Liquidity in the European bond market will be impacted drastically if regulators require greater disclosure on trades, fear market participants. The requirements are part of a broader proposal due to be finalized soon. Banking associations are actively lobbying European regulators to prevent such disclosure requirements but a decision will not be known until the end of next month. Officials say it is unclear if the liquidity-damaging requirements will come to fruition but the mere specter of them is spooking players.
The Committee of European Securities Regulators (CESR) is due to advise the European Commission at the end of next month on how to implement the Markets in Financial Instruments Directive (MiFID), which applies to bonds as well as other securities. In its proposal, CESR said it takes note of Securities and Exchange Commission rule 11Ac1-6, which requires broker-dealers in equities and options to produce quarterly reports on where their orders are executed. What precise route the CESR will take is unclear because it is still formulating its opinion.
Regulators are considering requiring all traders to post information on where and with whom they conduct all their trades. Given the number of dealers who execute trades in European corporate and government bonds, and the majority of trades are still done by phone, providing disclosure on every trade would be highly complex and burdensome. "All we can see is downside for liquidity," said Michael McKee, executive director of the British Bankers' Association, noting the extent would depend on the specifics of the policy.
Atilla Ilkson, senior counsel at Merrill Lynch in London, said system investments would be costly. "A broker would have to have systems in place to monitor scores of dealers and track trades in all the bonds of all the listed corporates and governments its clients trade in."
Illiquid bonds, such as those in the high-yield market, or trades in small sizes such as retail trades would be the most likely to be affected, said the BBA's McKee. Bertrand Huet-Delaherse, v.p. and European legal and regulatory counsel at The Bond Market Association in London, said the proposed disclosure would "be an administrative and operational nightmare" and would represent a major inconvenience to dealers.
