BlackRock said that defining fixed income liquidity is the most fraught issue and requires the most attention going forward under proposed new trading regulations.

The fund manager was responding to the European Securities and Markets Authority’s consultation paper on MiFID II, covering financial services in the Eurozone.

BlackRock said in its comment letter that if illiquid fixed income instruments are incorrectly classified as liquid, this could be severely detrimental to the efficient allocation of capital from investors to issuers.

The letter said: “We urge Esma to carefully consider the impact of applying pre-trade transparency requirements to genuinely illiquid bonds.”

BlackRock said consequences may include brokers not being willing to make prices that would have to be publicly disclosed; firms running predatory strategies on public prices; higher costs for investors and increased market volatility.

The asset manager suggested that the publication of request-for-quote prices should be either in the form of a composite average of the quotes received within certain volume bands or that a quote batching system should be created with built-in delays for publication.

“We would welcome the opportunity to expand on these proposals with ESMA to find a workable solution to this most problematic section of the draft RTS,” added the letter.

In post-trade transparency, BlackRock said Esma should learn lessons from the implementation of the Trace reporting system for fixed income in the US.

“European fixed income markets are relatively less liquid than their US counterparts hence there is a risk that an aggressive post-trade publication schedule would amplify the liquidity challenge in such markets,” added BlackRock.

Fidelity Worldwide Investment also said in its comment letter that publishing individual responses to RFQs could have unintended consequences if market participants become aware of all the material information about a trade that is about to take place and lead to front-running.

“It is clear that the pre-trade transparency data to be published in relation to RFQ systems will be far more granular in nature, and that individual bids and offers will be immediately apparent to the market based on Esma’s current proposal,” added Fidelity. “This puts RFQ systems at a significant disadvantage compared to other types of trading system, and risks liquidity moving to other types of trading system which may not otherwise be most appropriate to achieve best execution.”

Fidelity suggested that it would be better if venues provide executable RFQ responses to requester but only make them public after a specified time period or that they publish an average of the responses.

Schroders also expressed concerns about the liquidity definitions for bonds and the publication of RFQs in its comments. The UK fund manager said it supported the liquidity criteria set out by the Investment Association.

The fund manager added that there is also no requirement to link pre- and post-trade transparency. The letter said: “There are categorical differences between information being made available on a pre- versus post-trade basis. The former provides indicative market activity that becomes tradable information ahead of execution; the latter is a true reflection of what has occurred in the market.”

For post-trade reporting, Schroders supported a large-in-scale volume masking regime similar to that in the US Trace system.

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