Esma Highlights Illiquid Bond Markets

Shanny Basar

The European Securities and Markets Authority has calculated that only 157 corporate bonds out of 39,000 are deemed liquid, an important classification for incoming regulations.

Yesterday Esma published its transitional transparency calculations for fixed income which come in effect with MiFID II from 3 January 2018. Under The regulations coming into force across the European Union, liquid instruments face more immediate pre- and post-trade reporting requirements for trades below a certain size.

For example, in liquid bond markets the prices provided to the request for quote should be be made public in real-time  and all at the same time. Once a trade is executed, certain details should be made public as close to real-time as possible. In contrast for illiquid instruments, pre-trade quotes will not be made public and on execution, post-trade reporting in on a T+2 business, although this time can be increased by national regulators.

Christophe Roupie, head of Europe and Asia for MarketAxess and Trax, said in a statement: “Having provided Esma with data sourced from our trading and post-trade activities, we are pleased to note that the transparency calculations published by Esma are aligned with our predictions, as well as industry expectations. And most notably, only 157 corporate bonds out of 39,000 ISINs have been deemed liquid, demonstrating further the illiquid nature of the corporate bond market, and the need for alternative ways to source liquidity in those markets.”

In addition the calculations showed that only 566 bonds out of a universe of 61,761, or 0.92%, which traded in the quarter ending 31 Oct 2017 were deemed liquid. The most liquid were sovereign bonds, where 5.3% met the threshold. The calculations apply until 15 May 2018.

In equities 1,907 instruments out of a universe or 28,971, or a higher 6.7%, were found to have a liquid market. The calculations will apply until 31 March 2018.

Esma said in a statement: “Esma has performed these calculations with due care and to the best of its ability. However, given the scope and complexity of the calculations, including the various underlying data sources, future corrections cannot be ruled out. Esma expects to continuously supplement and update the information provided, where necessary.”

In August derivatives analytics provider Clarus Financial Technology found that 80% of euro swaps will not be subject to pre-trade transparency under new reporting requirements despite the European Union’s aim of improving price and volume data.

Chris Barnes at Clarus said in a blog: “In a nutshell, these limits have been calibrated such that there will be no pre-trade transparency for euro trades above €20m in size. There will also be sizeable delays in post-trade transparency for trades above ~€100m (depending on maturity).”

Barnes found that 80% of of all euro swaps will not be subject to pre-trade transparency and 75% of risk traded in euro swaps will remain dark for up to four weeks. He added: “Pre-trade transparency will only give us price data for three points on our interest rate swap curve. This is not enough to calibrate any meaningful pricing data.”

He continued that Esma should recalibrate the thresholds, along with the liquid designations, using the freely available from US swap data repositories.

Clarus has also recommended that the data being used by Esma to derive the trading obligation of euro swaps should be combined with information from US swap data repositories to give the most complete picture of liquidity available to a market participant.

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