A new analysis by CFA Institute recommends that careful implementation of post-trade transparency requirements beyond equities to the bond markets can benefit investors by improving access to pricing information and increasing competition, without sacrificing liquidity.
The study by CFA Institute, the global association of investment professionals, coincides with the proposals for greater transparency under the revised Markets in Financial Instruments Directive (MiFID).
The report, An Examination of Transparency in European Bond Markets, looks at the existing state of transparency in fixed income markets and the potential for increased transparency in Europe, drawing from the experiences of Italy – Europe’s largest bond market – and the United States. Thus far in Europe, Italy is one of only a few countries to mandate public reporting of transactions in fixed income securities, while the U.S. has mandated such transparency since 2002, via the Trade Reporting and Compliance Engine (TRACE) system. The report reviews both examples to reveal likely costs and benefits to increased transparency for investors. At the same time, a recent CFA Institute poll of its members in Europe found that 76% of respondents think the benefits of greater transparency and trading on exchange-like platforms would outweigh the costs.
On the basis of the findings, CFA Institute supports the introduction of a public reporting requirement for bond transactions in the European Union, under the revised MiFID. Specifically:
Post-trade transparency provisions should be calibrated to take account of the size and liquidity of the issue. In particular, it should be possible to delay the reporting of very large transactions to allow market makers sufficient time to hedge their positions. This will address some fears that dealers would be needlessly exposed to the market, potentially sacrificing liquidity.
New requirements should be implemented gradually. Market participants will need time to adjust their trading processes to any new requirements. A phased-in approach would also mitigate the risk of a temporary liquidity shock.
Authorities should set minimum standards over the content and format of post-trade data. Investors need access to accurate and consistent information on transactions in fixed income securities to facilitate the investment decision making process. Consistent standards over trade reporting are necessary to facilitate the consolidation of post-trade data to provide investors with an aggregate view of bond market transactions.
With regards to pre-trade transparency, a single standard on the publication of quotes would be impractical at this stage, given that bonds are largely traded over the counter and vary significantly in liquidity characteristics. Increased market acceptance of electronic trading platforms may lessen the immediate need for regulatory attention to pre-trade transparency requirements generally.
Rhodri Preece (pictured), CFA, director, Capital Markets Policy, CFA Institute, says: “MiFID II is instrumental in improving the structure of the markets following on from the financial crisis, and greater transparency is a key part of these reforms. We believe that investors will benefit from access to timely information related to the price and size of past trades, and that the legitimate concerns of dealers in the market can be accommodated while still advancing transparency.”