By Simon Miller
European proposals to reform pricing practices in the fixed-income market will seriously undermine trading firms’ ability to provide liquidity according to research.
A report from the Tabb Group warns that, with the European Parliament’s Economic and Monetary Affairs Committee voting on the second Markets in Financial Industry Directive (MiFID II) next week, the transparency proposals on fixed-income will also increase trading costs for investors and make it more difficult and expensive for governments and companies to raise capital.
Author of the report - MiFID II and Fixed-Income Price Transparency: Panacea or Problem? - and Tabb senior analyst Rebecca Healey said that with Europe’s debt markets already in stress and upcoming Basel III regulations on capital requirements, the pricing proposals may have a material negative impact on Europe’s real economy.
According to Healey, the proposals would exacerbate current stresses on the debt markets across Europe. “In particular, we believe they would increase the risks of trading numerous fixed-income instruments, leading trading firms to restrict their client activity, if not see some leave the markets entirely.”
While equity is predominantly traded on exchanges, most fixed-income instruments are still traded bilaterally over-the-counter. As a result, forcing full transparency irrespective of the product, order type or underlying market conditions will come at a cost that should not be taken lightly,” according to Healey.
In the report, the head of execution at a large asset manager based in Europe interviewed for the study commented: “We are in favour of greater transparency but have concerns over how that transparency will manifest itself. Everything is dependent on the correct calibration and what is deemed to be reasonable liquidity”.
Healey added that increased transparency might force market participants to trade only sufficiently liquid bonds in order to reduce their trading costs and this will impact primary issuance as well as secondary trading.
She commented: “It will hurt project finance; municipalities; regional governments; and medium-sized corporations. Small-and mid-sized enterprises and less robust sovereigns will be relegated to the sidelines with far reaching impact on the wider pan-European economy, the health of which is directly related to the health of its capital markets, especially if international investors exit and sovereign issuers are left more reliant on only domestic investors.”