MiFID Bond-Price Rules a Gift for Traders as Just 1% CoveredBy and
ESMA says less than 1% of bonds initially face disclosure rule
Finance Watch says this approach is ‘present to market makers’
With less than 1 percent of notes affected by rules on price disclosure when MiFID II kicks in next month, years of lobbying by the bond industry appear to have paid off.
The European Securities and Markets Authority said last week that 566 bond instruments out of 61,761 it analyzed were sufficiently liquid to fall under the pre- and post-trade transparency rules in the MiFID II package. Most were sovereign bonds, which are used as collateral in everything from repurchase agreements to derivative trades.
About 150 corporate securities made the list, issued by financial firms such as CaixaBank SA, Italian power giant Enel SpA and telecommunications company Wind Tre SpA. But the small number of securities initially captured by MiFID II means the law’s goal of shedding light on the market may not be achieved anytime soon.
“ESMA’s approach will contribute very little towards improving transparency in this notoriously opaque market segment,” said Christian Stiefmueller, who’s in charge of banking for Finance Watch, a public-interest watchdog in Brussels. “ESMA’s approach is a present to market makers, i.e. traders at the major investment banks, who thrive on a lack of transparency.”
As part of its efforts to prevent another financial crisis, the EU is implementing rules designed to shift trading on to exchanges where regulators can track it, boost transparency to protect individual investors and level the playing field for professionals.
MiFID II transparency rules require market operators and investment firms that run a trading venue to make public “current bid and offer prices and the depth of trading interests at those prices” continuously during trading hours for some bonds and other non-equity securities.
Banks, asset managers and trading platforms have long argued that the transparency requirements in MiFID II are ill-suited to a market dominated by securities that investors typically buy and hold to maturity. And the push for transparency still meets with warnings that trading will be impeded as a result.
“Knowing other people’s positions and the price they paid will naturally hinder their ability to trade out of a position,” said Stuart Stanley, who helps manage about $5 billion in high-yield bonds at Invesco Asset Management in London.
The industry has also challenged the definition of liquidity in MiFID II, and ESMA’s publication of transitional transparency calculations for determining which securities fall under the disclosure rules hasn’t softened this opposition. The transitional findings apply until May 15 as ESMA computes its first assessment of data gathered with the law in effect.
“A lot of these bonds are not what I would call liquid,” said Chris Telfer, a credit manager at ECM Asset Management, whose parent Wells Fargo Asset Management oversees more than $353 billion of assets. “There are a lot of bonds that might have traded a bit recently but which will disappear into people’s drawers once attention moves on.”
The law sets out four liquidity levels that will be phased in, starting with an average of 15 trades a day and moving to two a day. ESMA estimated last year that the 15-trade test would cover 2 percent of the market; at two trades, 5 percent would be captured. The law also contains size thresholds and a test based on the percentage of days a bond trades in the assessment period.
The top of ESMA’s list is filled with sovereign bonds issued by the U.S., U.K., France and Italy. Corporate bonds are dominated by big banks. Trading in some of the securities may be the result of news coverage of major announcements by issuing firms or corporate crises.
“In the corporate space there’s a bit of everything, from junk-rated bonds to unrated to investment grade,” said Chris Bowie, who helps manage about 10 billion pounds ($13.4 billion) in credit at TwentyFour Asset Management in London. “There are a lot of story bonds, where they wouldn’t trade if not for the headlines.”
The list contains three bonds issued by rescued lender Banca Monte dei Paschi di Siena SpA, of which the largest amount outstanding is just over 88 million euros, data compiled by Bloomberg show. It also contains 3.75 percent subordinated bonds due December 2018 issued by Credito Valtellinese SpA, a regional Italian bank whose battle to clear a backlog of bad loans has made the news.
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