10 May 2012

ECBC Position Paper on MiFIR

Pre-trade price transparency

The European Covered Bond Council (ECBC) believes that the proposals with regard to pre-trade price transparency in particular in Article 17 will be counter-productive given the specificities of the covered bond market. The rules in themselves will reduce the willingness and ability of traders to provide liquid two-way prices to end investors and because the implementation of these rules will necessitate trading moving to a new platform which, as was demonstrated in the onset of the financial crisis, was not able to fit for purpose in volatile market conditions.

Trader capability: Making a price widely available will reduce the willingness and ability of market makers to provide competitive prices for the large ticket sizes.

Firmness of and binding quotes and obligation to contract: Article 17(1) requires systematic internalisers (SI) to provide “firm quotes” and provides for an obligation to contract in Article 17(3) in case the quote is at or below a size specific to the instrument which shall be determined later by ESMA. This is all the more true with respect to the rapporteur’s amendments (14) and (15) which seem to restrict trading exclusively on electronic systems. A large number of covered bonds (such as smaller issues and private placements) are seldom or never traded on regulated markets, MTFs or OTFs. Yet they are affected by the transparency requirements pursuant to the draft MiFIR because they are listed on the stock exchange and/or because a prospectus has been issued for them. Anything which changes the existing bilateral understanding could be considered to be at odds with principle of the freedom of contract. This may lead to the effective termination of phone based trading with serious consequences for liquidity.

Trading platform: Covered bonds are currently traded predominantly by phone, most market makers deal with hundreds, if not thousands of end investors. Obviously this is not compatible with the requirement that all customers of the SI are informed of prices thus necessitating the introduction of some presumably screen based trading system.

Post-trade price transparency

ECBC recognises the benefits of full transparency for non-market moving positions and would therefore look to work with the competent authorities to identify an appropriate trade off between transaction size and disclosure. Developing an appropriate trade-off will be fraught; the definition of the appropriate cut-off point to qualify for delayed reporting will differ by product (and potentially by time). Also, needless to say, there will be different opinions about the appropriate cut-off points. The ECBC has in the past undertaken an extensive consultation on the topic of post-trade price transparency, and would be happy to share the feedback that it received via this process at the appropriate time.

Limitation on market access

Also, ECBC understanding of amendment 44 of the Ferber Report is that as covered bonds will not be traded through an MTF, it will give an unfair advantage to those credit institutions that are able to qualify as Systemic Internalisers. In the covered bond market currently, the pressure on the large investment banks to reduce their risk weighted assets means that much of the de facto liquidity in the market comes from either smaller credit institutions or from end investors. As neither of these categories will qualify for SI status, amendment 44 will force them to trade via the large investment banks which would obviously be an undesirable policy outcome of the regulation.

Full position paper

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