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Increased transparency could damage non-equity markets

Thursday 10 June 2010 - by Luke Nelson

Increased pre and post-trade transparency may adversely affect liquidity in non-equity markets, industry representatives have warned.

Speaking at the Committee of European Securities Regulators open hearing on non-equity market transparency in Paris on 27 May, industry commentators suggested that the liquidity of the corporate bond, structured finance, credit default swaps and over the counter derivatives markets could all be impacted by increased levels of transparency.

A spokesperson for JP Morgan questioned how CESR would judge the degree to which increased transparency on liquidity is acceptable, both pre and post-implementation.

Chairing the hearing, FSA director of markets Alexander Justham (right) said that CESR has already taken some sounding as to the degree of liquidity that is acceptable. He said that more colour would be added to its findings by views aired in the hearing and by responses to the consultation paper.

Other participants were keen to stress that the most pressing current political objective is to get Europe’s economy going once again and that therefore when considering the transparency/liquidity balance, regulators should place greater emphasis on liquidity.



Justham responded to this by explaining that regulators recognise the need for healthy markets and that this is important for retail assets and the mortgage market in particular.

He added that transparency is an important step in making the markets healthier in this post-crisis period.

A representative from the Association of Financial Markets in Europe said that due to the complexities of the structured finance space there needs to be extra emphasis placed on research and analysis.

The JP Morgan representative argued that there are some products that only trade once or twice in their lifetime, and there are greater implications for increased post-trade transparency for these products than products that are traded more regularly. He added that many dealers get involved in the bid/offer process to get information on pricing – if the price is made immediately available post-trade then there is less incentive to get involved in the bid/offer process; producing more reference points is likely to reduce liquidity.

CESR chair Alexander Justham pressed participants for views on sovereign CDS, noting that it is the “topic du jour”. Participants remained tight-lipped – although a spokesperson for Deutsche Bank did suggest that there is adequate transparency in that space.

Justham said: “This space is a key area of the financial landscape. It is important that CESR grounds its recommendations to the Commission in fact and gets the right answers for the right regulatory purposes.”

The hearing was part of an ongoing consultative process being carried out by CESR ahead of the European Commission’s review of MiFID. Submissions to the consultative paper were due by 4 June.


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