EU Investigates inclusion of FI and GED in MiFID transparency – industry is unimpressed!
On June 12th this year (2006) the European Commission launched a Call for Evidence regarding the pre- and post-trade transparency provisions of MiFID in relation to classes of financial instruments other than shares.
MiFID itself requires the Commission to report on the adequacy of the level of pre- and post-trade transparency in financial instruments other than equities. This process had become inevitable because it was made clear in the Level 2 documentation that the best execution provisions of MiFID apply to all classes of financial instruments; however it’s not clear how any organisation can demonstrate best execution in a financial instrument where there is inadequate transparency.
The Call for Evidence closed on 15th September 2006, and the Commission is due to report to the European Parliament by 31st October 2007… the day before MiFID comes into force. All interested stakeholders, including industry and individuals, were encouraged to reply.
Rather than simply pushing ahead with the extension of MiFID transparency to bonds, derivatives and other instruments, the Commission is examining the existing market dynamics and mechanisms to establish whether there is sufficient transparency already for the best execution provisions to be demonstrably achievable.
 Finextra reported (on July 5th 2006) that the FSA has already responded by saying that it sees no evidence of market failures in bonds being caused by insufficient transparency. Hector Sants (right), FSA managing director for wholesale business stated that “a combination of competition, market-driven transparency, the interaction between the cash and credit derivatives markets, and regulation that is either in place or in the pipeline seems sufficient, in general, to deliver efficient and fair markets.”
But it’s not completely clear that the FSA is actually answering the question the Commission is asking. In particular the Commission is concerned with investor protection, market efficiency and response to technological developments – two of which do not appear to be addressed by the FSA’s response.
Earlier in the year (on May 24th 2006), the Centre for Economic Policy Research published two independent pieces of research, sponsored by a cross-market group of associations, into the Transparency of European bond markets. The first report was on corporate bonds and the second on government bonds. The studies concluded that the market in Euro-denominated corporate bonds is more liquid and competitive than sterling or US Dollar denominated bonds and that although greater post-trade transparency might benefit some market participants it would be better to be market led than regulatory.
As far as government bonds were concerned the study concluded that existing transparency seemed to work well and that regulatory imposition of greater transparency might adversely affect liquidity.
So it seems that the markets themselves are generally happy with the levels of transparency that exist in bonds; however the fact that a market is happy with its situation hasn’t prevented legislators wanting to flex their muscles in the past, nor does it mean that the situation couldn’t be improved for other market participants.
Clearly the Commission has to be very careful addressing this area. After all, the original MiFID was designed to effectively create a single European market for equities and protect the retail purchaser of shares – we have yet to see how it works out, but at this stage it looks like it might simply open the European door to the big US and Swiss banks and, by imposing regulatory costs and obligations while reducing spreads and margins, reduce the number of market participants prepared to trade on behalf of retail purchasers. Not really its original objective.
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