The European Securities and Markets Authority will be tasked with drawing up new technical standards each year to determine whether or not a corporate bond is liquid enough to be subject to enhanced disclosures under the revised Markets in Financial Instruments Directive – the EU’s securities trading rulebook, which is coming into force in 2018.
However, the Commission stood its ground and included the requirement in new regulatory technical standards for Mifid II which it published on July 14. These rules must now be approved by both the European Council and the European Parliament, which can reject them.
Mifid II’s rules on bond transparency go further than those in the US under the Trade Reporting and Compliance Engine, or Trace, by forcing quotes to be published – known as pre-trade transparency – as well as actual transactions.
The rules have been met with resistance because many fear too much transparency in illiquid markets such as credit could harm their ability to trade without revealing what they are doing to others – making them unwilling to make a market and risking further damage to already low levels of bond liquidity.
The Commission has responded by proposing a four-year phase-in of the rules, and on July 14 it said it was crucial for Esma to carry out “comprehensive [annual] assessments analysing the evolution of trading volumes in non-equity instruments”. The move from one phase to the next will apply only once Esma is satisfied that liquidity will not be negatively affected, something which will require it to write a new technical standard.
While it is not uncommon for European regulation to contain review clauses, there are no other examples where Esma is required to produce new technical standards each year – such a move is onerous requiring a public consultation to get stakeholder views.
However, a lobbyist at a trade body, who did not want to be named, said the move was welcome.
He added: “It means Esma will need to take into consideration the impact the rules are having on the market. In the context of Brexit and likely interest rate cuts (or rises) the requirement is helpful.”
On July 14, the Commission also specified the liquidity thresholds – linked to the size and frequency of trading in a security – which will determine whether or not a bond is subject to enhanced disclosures. The rules state that only if a corporate bond trades 15 times a day in the first year of Mifid II will it be deemed liquid and therefore subject to enhanced transparency, with that threshold falling to 10 in year two, seven in year three and two in year four.
While Esma had proposed an automatic phase-in of these four distinct steps, the Commission has proposed that each transition should be preceded by a full liquidity assessment by Esma.
The rules state that if Esma does not publish a new regulatory technical standard, then the current calibration will remain and the increase will be postponed to the following year.
The Commission said that while it “supports setting out a clear phase-in schedule for both the liquidity standards and the waiver thresholds that gives clarity to market participants, the Commission is of the view that an automatic phase-in is not warranted”.
The non-equity market elements of Mifid II have proved to be among the new rulebook’s most controversial. Those concerns were such that the Commission asked Esma in March to rewrite its standards covering bond transparency. The Commission urged Esma to take a more “cautious approach” to help a smooth transition to the regime.
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