Bond Market Liquidity Comes Under Review as EU Pushes for Growth

The European Union will conduct a “comprehensive review” of liquidity in corporate bond markets as policy makers comb through rules put in place since the financial crisis in search of impediments to growth.

“The decline of market liquidity is, of course, the subject of a lively debate,” Jonathan Hill, the EU’s financial-services commissioner, said in a speech in Amsterdam on Thursday. In addition to the review, “when it comes to new measures, we’ll be careful to avoid anything that could make the situation more difficult,” he said.

Hill said he had written to the European Securities and Markets Authority to request a “more cautious approach” to determining bond liquidity for transparency rules in the market-rule overhaul known as MiFID II.

The European Commission, the EU’s executive arm, is taking a second look at the post-crisis financial framework and has sought input from the industry. Jean-Claude Juncker, the commission president, said this week that the EU should shouldn’t “over-regulate” or “interfere too much.”

While the commission’s analysis of responses to its call for evidence will continue until the summer, Hill on Thursday outlined the main areas of concern raised by respondents.

Hill said he’s “very sympathetic to the argument that rules need to be better attuned to companies’ business models, to their risk profiles and their size,” and that he wants to “see whether we can take a more proportionate approach.” He indicated a willingness to consider lighter capital, reporting and disclosure requirements for smaller banks.

Clearing Services

“Smaller companies claim that future capital requirements are stopping banks from providing clearing services to them,” Hill said. “So we must make sure the cumulative impact of bank capital requirements and EMIR is not overly burdensome, that it doesn’t inhibit sensible business planning,” he said, referring to the European Market Infrastructure Regulation.

Hill said the commission “will simplify EMIR’s requirements without jeopardizing its core purpose of reducing systemic risk in our derivative markets.”

The EU will retain the so-called SME supporting factor -- preferential capital treatment for loans to small and medium-sized companies -- and that “we’re also examining whether to raise the threshold so that more loans to SMEs can qualify for lower capital requirements.”

The European Banking Authority said in March that there’s “no sufficient evidence” that the supporting factor has “provided additional stimulus for lending to SMEs” compared with large corporates.

Additional Fees

The commission will begin a public consultation in May to identify barriers to investment funds operating across borders.

“Smaller fund managers tell us they still struggle to offer their products in different countries,” Hill said. “That gold-plating by national supervisors, additional fees, and different requirements for marketing material too often get in the way. They find that unacceptable. And if it’s true, so do I.”

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