The European Securities and Markets Authority is due to send final draft of the Level 2 regulatory technical standards (RTS) to the European Commission by the end of the month and the IA has significant concerns that the plans could damage already-strained levels of liquidity in the bond market, triggering higher transaction costs and higher borrowing costs for sovereigns and companies.
Under the current RTS rules, investors would be forced to alert the markets ahead of trying to buy or sell bonds, even when these show relatively low liquidity levels – trading less frequently than once a day.
The IA said: “Such frequencies are at odds with the liquidity threshold test contained in MiFIR itself, which calls for the existence of “ready and willing buyers on a continuous basis”.
It would also likely raise transaction costs, which would then have the knock on effect of increasing borrowing costs within the market.
While the industry body is in agreement that more transparency is needed, Richard Metcalfe, director of regulatory affairs at the IA said, what it is suggesting is that there is a serious need for a “sense check”.
“Everyone has got increasingly bogged down in the detail of how one defines liquidity and we think it is important to assess again exactly what the fundamental question is.”
As a result, the IA has called for a public consultation of at least 30 days on the plans. And, because it is also worried about the timetable for implementation of the new rules, it is also recommending that the European authorities draw from the lessons learned during previous legislative implementation and provide the market with sufficient time to allow infrastructure to develop.
“Specifically,” it said, “that means pushing back application of the MiFIR rules from January 2017 to January 2018.”
