Many traders and pundits saw implementation of MiFID II as a watershed moment in the equities markets. But what about the growing fixed-income sector?

Hmmm.

In a recent research note, market consultancy Greenwich Associates said MiFID II will make the European corporate bond market more transparent, and likely more electronic. But investors are waiting to see what this means for liquidity in the market longer term.

The report, European Corporate Bond Trading: Impacts of MiFID II, found that that more than half of investment-grade corporate cash bond trading volume is now conducted electronically in Europe, easily topping the 19% of electronic volume in the United States. MiFID II is expected to push even more European business to electronic venues, as dealers try to minimize skyrocketing compliance costs with new technology platforms.

Regulators expect this and other changes caused by MiFID II will make markets more transparent and competitive. However, market participants are concerned that the price of success for increased transparency could be reduced levels of liquidity in products like corporate bonds.

“Despite these concerns, increases in dealer competition should ultimately result in tighter spreads,” said Brad Tingley, Market Structure and Technology Analyst at Greenwich Associates and author of the new report.

Liquidity Concerns

Doesn’t liquidity beget liquidity?

Even before MiFID II implementation, European fixed-income investors were experiencing reductions in corporate bond market liquidity. The new Greenwich report finds institutional investors in search of consistent liquidity are looking to alternatives such as single-name credit-default swaps (CDS) and corporate bond ETFs.

“Investors are taking these steps to ensure liquidity in the short term,” Tingley said. “Over a longer-term horizon, increases in transparency and efficiency brought on by MiFID II and the continuing electronification of market will be a long-run benefit for all involved.”