FSA Comments On Trading Transparency In Secondary Bond Markets

by Robin Pilgrim, LawAndTax-News.com, London

06 July 2006

The UK's Financial Services Authority (FSA) on Wednesday published its feedback statement on trading transparency in the UK secondary bond markets.

The discussion paper upon which the feedback statement is based was primarily aimed at informing the FSA's position on the European Commission’s review, which sought to examine whether the MiFID transparency requirements for markets in shares should be extended to other asset classes, including bonds.

The FSA stated that it believes that prior to any new regulations being introduced, it should be established whether there are any market failures in bond markets being caused by insufficient transparency.

Based on the analysis set out in the feedback statement, the FSA revealed that it does not see any evidence of significant market failures related to transparency in the UK's wholesale bond markets.

Hector Sants, FSA Managing Director for Wholesale Business, explained:

"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."

"However the evidence does suggest that some participants, in the UK's predominantly wholesale markets, may find existing transparency levels deficient. 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."

The feedback statement reaches a number of conclusions, namely that:

• No evidence has been found of widespread market failure related to transparency that would warrant regulation;
• Extreme caution needs to be exercised 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. These markets are still relatively dynamic and continue to evolve;
• Changes to post-trade transparency may have less impact on market structure. Further analysis is needed of the trade-off between transparency levels and liquidity provision, particularly for less liquid bonds;
• Some participants may find existing transparency deficient but it is not clear whether differences in the availability of trading information to different types of institution is a market failure per se, or a reflection of the fact that in any market there will be those with better access to information;
• There are very few direct UK retail participants in the secondary bond markets, due to a number of structural features that are unlikely to change in the short term. Concerns raised about retail participation in bond markets relate primarily to matters other than market transparency; and
• The introduction through MiFID of a new pan –EU best-execution regime should, if implemented effectively, address a key concern for retail investors in relation to bond markets.

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