EC: ESMA should run consolidated tape for fixed income

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By Flora McFarlane.

An expert group organised by the European Commission to analyse the European corporate bond market has issued recommendations aiming to make issuance easier for companies increase access for investors, as well as addressing trade and transparency concerns.

Electronic trading did not escape the attention of the report, entitled Improving European Corporate Bond Markets, which called for an issuance of guidance on good practices for electronic trading.

Identifying the challenges within fixed income surrounding the lack of data in fixed income markets, the expert group proposed the European Securities and Markets Authority (ESMA) ought to facilitate effective supervision.

“A consolidated tape owned by ESMA should be created to collect data on all eligible and private corporate bonds,” it reported. “As the lack of comparable data significantly undermines the development and functioning of European corporate bond markets, the Expert Group recommend that this consolidated tape be created at a significantly faster pace than currently envisaged in MiFID II.”

ESMA issued regulatory technical standards in March for the consolidated tape providers (CPTs) under the MiFID II rules, dues to come into effect on 3 January 2018. The approach to date has implied a privately run consolidated tape would be expected by regulators, despite the lack of precedent for such a tape, and the failure of such an initiative in the equity markets, following a similar recommendation in 2010.

The EC’s latest report is driven by international competitiveness. Despite the number of corporate bond issuances by non-financial corporations (NFCs) more than doubling from 2006 to 2016, thanks to low-interest rates, the European corporate bond market may be underperforming compared to its US counterpart.

Corporate bonds represent on average only 4.3% of NFCs’ total liabilities in Europe, compared to a figure of 11% in the US. The group therefore highlighted the potential of corporate bonds to represent a much larger source of financing for European companies.

The market has opened up to a wider range of investors over the years, thanks to collective investment schemes. These schemes have afforded access to retail investors, as opposed to institutional players which “creates the potential for significant new demand for underlying corporate bonds.”

A potentially more robust corporate bond market would benefit investors. The expert group, made up of 17 members of leading institutions, highlighted the opportunity for diversifying asset strategies and mitigating risk.

Recognising the need to “ensure that market making is not dis-incentivised” which could lead to greater risk for the economy as a whole, the expert group recommended a review of capital and liquidity requirements, and timing of settlement and central securities depositories mandatory buy-ins.

Another key factor facing investors within the corporate bond market is artificial inflation of primary orders. The demand for bonds usually exceeds the amount available, leading investors who are not constrained by internal rules to inflate their orders. The group recommended “coordinated action between regulators and market professionals to discourage any artificial inflation of primary orders.”

For retail investors, ETFs can prove useful to gain access to different asset classes. The Commission was advised to review Member States’ regulations and practices to identify the obstacles for investors trading ETFs on exchange.
Encouragingly, the paper also called on the European Commission to identify best practices, and in 2018 report on how barriers to greater fixed income clearing are being addressed.

ESMA was called to reduce the risk that post-trade transparency requirements dis-incentivise the provision of liquidity. The group recommended that “the obligation for execution venues to publish details of trades of all sizes should be either narrowed in scope and depth of details provided, or replaced by an obligation to report aggregated information.”

MiFID II was under scrutiny, with the report calling for the European Commission to monitor the impact of MiFID II rules on research in the corporate bond market and act if necessary.

©TheDESK 2017

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