ICMA, ISDA respond to EC MiFID bond market call

Source: ICMA, ISDA

The International Capital Market Association (ICMA) has submitted its response to the European Commission's Call for Evidence on Pre- and post-trade transparency provisions of the Markets in Financial Instruments Directive (MiFID) in relation to transactions in classes of financial instruments other than shares.

The Association welcomes this early opportunity to contribute to the thinking of the Commission as it begins work on the report it is mandated to produce to the Parliament and Council under Article 65(1) of the MiFID. It also welcomes the Commission's recognition of the need to ensure that, if the evolution of Europe's bond markets are to continue to be one of the main drivers of economic growth and the underpinning of secure long term savings, changes in the rules governing their operation should be driven by and be consistent with the needs of all market participants.

The ICMA response focuses on the European corporate bond market, emphasising ICMA's unique status as the established self regulatory organisation (SRO) for the international securities market. It concludes that the evidence from both academic research and market practitioners does not point to any current market failure which would justify the imposition of mandatory transparency on the European bond market. ICMA does not therefore support the extension of the MiFID transparency provisions to bonds.

ICMA is however committed to making a positive contribution to the debate on transparency. In the coming months the Association will work to establish consensus among its members on whether there is more that should be done at the self-regulatory level to enhance levels of post-trade transparency in international debt securities. If members wish to proceed with phased or experimental introduction of enhanced post trade transparency, as an industry led initiative, the Association hopes to work in close cooperation with the Commission and the Committee of European Securities Regulators (CESR) in assessing detailed plans and possible effects on bond market liquidity.

Commenting on the response Nick Collier, ICMA's Head of Regulatory policy said: "Unlike equities, bonds are generally traded over the counter (OTC) and liquidity is provided by dealers. There is a high degree of pre-trade transparency and we do not see the need to extend the MiFID provisions for transparency in equity markets to bonds. Our discussions with members will help us to decide whether the levels of post-trade transparency applied under ICMA's own rules as a self regulatory body and through its TRAX reporting system should be further enhanced".

The International Swaps and Derivatives Association (ISDA) welcomes the opportunity to respond to the Commission's call for evidence in advance of its proposed report under article 65(1) MiFID addressing the possible expansion of pre- and post-trade transparency requirements to transactions in classes of financial instruments other than shares.

ISDA, which represents participants in the privately negotiated derivatives industry, is the largest global financial trade association, by number of member firms. ISDA was chartered in 1985, and today has over 725 member institutions from 50 countries on six continents. These members include most of the world's major institutions that deal in privately negotiated derivatives, as well as many of the businesses, governmental entities and other end users that rely on over-the-counter derivatives to manage efficiently the financial market risks inherent in their core economic activities.

In this response, we focus on those issues raised by the call for evidence which are particular to over-the-counter (OTC) derivatives. In addition, we support the joint response of a number of industry associations, including ISDA, dated 15 September 2006 attached as Annex A (the Joint Response) which deals with the more general issues raised by the call for evidence across the wider range of asset classes.

ISDA believes that mandated transparency requirements would not help and are likely to harm the efficiency of OTC derivatives market activity. ISDA believes that, before imposing a regulatory solution, it is essential to demonstrate that a market failure has occurred and that, so far, there has been no evidence of market failure in the OTC derivatives market. Even if such evidence were found, however, it would not be sufficient to warrant a regulatory solution: It is also necessary to demonstrate that the mandated solution is likely lead to an improvement over the current state, so that regulatory intervention is limited to cases that are justified by a cost-benefit analysis.

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