European Fund and Asset Management Association (EFAMA) and the International Capital Markets Association (ICMA) – have released a joint statement on behalf of their members active in the EU bond markets, including the sell-side, buy-side, and financial market infrastructures.
The associations noted that distinguishing between investment grade (IG) and high-yield (HY) corporate bonds is a key component to tap into greater transparency in more liquid bonds, while ensuring protection for those bonds.
Particularly, as overly prompt dissemination of trade information could lead to a negative impact on market liquidity.
“Having a distinction between IG/HY corporate bonds allows for more tailored transparency levels for instruments with different price volatility profiles,” the trade associations said in their joint statement.
The associations highlighted sophisticated bond markets outside of the EU for calibrating transparency for corporate bonds according to the credit rating of the issuer, adding that “not adopting a similar methodology would put EU corporate bond markets at a disadvantage globally.”
As a result, policy makers have been urged to ensure that the European Union will maintain its competitiveness in the global fixed income markets, alongside preserving and potentially expanding existing liquidity in EU bond markets, which in turn will continue to ensure issuers have an effective way to finance their investment needs.
“It is clear that there are precedents for using credit ratings, not just across jurisdictions but also under other EU regulations,” added the trade associations.
Credit ratings, which has been a criterion used by TRACE in the US for years, as well as the more recent UK adoption of credit ratings through the FCA, were noted by AFME as an approach that can “provide sufficient reassurance for regulators in the EU as well […] and can help achieve the goal of competitiveness of EU capital markets with other leading global financial centres.”