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ICMA has updated its briefing note on MiFID II/R trade transparency requirements in respect of bonds, in light of the draft regulatory technical standards published by ESMA in September 2015. These RTS are still to be approved by the co-legislators and could be subject to further change.
The main purpose of the systematic internaliser regime is to ensure that the internalisation of order flow by investment firms does not undermine the efficiency of price formation on RMs, MTFs, and OTFs. In other words, the objective of the SI regime is to extend transparency obligations into the OTC space. Effectively, SIs are subject to the same pre-trade transparency requirements (including the same conditions for waivers).
Market-makers will be reluctant to provide liquidity in securities that are defined as ‘liquid’ under the regulation, but would otherwise be considered as ‘illiquid’ by the broader market. This would be detrimental to bond market liquidity, resulting in wider bid-ask spreads and fewer executionableprices. While the dynamic IBIA methodology is intended to minimize such ‘false positives’, bonds will still be subject to the static COFIA determination methodology for the first few months post issuance. However, by most determinations, corporate bonds, for instance, would only be considered ‘liquid’ for the first few days post issuance.