MiFID is moving up the agenda, with a major review due this year that is likely to see its post-trade transparency regime for equity markets extended to non-equity markets. Bond dealers are understandably nervous. Writer Michael Imeson

What is it?

The effectiveness of the Markets in Financial Instruments Directive (MiFID) is about to be reviewed and it looks as if the post-trade transparency provisions that currently apply only to equity trades will be extended to cover bonds and other non-equity trades.

Who dreamed it up?

The Internal Market and Services Directorate-General of the European Commission (EC), which created MiFID, will conduct the MiFID review this year. It will look at many aspects of the directive, not just transparency, and will listen to advice given to it by the Committee of European Securities Regulators (CESR).

The CESR has published a report on transparency in which it recommends that the EC should consider adopting a mandatory post-trade transparency regime for the corporate bond, structured finance and credit derivatives markets - a reversal of the CESR's 2007 position. The change of mind came about because the CESR believed market forces had "failed to reach an adequate level of transparency" and "market participants seem not to have had the proper incentives to reach the optimal outcome".

What are the main provisions?

CESR recommends post-trade transparency rules to cover bonds, for which a prospectus has been published; that is, all bonds admitted to trading on a regulated market or on a multilateral trading facility. The post-trade information should include a description of the bond, price/yield, volume and date and time of execution.

Similar rules are recommended for structured finance products and credit derivatives.

What's in the small print?

To minimise any potential drawback on liquidity, the rules are likely to allow for delayed publication of the information, and/or publication without specified volumes if the transaction is above a certain value.

What does the industry say?

Richard Britton, senior consultant at the International Capital Market Association, says many of the CESR's members "believe that an enhanced and harmonised European system of transparency should share many of the key characteristics of the US Trace system". Trace is the trade reporting engine developed by the Financial Industry Regulatory Authority to help securities firms meet Securities and Exchange Commission rules that require them to report their over-the-counter secondary market transactions in corporate bonds.

"The impact of Trace on the US corporate bond market remains controversial," says Mr Britton. "Broadly, it appears that retail investors have benefited as spreads in small sizes have tightened, while large institutional investors have found that executions have become slower and less predictable as dealers have committed less capital for immediate execution."

Bertrand Huet-Delaherse, a managing director at the Association for Financial Markets in Europe (AFME), agrees that extending MiFID's trading transparency provisions to non-equity markets will be contentious. He says non-equity dealers support full real-time transparency, with one important proviso: that it "does not mimic the regime for an equity, retail-based market", but "continues to incentivise dealers to provide liquidity to what is a predominantly institutional client base".

How much will it cost?

Not much with regards to additional reporting, but the cost in terms of reduced liquidity could be significant.

What do the regulators say?

Jean-Paul Servais, chairman of the CESR's MiFID Level 3 Expert Group, says: "The recent market turmoil has highlighted the need for more transparency in the non-equity markets. We think that it might be helpful in improving current market conditions, supporting liquidity in normal times and contributing to greater accuracy in valuations."

Law of unintended consequences?

Badly drafted rules "could reduce the willingness of dealers to commit capital to providing liquidity in the bond markets", which has been the effect of Trace on the US bond markets, says AFME's Mr Huet-Delaherse.

Could we live without it?

Not really.



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