LONDON Feb 25 The European Union's securities
watchdog said it will tread carefully in regulating government
and corporate bonds to avoid crimping liquidity in already
fragile markets that are key to funding economic growth.
Verena Ross, executive director of the European Securities
and Markets Authority (ESMA), said changes to market practices
were inevitable under new EU rules in 2016.
Many bonds are traded privately but under the rules, known
as MiFID II, traders would have to post prices to the wider
market - a step critics say will force some banks to only trade
the most popular bonds as it would be harder to make a market in
less liquid ones.
Ross said ESMA was, however, mindful of the need not to
damage liquidity which it acknowledges is already under
Issuance of sovereign bonds in Europe in the second half of
last year fell to 429 billion euros, its lowest level since the
height of the financial crisis in 2008.
"It is clear that liquidity in bond markets is still pretty
fragile and that ESMA's regulatory framework may have a role in
order to safeguard the functioning of this market," Ross told a
conference organised by the Association for Financial Markets in
Europe (AFME), a banking lobby, on Tuesday.
ESMA will face political as well as industry pressure to go
easy on corporate bonds as politicians look for ways to boost
trading in a bid to reduce companies' reliance on banks for
Poor liquidity in corporate bonds is already prompting
policymakers to look at alternative ways of funding companies,
such as by reviving securitisation or pooling of loans into
Ross said market practices and possibly their structures
will change as a result of the new transparency requirements
aimed at giving investors more information and allowing
regulators to see what is going on in the market.
"I know some of you are concerned about this but things
cannot stay as they are today," she said.
ESMA's first task will be to define liquidity so that it can
then determine which bonds are subject to the transparency
rules, but so far no single definition has emerged. Bonds deemed
illiquid would get waivers or be exempt from some rules.
Ross sought to reassure bond traders in the audience that
current tough transparency rules for shares would not be
"mechanistically" applied to bonds.
Rick Watson, AFME's head of capital markets, said Ross'
speech made it clear the watchdog recognises the important
differences between equity and bond markets and that it plans to
calibrate liquidity based on fixed income specific data.
ESMA also recognised that fixed income markets will "require
a flexible and dynamic approach to calibration and waivers
thresholds", Watson said.
The watchdog will monitor the liquidity of bonds regularly
once the new rules are in force, meaning that if a bond becomes
less liquid over time as many do, they could be exempt later on
from the toughest transparency rules.