Bond market liquidity and the fixed-income investing business could be affected by new transparency requirements under the incoming MiFID II rules, warn money management and association executives.
The Markets in Financial Instruments Directive II, effective Jan. 3, will put new pre- and post-trade transparency demands on certain fixed-income trades such as those deemed liquid and below a certain size.
"One of the interesting developments from the introduction of MiFID II is the introduction of the transparency of fixed-income trades," said Gary Kirk, London-based partner and portfolio managers of the Strategic Income Fund at TwentyFour Asset Management LLP. "Effectively, moving forward, full transparency of participant flow and direction will be posted after every trade, and this is going to be a useful development. At the moment when we do a trade with a counterparty, only we (and the counterparty) know about the size, direction and price of that trade. However, going forward all this information will be posted and we will be able to get ongoing information about all trades taking place in the bonds that we have a care in."
Sources are split on whether the transparency push will affect market liquidity in a positive or negative way.
Speaking last month on a panel regarding regulation at Pensions & Investments' WorldPensionSummit in The Hague, Netherlands, Jack Inglis, CEO at the Alternative Investment Management Association, voiced his concerns.
"I think liquidity in the corporate bond market has already been hit fairly significantly just by Basel III capital requirements — so that banks that have traditionally been providers of liquidity to the marketplace, warehousing inventory, have much-reduced capacity. We're aware of that … it definitely has dropped. What does MiFID II do, then — does that bring even further challenges to liquidity? And I would suggest that it does."
Mr. Inglis said pre- and post-trade transparency requirements, and the definitions around what bonds are deemed liquid and illiquid by regulators, might cause problems in particular. "I think there's some confusion out there, and I think all that confusion is going to lead, unfortunately … potentially (to) even less liquidity," Mr. Inglis said.
Said Chris White, CEO at BondCliQ in New York: "The MiFID II methodology for transparency will have a negative impact on the commercial prospects for market makers, which will ultimately impair bond liquidity. The MiFID II approach forces market makers to provide proprietary pre-trade information, but does not create the necessary environment to link customer order flow to the price-making capabilities of the dealers. Outside of regulatory compliance, market makers, who are critical to maintaining well-functioning markets, are not incentivized to improve market transparency and provide liquidity."