Europe’s New Bond Market Has Worst of U.S., Kenny SaysJohn Glover
New price-reporting rules aimed at bringing transparency to Europe’s $11.4 trillion corporate-bond market may do little to curb risky practices, according to Christine Kenny, head of trading and compliance at Loomis Sayles & Co. in London.
European regulators, in the biggest change to the market in its half-century history, are insisting on disclosure of prices both before and after a trade takes place. Kenny, who was a senior bond trader at Loomis in Boston when the U.S. instituted trade reporting more than a decade ago, says the remedy has its limits and may make matters worse.
“In a really strong market, or a really poor market, reporting can create a momentum that exacerbates whichever way things are going,” Kenny said in an interview. “Trace added to a momentum that wasn’t always helpful,” referring to the U.S.’s Trade Reporting and Compliance Engine.
Authorities are seeking to boost the resilience of financial markets through increased oversight by illuminating the darker corners whose opacity they blame for worsening the 2008 crisis. Along with tracking who owns what, they’ve proposed that dealers transact using posted prices. Price alone, though, doesn’t tell traders everything they need to know, Kenny said.
A trader seeing a bond change hands at a price perceived as aggressive may not be aware there was a second trade on a different bond taking place at a level closer to the market, evening out the overall transaction, she said. Or perhaps the seller was forced to offload the security because a client wants its money back.
“So if you don’t know the full picture, using that single point as your main reason for choosing the level where you want to trade next, you’re trading in a vacuum really,” she said. “Taken on its own it’s not a helpful piece of information.”
Kenny joined Boston-based Loomis in 2001 from State Street Global Advisors where she traded emerging market debt during the Asian crisis and then as John Meriwether’s Long-Term Capital Management LP crashed. She was at Loomis in 2008 and 2009, during the depths of the credit crunch.
Investment-grade securities lost a combined 9.8 percent in September and October in 2008, while negative returns on junk bonds were a record 25 percent, plus another 8 percent in November, according to Bank of America Merrill Lynch index data.
“You sold what you could, not what you wanted to,” she said. “That’s what happens any time there’s even a minor hiccup, you sell what you can. If you have outflows and you have to create cash, you have to sell a bond, or an equity, or whatever it is.”
It was the 2008 crisis that inspired the changes to market structure that Europe is now preparing to implement through an update of its Markets in Financial Instruments Directive, or MiFID. The new rules are scheduled to be in force by the end of 2016.
Kenny, who transferred to London in September 2011, is unconvinced that the changes -- more ambitious than those U.S. regulators pushed through -- will get the results desired. That stems in part from the lack of standardization inherent to debt securities.
Each bond has different coupons, terms, amounts and maturities designed to meet the needs of each individual issuer. The members of the benchmark Stoxx Europe 600 Index have 33,983 bonds out, 94 of them of 2 billion euros ($2.7 billion) or more, Bloomberg data show.
“There’s just too many nuances,” she said. “I personally don’t think the bond market ever fully moves away from voice” trading.
The structure of the market also changed post-crisis, she said. In the U.S. in 2002 banks were willing and able to commit capital to ease trading. Since then, regulators’ insistence they deploy more capital against their trades has made them unwilling to hold bonds while looking for a buyer.
That’s added to the lack of liquidity in Europe, which itself risks aggravating the danger of a herd mentality based on reported prices developing, Kenny said.
“That’s a little bit of my concern here because liquidity in general here is less than it is in the U.S. anyway,” she said. “I worry that people will rely on that single data point a bit too much.”