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FSA to examine secondary market bond transparency

The UK's FSA this week published a Discussion Paper which examines the need for greater pre- or post-trade price information in the secondary bond markets.

The paper, entitled "Trading Transparency in the UK Secondary Bond Market",  is designed to stimulate debate amongst market participants to enable the Financial Services Authority (FSA) to develop an appropriate policy in respect of trading transparency in the secondary bond markets, particularly in advance of the European Commission's consideration of the issue, expected to begin early in 2006. This paper does not propose any new rules in this area.

Hector Sants, FSA Managing Director for Wholesale Business, said: "The FSA is publishing this paper now in order to encourage the development from first principles of a thoughtful approach to whether there is any need for increased transparency in the secondary bond markets."

"In developing our views we will look in particular at the current role of transparency, and whether there are any possible market failures caused by a lack of transparency in the UK and EU bond markets. We will also be seeking views on the practicalities of any regulatory change in this area."

"We are mindful of the importance of the bond markets to the UK, for investors, issuers and as a leading trading centre, and a key objective in undertaking this work is to ensure that the UK contributes constructively to the Commission's review of whether the scope of the MiFID transparency regime ought to be extended to the bond markets."

MiFID will introduce, in April 2007, a comprehensive pan-European Union transparency regime for the trading of shares on EU regulated markets. Initially this will apply only to shares but the European Commission is required by the Directive to consider whether the scope of these requirements should be extended to other asset classes including bonds.
The FSA believes there is a need to establish in the first instance if there are any market failures in bond markets being caused by insufficient transparency which need to be remedied by new regulations.

The FSA has also been prompted by other developments to undertake its review. These include:

• The International Organisation of Securities Commissions (IOSCO) asking member country regulators to assess the appropriate level of transparency for their corporate bond markets and how this information is consolidated;
• Increased interest from retail customers reported by several IOSCO members and, in the UK, an increase in retail investment in bond funds;
• Increased institutional activity as many long term investment funds have reweighted their portfolios in favour of bonds.
• The implementation in the US of a post-trade transparency system for corporate bonds (the Trade Reporting and Compliance Engine - TRACE).

As part of its follow up to publishing the paper, the FSA will host a roundtable with market participants and fellow European regulators will be invited to discuss these issues further.
The discussion paper DP05/5 Trading Transparency in the UK Secondary Bond Markets can be found on the FSA's website <>.

Closing date for submissions is 5 December 2005.

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