CEPR published two studies on the European government and corporate bond markets concluding that the lack of full transparency shouldn't be resolved by increased regulation. If regulators want greater transparency, market participants should lead efforts to introduce it. The reports claim that increased post-trade transparency could force some banks to pull out of dealing in the European bond markets because it would alert competitors to their hedging needs.
The study on the corporate bond markets concluded that Euro-denominated bonds have tighter spreads than either sterling bonds or their US counterparts. Competition is a key driver of liquidity, and this is where public policy should focus. To impose pre-trade transparency via regulation would be risky, as it would require significant changes to the microstructure of the market.
Greater post-trade transparency would benefit some market participants but should be designed and implemented carefully and be market-led if possible.
“Pre-trade transparency would require significant changes in the microstructure of the market”, the report concludes. “Several persons ... expressed the concern that major regulatory changes could upset the current balance at the risk of reducing the quality of the market.”
The study on the government bond markets concluded that the secondary market microstructure is heavily influenced by the relationships between issuers and primary dealers. Where transparency is high, trade size tends to be low. Where primary dealer obligations are greatest or where syndication is used heavily, this provides better liquidity and low spreads, but worse execution quality for large trades. Effective spreads in the US Treasury market are lower than on MTS, except for the long benchmark.
The differing levels of transparency seem appropriate for all major market participants. The study suggests that regulatory imposition of greater transparency could adversely affect liquidity in the government bond markets.
“Regulators should be cautious in intervening in the government bond markets” the report concludes. Regulators should be wary about intervening in this sort of structure and should wait for the markets to develop further.
Government Bond Market
Corporate Bond Market
© Centre for European Reform
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