Does sovereign debt need more special treatment?
The massed public debt officials of the European Union have endorsed a plea from the Belgian Debt Office to keep their primary dealers safe from MiFID II, a mammoth regulatory overhaul of wholesale and retail financial markets.
The implementing text is 800 pages, the consultation has 659 questions, and the regulation touches every aspect of the financial markets. But the sovereign debt managers take issue only with post-trade transparency — reporting trade sizes and prices promptly after executing a trade.
Naturally, this requirement would only work in liquid markets such as equities or, one would have thought, sovereign debt, and it is only in such markets where the European regulator proposes to apply it. Enforce it with, say, high yield or ABS, and it would be a recipe for dealers to get picked off.
The sovereign debt committee says it, “want[s] to ensure sovereign debt market liquidity providers have sufficient time to hedge their risk after taking part in a transaction, before having to disclose the details of that transaction. Failure to do so could expose liquidity providers to significant market risk.”
It’s a decent argument — the question of how to balance transparency and liquidity is central to the debate — but the whole market has been making this point for years.
The unsavoury part here is singling out sovereign debt. The issuers say that liquidity in sovereign debt markets is a public good, so dealers should get a special exemption from reporting requirements, but why should that not apply to all bonds?
Sovereign debt already has the largest lines, the lowest risk weight, privileged status as repo collateral in public and private markets and regulatory favour in liquidity buffers.
The bank-sovereign link has been forged all the stronger by much of the new bank regulation passed since the crisis and shows no sign of weakening, despite leverage ratios and extensive handwringing over SME lending. The last thing the financial system needs is another reason to privilege sovereign bonds.