But the backdrop to the changes could not be more different. Europe’s capital-constrained banks are devoting less and less of their shrinking balance sheets to their bond trading operations and, with fewer participants willing or even capable of making markets, liquidity has to deteriorate.
In April, the European Parliament approved the Markets in Financial Instruments Directive (Mifid II) and in December the European Securities & Markets Authority (Esma) is expected to issue a definitive regulatory proposal to the European Commission after taking into account the market’s feedback.
But obliging dealers to post price details of their trades and sizes - better information - does not necessarily mean better liquidity.
Banks now hold a small fraction of the bond inventory that they did a few years ago, and with many trading operations still in the midst of being downsized or closed, it is difficult to see how liquidity can improve.
Electronic platforms should help provide a solution, as buyers and sellers are able to meet after posting their stock for sale with indicative prices. But e-platforms are only platforms, and willcontinue to rely on the banks that are willing to take the other side of trades.
Since investors have far more capacity to hold bond inventory than banks, they should logically be more than competent to take up the liquidity slack left by deserting investment banks, and trade on an almost equal footing with banks and other investors.
But publicly placed fixed income issuance is shrinking, and investors that sell run the real risk of not being able to replace their prized, scarce asset holdings. Most would therefore prefer to hold to maturity — they are simply not axed to sell or trade like banks.
For banks that are thinking of cutting back on their market-making operations anyway, Mifid could turn out to be the final nail in the liquidity coffin.