With an important vote looming in the European Parliament’s Economic and Monetary Affairs Committee on MiFID II on July 9, TABB Group believes that current proposals to reform pricing practices in the fixed-income market will seriously undermine trading firms’ ability to provide liquidity, increase trading costs for investors and make it more difficult and expensive for governments and companies to raise capital.
In the face of Europe’s already stressed debt markets and in conjunction with the intended Basel III regulations on capital requirements, the pricing proposals may have a material negative impact on Europe’s real economy, says Rebecca Healey (pictured), senior analyst at TABB Group, the global financial market research and advisory firm, and author of “MiFID II and Fixed-Income Price Transparency: Panacea or Problem?”. Published today, the study investigates the potential impact of the MiFID II’s pre-trade transparency proposals on the fixed-income market, its investors and the European economy as a whole.
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.”
Whilst equity is predominantly traded on exchanges, most fixed-income instruments are still traded bilaterally over-the-counter. “Forcing full transparency irrespective of the product, order type or underlying market conditions will come at a cost that should not be taken lightly,” Healey warns. The head of execution at a large asset manager based in Europe interviewed for the study said, “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 explains that increased transparency may 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. “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.”
The 40-page, 21-exhibit study with 21 quotes drawn from interviews with buy-side firms with AuM of €4 trillion; corporate issuers; investment banks; and sovereign debt management offices, examines the current structure of the European debt markets and the increasingly important role they play in the wider economy. Supported by hundreds of interviews from 2012 European-focused TABB research, Healey explains why debt markets are distinct and cannot be viewed in the same light as equity markets, and why it requires different investment, distribution and trading structures.
The study also investigates the different types of debt trading structures, the notion that fixed-income markets are primarily institutional, the role of primary versus secondary market activity, and how the secondary market operates in relation to indicative pricing, firm quotes and actionable orders. The final section focuses on regulatory changes proposed in MiFID II and the impact they will have on pricing, disclosure, order execution and the essential ability to raise capital.