European and U.S. industry groups voiced their concerns over a proposed increase in ABS and CDO post-trade transparency disclosures in a joint letter to the Committee on European Securities Regulators (CESR).
The Association for Financial Markets in Europe (AFME), the British Bankers’ Association (BBA), and the International Swaps and Derivatives Association (ISDA), cautioned that added disclosure may threaten the stability of markets for structured finance (SF) products, especially when those markets cannot be electronically integrated.
Because the market value of a given SF product is derived from its underlying assets, the pricing of SF products within and across different originators are not necessarily comparable, the letter explained .
The industries fear that the disclosure of pricing information for rarely-traded instruments will ultimately have the effect of disseminating proprietary information that will hurt dealers.
“Disseminating trade information may negatively affect market participants whose trades are revealed to the market, often before these trades can be executed in their entirety,” the letter states.
The joint statement goes on to identify the risks to more liquid SF products, where incoming market information could impact prices, prompting participants to buy or sell before the close of the intended transactions.
“As market participants trade on the information, prices would fall ahead of sellers and rise ahead of buyers,” the groups explained . “Thus, investors would pay more for the bonds they purchase and receive less for the bonds they sell. The adverse market movements precipitated by additional trade transparency would negatively impact investors.”
The associations warned that post-trade transparency might decrease the liquidity of or freeze up markets. Concerned participants will not want their positions ranked on a single trade in an illiquid or overly depressed market. If forced to report these trades, they may prefer not to trade at all, the letter said.