UK's Financial Services Authority Publishes Feedback On Trading Transparency In The UK Secondary Bond Market

The Financial Services Authority (FSA) has today published its feedback statement FS06/4 Trading Transparency in the UK Secondary Bond Markets – feedback on DP05/5.

The discussion paper was primarily aimed at informing the FSA's position on the European Commission’s review of whether the MiFID transparency requirements for markets in shares should be extended to other asset classes, including bonds.

The FSA believes that prior to any new regulations being introduced it should be established whether there are any market failures in bond markets being caused by insufficient transparency. Based on the analysis set out in the feedback statement the FSA does not see any evidence of significant market failures related to transparency in the UK's wholesale bond markets.

Hector Sants, FSA Managing Director for Wholesale Business, said:

"Our analysis agrees with the majority of respondents that 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."

"However the evidence does suggest that some participants, in the UK's predominantly wholesale markets, may find existing transparency levels deficient. We will look to the market in the first instance to generate solutions to these deficiencies and will be discussing possible ways forward with the industry and trade associations."

The feedback statement combines the responses to the discussion paper, the outcome of ongoing discussions with a range of stakeholders, further analysis of existing empirical research and the FSA's own data analysis. It reaches a number of conclusions:

• No evidence has been found of widespread market failure related to transparency that would warrant regulation. We agree with the view of the majority of respondents that a combination of competition, market-driven transparency, interaction between the cash and credit derivatives markets and regulation is sufficient to deliver efficient pricing and fair executions;
• Extreme caution needs to be exercised in mandating greater transparency in the UK and Europe, as greater pre-trade transparency is likely to impact on existing complex market structures in unknown, but potentially significant ways. These markets are still relatively dynamic and continue to evolve;
• Changes to post-trade transparency may have less impact on market structure. Further analysis is needed of the trade-off between transparency levels and liquidity provision, particularly for less liquid bonds. The impact that TRACE has had in reducing transaction costs in the US is unlikely to be mirrored to the same extent in the UK, due to the difference in market structures;
• Some participants may find existing transparency deficient but it is not clear whether differences in the availability of trading information to different types of institution is a market failure per se or a reflection of the fact that in any market there will be those with better access to information. The FSA will look to the market to generate appropriate solutions in the first instance;
• There are very few direct UK retail participants in the secondary bond markets, due to a number of structural features that are unlikely to change in the short term. Concerns raised about retail participation in bond markets relate primarily to matters other than market transparency;
• The introduction through MiFID of a new pan –EU best-execution regime should, if implemented effectively, address a key concern for retail investors in relation to bond markets. DP06/3 aims to open up debate on how best to implement the MiFID best execution requirements across a range of financial instruments, and the role that transparency information might play.

The European Commission recently issued a call for evidence on the extension of the MiFID pre and post-trade transparency regime across asset classes and is due to present its report by end-October 2007. The findings as set out in this paper will inform our response to the Commission’s call for evidence.

Background

1. The feedback statement is available on the FSA's website at this link - FS06/4 Trading Transparency in the UK Secondary Bond Markets – feedback on DP05/5.
2. The discussion paper - DP05/5 Trading Transparency in the UK Secondary Bond Markets - was published in September 2005.
3. On 14 November 2005, the FSA held a seminar on trading transparency in the secondary bond markets. The key points raised at that discussion can be accessed here.
4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
5. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.