Keeping Bond Trades Quiet Gets Hard in Europe. Unless You're Big

  • Largest deals in sovereigns and corporates may be exempted
  • Securities-law revamp still needs European Commission approval

For the $74 trillion fund management industry, this week’s publication of new requirements to disclose bond trades in the European Union was a reminder of how some investors are more equal than others.

Look carefully, and exceptions are provided for the biggest trades. A large transaction in, say, a German government bond or Credit Agricole SA debt may escape the new disclosure demands if it’s bigger than 60 percent of last year’s trades in that security.

The exceptions, an option for the wealthiest money managers and hedge funds, are among several loopholes surviving years of tussling between industry lobbyists and regulators of the 28 EU nations. While publishing pending orders and traded prices is meant to add more security for investors, critics say it’s like showing your cards before anyone else.

“When an asset manager is executing in large sizes, he has a duty to get the best price and at the best time for his clients,” said Arjun Singh-Muchelle, senior adviser on regulatory affairs for the Investment Association in London. “A broker shouldn’t have to undergo undue market risk,” said Singh-Muchelle, referring to opportunistic investors that may use price information that previously was kept private.

January 2017

EU regulators are trying to make markets more transparent after the financial crisis and also more competitive to cut trading costs for investors. They’ve faced a barrage of criticism that their efforts will backfire by giving away too much information, discouraging the very trading they’re trying to promote. Officials have sought to balance those concerns with exceptions for bigger, block transactions.

Bond-trading waivers and deferrals were included in 1,500 pages of documents published on Sept. 28 that largely tighten rules on everything from credit-default swaps to commodities. The new regime still needs final approval by the European Commission, which has three months to decide. They would come into force in January 2017.

To find the exceptions, a reader of the draft regulations needs to search for the acronym SSTI, which stands for “size specific to the instrument,” and LIS, which refers to “large in scale.”

Bond trades bigger than 80 percent of the market’s transactions in that issue, or larger than 90 percent of the entire EU market’s fixed-income trades in a given period, may seek a reporting deferral for as long as a month on a case-by-case basis. Separately, there is also a waiver possible to “pre-trade’’ disclosure of price ranges: a potential trade larger than 60 percent of historic transactions in that instrument, or bigger than 70 percent of trades in all fixed-income, may be exempted.

Lauding Transparency

Some investors don’t want to stay in the dark.

"I’d rather see prices on trades of all sizes, especially if the point of the rules is to increase transparency and improve the way the bond market functions," said Regina Borromeo, a London-based money manager at Brandywine Global Investment Management, which oversees $67 billion of assets. "Hopefully excluding certain trades won’t make the picture even less clear for investors."

There were other exceptions to the new disclosure rules for bonds that concern smaller-scale investments. Debt instruments are free of disclosure requirements if the average daily amount traded was less than 100,000 euros ($112,000), or they averaged less than two trades daily or they didn’t sell on at least 80 percent of trading sessions. Newly issued instruments will be deemed liquid depending on their issue size.

The disclosure will apply only to a small fraction of bonds because most aren’t liquid enough to be reported. Of the 50,000 or so sovereign and corporate bonds studied by the European Securities and Markets Authority, or ESMA, which produced the draft, just 4 percent make the cut. Yet that select group, including government benchmarks and the largest companies, should account for a majority of the market’s turnover.

ESMA Chairman Steven Maijoor hinted that the criteria may be altered in the future, depending on how the new regime plays out.

"I am for anything that increases transparency and helps price discovery because there is not enough of that in Europe, which can make valuing bond holdings difficult," said Jon Mawby, a London-based fund manager at GLG Partners, which runs $33 billion. "Not having information available on larger trades is not what we’d want to see."

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