The instrument-by-instrument approach (IBIA) would determine whether a non-equity instrument is liquid enough to be subject to pre-trade transparency rules based on its individual characteristics. But ESMA favours the classes of financial instruments approach (COFIA), which would identify instruments as belonging to a certain class, such as grouping bonds into sovereign, corporate, covered and so on. Industry responses to the discussion paper, submitted at the beginning of August, reveal a split not only on which approach should be adopted but how COFIA should be implemented.
Supporters of the COFIA approach include the International Swaps and Derivatives Association (ISDA). However, in contrast to the broad categorisation suggested by ESMA, ISDA believes a far more granular approach is required to ensure classes of instruments are sufficiently homogenous. “ESMA must consider the granularity of classification and the thresholds themselves as intimately linked – the more granular the approach, the greater the likelihood that the thresholds will be set at an appropriate level,” it said in its response. Fixed income electronic trading platform provider MarketAxess has also given its support to COFIA.
Other firms and industry bodies have argued that, despite the additional overheads associated with an IBIA approach, it will be the only way to ensure trading is not adversely affected by the new transparency rules should they end up being implemented on highly illiquid instruments. Alex McDonald, chief executive of the Wholesale Markets and Brokers Association (WMBA), believes many of the suggestions for COIFA are so complex as to be little use. "The proposed COFIA approach is far too complicated, with 500 classes that bundle lots of things together that can have very different liquidity profiles. Additionally, moving instruments between classes potentially creates a risk of stopping trading in that instrument, a major downside. For this reason, we are backing the single instrument approach," he explained. Asset manager BlackRock also believes that the divergent liquidity profiles of instruments within each of the classes proposed by ESMA means IBIA is the only way to ensure instruments are judged fairly.
ESMA’s consultation process has now closed and the pan-European regulator is currently considering over 350 responses to more than 500 questions in order to prepare draft regulatory technical standards by the end of the year.
Full article
© The TRADE
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article