Five European trade groups have formed the EU Bond Price Transparency Committee to refute suggestions that greater price transparency would benefit U.K. and European bond markets.
The committee - made up of the Bond Market Association, the European High-Yield Association, the Trade Association for Emerging Markets, the European Securitization Forum and the European Primary Dealers Association - last week responded specifically to an investigation led by the Financial Services Authority.
The FSA, along with the European Commission, is looking to see whether a new market capital directive designed to apply a broader transparency regime for European equity markets might benefit European bond markets. In an effort to boost post trade in the European bond markets, the FSA said in September that it would look into regulating price transparency ahead of the mid 2007 implementation of the Markets in Financial Instruments Directive. The FSA believes that the bond markets are too opaque, which could lead to trading inefficiency. Currently, the FSA is still gathering information to decide whether there is any market failure in the way the bond markets operate, and whether poor transparency is a cause. The FSA intends to publish a follow-up paper by the end of March 2006.
The Transparency Committee responded to the comments by defending the current set up and arguing that more price transparency will not bring the desired effect, and could even prove counterproductive. The trade groups stressed that a uniformed approach to transparency in the European fixed-income markets would not appropriately incorporate differences in currency, maturity, credit, structure and trading methods.
The committee believes that the growing, competitive bond market structure already provides investors with appropriate levels of price transparency across the varying bond market segments. "Price formation is now much more efficient than it was five years ago, driven by opaque and effective competition between dealers, trading platforms and data vendors, and as a result of the increased role of credit derivatives in the trading of credit instruments," said Charles Longden, committee member and head of credit trading at ABN AMRO, in a statement.
Keeping pace with the market's evolution, there is an ongoing process to improve bond valuation and price dissemination tools, according to the Transparency Committee. Market developments will continue to provide adequate and efficient levels of price transparency and liquidity. For instance, current growth in the securitization and high-yield markets have fostered greater price transparency, the committee said. "As the European high-yield market grows, there will be room to increase price transparency," said Craig Abouchar, senior fund manager at Insight Investment and board member of the High Yield Association. "However, as liquidity continues to improve as a result of more issuers, banks and investors becoming active in this market, the optimal level of transparency should be left for the market to identify, and should not be dictated by a rigid, regulatory regime."
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