20 December 2019

ICMA: European bond markets still facing challenges in 2nd year of MiFID II/R implementation

The report is intended to provide an overview of the second year of MiFID II/R, drawing on discussions and feedback from ICMA’s diverse sell-side and buy-side members and trading venues active in the European bond market, covering primary market issuance, secondary market trading, and research unbundling.
Confirming the findings of the one-year report published in December 2018, the new report indicates that, while the implementation of MiFID II and MiFIR has not significantly impacted liquidity in the European bond markets, it has not fully achieved its objectives and challenges remain.
The main conclusions are that:

In primary markets, unintended consequences of the product governance and PRIIPS regimes continue to adversely impact retail investors.

In secondary markets, electronic trading has further increased in 2019, and price discovery has improved slightly, but post-trade transparency in secondary markets does not seem to have improved compared to 2018.

Research rules have been implemented differently, both within Europe and globally, and are being reviewed by regulators.

In fixed income primary markets, the impacts of MiFID II/R at year-end 2019 are effectively the same as at the end 2018. Requirements in terms of allocation justification recording and disclosure of underwriting fees do not seem to have generated tangible benefits or interest whilst placing a greater administrative burden on underwriters. However, the product governance and Packaged Retail and Insurance-Based Investment Products (PRIIPs) regimes continue to have significant problematic features that have led to unintended consequences lowering retail investors’ participation as well as raising concerns over the fundamental practicability of compliance.

From a secondary market perspective, electronic trading has further increased across IG, HY, SSA and EM bonds in 2019 while interest in reporting on the quality of transaction execution (“best execution”) appears to remain minimal. 15 months after the Systematic Internaliser (SI) regime has been introduced, major challenges still persist in identifying whether a counterparty is a SI. However, one of the greatest shortcomings is the continued lack of post-trade transparency in fixed income markets. Survey results suggest that data quality, accessibility of data published through Approved Publication Arrangements (APAs) and usability of data published after deferral periods are key obstacles to creating greater transparency.

A single, centralised consolidated tape provider (CTP) for bonds in Europe seems to be the preferred solution for aggregating and disseminating post-trade data, according to survey results. Furthermore, market participants reported that a more streamlined approach such as direct reporting of post-trade data to a CTP would be preferable. However, cost is an important consideration and changing regulatory reporting obligations would likely increase costs, at least in the short term. Brexit and the risk of fragmentation is unsurprisingly expected to have a negative impact on an EU27 CT, and the preferred option would be to combine post-trade data from both the EU27 and the UK in a CT post-Brexit.

Overall, the extraterritorial impacts of MiFID II/R on market participants seem rather limited but non-EEA branches of EU firms appear to be impacted adversely while non-EEA trading activity seems to have shifted to non-EU trading venues. In terms of FICC research unbundling, it is evident that research rules have been implemented differently, both within Europe and globally. In the UK, firms have adopted the profit and loss (P&L) approach, European based firms have mostly chosen the research payment account (RPA) model, in the US costs remain bundled, while APAC sees a diverse range of practices. Eventually, performance will determine where assets are allocated, and this, in turn, will determine which system will prevail. Also, regulators have started to review the impact of the investment research rules’ implementation in light of its potentially negative impact on SME research. At the same time, the new rules have given rise to research management systems (RMS), which are an increasingly important tool in institutional investment management.

In summary, implementation of MiFID II/R continues to be a process and ICMA will continue to work with its diverse membership and engage with EU authorities and national competent authorities to help achieve the desired regulatory outcomes while maintaining resilient and efficient markets.

Full report

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