FSA cautions against extending MiFID to bond markets

FSA cautions against extending MiFID to bond markets

The Financial Services Authority is to tell the European Commission that it sees no reason for extending MiFID transparency requirements to the UK's secondary bond markets.

Responding to the European Commission’s review of whether the MiFID transparency requirements for markets in shares should be extended to other asset classes, the UK watchdog says it sees no evidence of market failures in bonds being caused by insufficient transparency.

The FSA has firmed up its position following a market-wide review of the secondary markets.

Hector Sants, FSA managing director for wholesale business, comments: "Our analysis agrees with the majority of respondents that a combination of competition, market-driven transparency, the interaction between the cash and credit derivatives markets, and regulation that is either in place or in the pipeline seems sufficient, in general, to deliver efficient and fair markets."

He cautions that some participants in the wholesale markets did report deficiencies in information levels, but adds that it is not certain whether this reflects a market failure per se or the fact that in any market there will be those with better access to information.

"We will look to the market in the first instance to generate solutions to these deficiencies and will be discussing possible ways forward with the industry and trade associations."

In general, the FSA concurs with the view of the majority of respondents that a combination of competition, market-driven transparency, interaction between the cash and credit derivatives markets and regulation is sufficient to deliver efficient pricing and fair executions.

The watchdog argues for "extreme caution" in mandating greater transparency in the UK and Europe, as greater pre-trade transparency is likely to impact on existing complex market structures in unknown, but potentially significant ways.

Changes to post-trade transparency, however, may have less impact on market structure.

The FSA says further analysis is needed of the trade-off between transparency levels and liquidity provision, particularly for less liquid bonds. The impact that the Trace trade reporting system has had in reducing transaction costs in the US is unlikely to be mirrored to the same extent in the UK, states the regulator, due to the difference in market structures

The European Commission recently issued a call for evidence on the extension of the MiFID pre and post-trade transparency regime across asset classes and is due to present its report by end-October 2007.

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