New transparency rules affecting European capital markets risk reducing market liquidity, the capacity of investment funds and will raise compliance costs for money managers, in particular bond managers, warns Moody’s Investors Service.
In its latest credit outlook, the credit rating agency looked at the potential effects of the final report of the Markets in Financial Instruments Directive, published by the European Securities and Markets Authority, on Sept. 28.
The new rules would require fixed-income traders to make public information on their trades, both before and after trading.
The hope is that the new regulations will promote greater transparency and competition in the marketplace, with more competitive pricing and better execution for investors.
However, Moody’s said the effects of increased costs and reduced market liquidity will be credit negative for money managers such as BlackRock, Fidelity Worldwide Investment and Schroders.
Costs would be incurred from the need to develop new trading procedures, and from monitoring and collecting data that is necessary to assess the quality of execution of trades.
The new transparency requirements “also risk impairing market liquidity, limiting asset managers’ revenue potential by constraining the potential size of a fund,” said the outlook. Market makers will be required to reveal details of their transactions, which Moody’s said could make them less willing to commit capital to facilitate clients’ trades — since the move could lead to others trading against their positions. “As market liquidity diminishes, asset managers would need to limit fund sizes and scale down their trading in order to trade in and out of positions quickly and efficiently,” said the outlook.
The U.K. financial market is expected to bear the brunt of compliance costs. The European Commission has estimated that MiFID II would impose one-off compliance costs of between €512 million ($537.9 million) and €732 million, and ongoing annual costs of between €312 million and €586 million across all market participants. Moody’s said the U.K. government has estimated that the U.K. will shoulder about 36% of this cost, based on the market’s share of European wholesale financial markets.
ESMA’s final technical standards have been submitted to the European Commission. The EC has three months to decide whether to endorse them.
