Fixed IncomeSep 29 2015

Regulators unveil Mifid II bond trading overhaul

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European regulators have opted not to adopt the approach advocated by the Investment Association (IA) in deciding how to classify liquid and illiquid bonds.

Publishing a series of technical standards relating to the forthcoming Markets in Financial Instruments Regulation (Mifir), the European Securities and Markets Authority (Esma) said its favoured approach will “strike the right balance among flexibility, stability and operational manageability”.

The reforms mean details of all transactions in bonds deemed to be liquid will be published to the wider market. Liquidity for a given bond will be measured quarterly, based on the volume and number of daily trades in the security.

Esma said it had adopted the “instrument by instrument approach” (IBIA) to classification. The IA’s favoured “classes of financial instrument approach” (COBIA) would have classified bonds into groupings such as “sovereign” and “corporate”, and used specific issuance size thresholds.

In its response, the IA said the European regulator is effectively using a hybrid approach because new issuance will be categorised in relation to certain groupings.

The IA had previously said IBIA was “deeply flawed” because liquidity definitions could end up “driven by day to day headlines”.

The trade body, which earlier this month called for a one-year delay to the proposals, said today (September 28) it continues to believe COBIA is more appropriate.

It added that Esma’s decision to exclude transactions under €100,000 (£73,800) will “heavily skew the application of transparency exemptions”.

Only a small proportion of European bond market securities are likely to be captured by the transparency requirements. But Esma said today that the magnitude of its Mifir technical standards, which encompass a range of other market trading proposals, “should not be underestimated”.

Mifir forms part of the second Markets in Financial Instruments Directive (Mifid II), which will take effect on January 3, 2017.

Parts of the directive more relevant to investment advisers, such as rules governing complex products and the unbundling of dealing commission, form part of the delegated acts currently under consideration by the European Commission.

Minutes from the FCA’s September 14 Mifid II roundtable, published this morning, show the UK regulator does not expect the EC to adopt the acts “before the beginning of November 2015 at the earliest”.

Upon adoption the European Parliament and Council will then have three months to decide whether or not to object to the proposals.

The Mifir technical standards must also pass through the same process.