CESR’s consultation on the Mifid review has been greeted by a mixture of responses from stakeholders with a resounding lack of support for increasing pre-trade transparency in non equity markets

As the Commission makes its considerations ahead of the Mifid review, now expected in the first quarter of 2011, it will look to the Committee of European Securities Regulators to provide guidance after consulting with the industry.

In both secondary and non-equity markets much of the debate has focused on possible changes to transparency regimes and the potential impact on liquidity.

The responses to CESR consultations point to cautious support of increased post-trade transparency in non-equity markets, and a welcoming of a three-pronged approach to improve consistency of standards in post-trade transparency in the equities market.

There is a resounding lack of support for increasing pre-trade transparency in corporate bonds, structured finance, credit default swaps and derivatives markets, with most respondents suggesting liquidity would be impinged.

However, a shift from a principles-based approach to a rules-based approach in regard to the waivers currently in place for pre-transparency in the equities space is well received.

The general consensus from respondents to the consultation on non-equity markets transparency is that an increase in post-trade transparency would be welcome. On the whole there was a lack of support for any pre-trade transparency regime.

The International Capital Market Association says its members fully support greater transparency of post-trade data to regulators – including all transaction size, data and time data. However, it also says that there is genuine concern among members that publication of post-trade data to the market as a whole will negatively impact on liquidity.

The European Banking Federation is slightly more favourable to the prospect of a post-trade transparency regime for products with “a sufficient degree of liquidity”, although it also states that such a regime must be thoroughly designed to avoid negative effects on market liquidity.

Opposition to a pre-trade transparency was greater than support for any increase in post-trade transparency throughout the responses.

The EBF points out that pre-trade transparency is already mandatory for all products that are traded on regulated exchanges. Requirements beyond this, it warns, would risk having a detrimental effect on market liquidity.

ICAP says that the only justification of mandatory pre-trade transparency obligations would be where a “demonstrable lack of such transparency” precludes trading by plausible market participants exists.

The joint response from the Association of Financial Markets in Europe, the British Bankers’ Association and International Swaps and Derivatives Association voices support for transparency where it is beneficial to market users and comes at a cost that is proportionate to its benefit.

The CESR consultation on secondary markets asked respondents to offer views on levels of pre and post-trade transparency.

In the equities market post-trade transparency space, most respondents note that the main problems are associated with the lack of consistency around standards and interpretation.

On post-trade transparency, the consultation recommended a three-pronged approach to amend Mifid to embed standards for the publication of post-trade transparency information; amend Mifid to provide greater clarity in terms of what constitutes a single transaction for post-trade transparency purposes; and to establish a joint CESR/Industry Working Group to finalise the development of standards.

The banking sector in particular, is united in its call for greater clarity and consistency in this area. Credit Suisse argues that it would be sensible to ensure standards around post-trade transparency are more prescriptive than has previously been the case. However, it also warns against creating the need for multiple trade reporting flags – as this would, it says, require significant and complex systems development work which may not ultimately have the desired impact of improving clarity and transparency.

Barclays Capital says that a large part of the problem lies with the interpretation of post-trade information, and urges CESR to provide much clearer guidance to all users, regulators in particular, so that interpretation is clear.

Nomura is extremely supportive of CESR’s three pronged approach, particularly the moves towards consistent interpretation of post-trade transparency rules in specific scenarios.

The consultation suggests that in terms of pre-trade transparency there should be a move away from a principles-based approach to a rule based one when applying waivers to the general regime.

Intesa Sanpaolo suggests that this proposal goes into the direction of establishing a single rule book for financial markets and will allow supervisors to implement rules coherently across member states.

Citigroup says it is important to provide the wider investing public with access to information on current opportunities to trade on a timely basis. It is equally important, it says, to ensure that liquidity on trading venues and elsewhere is not impaired as an unintended consequence of those obligations. Any impairment of liquidity will have an adverse impact to execution quality.

Fidelity welcomes the move to a rule-based approach, but states that it does not want to lose flexibility on its side to hide flow. Dark venues, it says, provide significant benefits to institutional clients whose flow tends to be large in size. It would be concerned, it says, if the Commission were to introduce rules which dictate that it needs to show its flow to lit venues.
CESR’s Mifid consultation has now closed. The Mifid review is ongoing and is due to be implemented in the first quarter of 2011.