06 July 2006

FT: FSA backing for UK bond markets

The Financial Services Authority, the UK regulator, headed off any move by Brussels to impose greater oversight on bond markets by saying the UK was sufficiently transparent. Secondary bond trading markets were already “efficient and fair”, the FSA said, adding that it did not see evidence of significant market failures related to transparency in the UK’s wholesale bond markets, where the majority of European bank and institutional trading in bonds takes place.

The Markets in Financial Instruments Directive, or Mifid, will impose greater transparency on stock markets from next year and the European Parliament had asked Brussels to look at whether fixed-income markets should also have improved transparency. EU members Italy and Germany have pushed for this change due to the higher involvement of retail investors in bonds in those markets.

Supporters of greater oversight say the US has imposed greater transparency on corporate bonds in the form of Trace (Trade reporting and compliance engine). The Securities and Exchange Commission, the US regulator, says that this has drastically cut transaction costs. However, the FSA said in a statement on Wednesday that differences in market structures meant that such savings were unlikely to be mirrored in the UK. European markets show tighter bid/offer spreads in pricing bonds – a sign of greater liquidity, the FSA said.

The regulator said the starting point for assessing the need for regulation was to ask whether there was evidence of market failure. Hector Sants, managing director for wholesale business, said there was not. “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,” Mr Sants said.

The FSA agreed broadly with an academic study published in May by the Centre for Economic Policy Research and sponsored by market associations that said caution was needed in imposing greater transparency because it could impact on liquidity. The study and the regulator have ignored any impact that greater transparency might have on retail investors. Bertrand Huet, legal and regulatory counsel for the Bond Market Association, one sponsor of the May study, said: “This feedback will have a significant influence in Brussels.”

CEPR report on:
Government Bond Market
Corporate Bond Market

© Financial Times