Andrew Balls, chief investment officer for global fixed income at Pacific Investment Management Co., said European Union transparency rules may take a toll on bond-market liquidity.
An EU law that comes into force in January 2017 requires dealers to post firm prices before trades take place and to report prices after they close. Reporting requirements for bond trades will vary depending on regulators’ assessment of the liquidity of the instrument.
“Transparency is a mixed blessing in trading, as if it is transparently obvious what you are doing you may have to behave differently,” Balls said in an interview in London. “You may provide less liquidity to the market if every man and his dog is going to know what you are doing. The idea that post-trade transparency will promote greater liquidity in markets does not seem sensible.”
To prevent a re-run of the 2008 financial crisis, the EU is implementing rules that go farther than the U.S.’s Trace bond-price reporting system, where trades are reported only after they have taken place. That has raised concern that liquidity will suffer as investors and traders balk at the risk of revealing positions and finding rivals trading against them.
The Paris-based European Securities and Markets Authority said last month that reporting requirements will apply to the roughly 2,000 most-liquid securities out of about 50,000, with the precise amount changing depending on trading levels. ESMA proposed to determine which securities are subject to the rules using a bond-by-bond approach, the method advocated by the sell side of the industry.
The new rules will probably have less impact on Pimco than they will on smaller investors, said Mike Amey, a London-based money manager at the firm, who said Newport Beach, California-based Pimco was expecting more demanding regulation in any case.
“The European regulatory environment is normalizing to the U.S. environment, and that makes it less troublesome for the global investor than for the purely local one,” said Amey. “The regulatory burden is going up, but that’s as expected. It’s part and parcel of the same process that has affected all of financial services post-crisis.”