Pre-Trade Transparency Queried at Esma Hearing

Terry Flanagan

Market participants warned that the requirements for pre-trade transparency under new trading regulations could lead to wider spreads and lower liquidity at a hearing held by the European Securities and Markets Authority.

On February 19, Esma held an open hearing on the consultation paper on the implementation of the revised Markets in Financial Instruments Directive. A video of the meeting was put on its website this week.

MiFID II extends pre- and post-trade data publication requirements to non-equity markets, including derivatives and fixed income. and requires real-time disclosure for “liquid” markets. There are waivers for “large-in-scale” trades and “size specific to instrument” trades, which allows liquidity to be defined for specific classes of products. Trades that meet the defined waivers will have a longer time to be reported which could be hours, days or weeks, depending on the instrument.

Under the new regulations, if a bank responds to request-for-quote for a liquid bond it could have to publish that price publicly and then honour that price to subsequent clients.

‎Brett Chappell, head of fixed income trading at Nordea Investment Management, warned at the hearing that banks could become reluctant to provide quotes if they have to be made public. “This will lead to very much wider bid-offer spreads, especially if banks cannot short bonds. Bid-offer spreads which are 10 basis points could widen to 25 to 30 points,” he added.

Esma officials at the hearing urged the industry to provide data that the regulator could use when defining liquidity and setting the waivers for individual instruments. Esma said it wanted to have a dynamic approach where it could review these definitions annually , rather than setting them permanently in the regulation.

Verena Ross, executive director of Esma, said in speech to the ABA/Law Society Capital Markets Conference in London yesterday: “There are endless debates about the relation between transparency and liquidity and whether there is a trade-off between them. We tend to see the MiFID II mandate as one aimed at increasing transparency in a manner that does not “damage”, but instead improves, the functioning of the market.”

At the hearing an official from MarketAxess, the fixed income electronic trading platform, asked whether it was more important for Esma to publicly publish all quotes or to not expose market-makers to undue risk.

This week MarketAxess launched Axess All, which it said was the first intra-day trade tape for European fixed income markets, providing aggregated volume and pricing for the most actively traded fixed income instruments in Europe. The data from Trax, its reporting subsidiary, includes all bonds that have traded five or more times in the current London business day with a one hour delay.

Rick McVey, chairman and chief executive of MarketAxess, said in a statement: “Axess All represents a logical step, ahead of MiFID II/MiFIR transparency requirements for fixed income instruments, to provide a trade tape in the most actively traded European bonds that helps dealer and investor clients manage market risk. Axess All also represents a valuable new data source to help investors with transaction cost analysis.”

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