The International Capital Market Association has warned that the two-day deferral period for reporting some bond trades under new European Union regulations is too short and will increase fragmentation, as well as costs for issuers and investors

The MiFID II regime expands the pre-trade and post-trade transparency regime from equities traded on regulated markets to cover an expanded range of assets including exchange-traded funds, bonds and derivatives, together with a larger range of trading venues.

Icma said in a position paper last week that MiFID II, which comes into force next January, requires large or illiquid fixed income transactions to be reported within two days. The paper added: “The two-day deferral period outlined in the regulation is too short, and in most cases even the four week deferral period that can be provided at the discretion of competent authorities is not sufficient time to protect market participants.”

The association said it fully supports the principle of greater pre- and post-trade price transparency in European fixed income markets but also recognizes that such transparency can create risks for both liquidity providers and takers, and result in result in higher transaction and borrowing costs.

For example, an asset manager looking to sell a large block of an illiquid bond may approach a market maker and ask them to bid for the entire size on a confidential request-for-quote. However, if the trade has to be published after 48 hours, it will be public that someone is trying to sell a portion of an illiquid bond and it will be more expensive for the market-maker to hedge their position. Icma said: “In a 48-hour trade deferral regime, the only options open to the market maker are to decline the RFQ, or show a bid so low that nobody would care to move the market even lower.”

In addition, an asset manager may choose to work the order themselves over several days or weeks by breaking the trade down into smaller orders, which will become more difficult if trade information becomes public every 48 hours. Icma said: “Again, dealers will mark their prices lower, making it increasingly more expensive, and difficult, for the asset manager to complete his or her order, or may even trade ahead of the order and sell short the market.”
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Law firm Hogan Lovells said in a briefing note that national regulators will continue to be permitted to authorize the deferred publication of post-trade information based on the size or type of the transaction. National competent authorities may also take a range of additional measures during the deferral period, such as requesting publication of limited details or of details of several transactions in aggregated form.

Icma argued that, as a result, there could be variations in the publication of details such as the aggregation of transactions, whether the volume for individual transactions is included and for sovereign debt, the publication of several transactions in an aggregated form for an indefinite period of time.

The paper said: “Icma understands that a range anywhere from minor to major differences could emerge between EU national competent authorities. It would seem likely that market liquidity will gravitate to those jurisdictions with the longest deferral periods and the most flexible publishing options, thus fragmenting market liquidity across the EU.”

The association has recommend that the maximum deferral period for relevant trades should be extended to four weeks.

“Furthermore, all supplementary information options available under MiFIR, within the four-week deferral, should also apply across EU national competent authorities,” added Icma. “The adoption by all 28 EU competent authorities of a supplementary four-week deferral period, taking into account maximum flexibility of available options, will lead to the avoidance of fragmented market liquidity and the insurance of a level playing field for all EU market participants and venues.”

The UK Financial Conduct Authority said in its MiFID II policy paper at the end of March that the standard deferral for transactions is the second trading day after the day of the trade. “We are inclined to use our powers to authorise the deferred publication by both trading venues and investment firms dealing over-the-counter,” added the UK regulator.

The FCA also asked whether it should defer or aggregate certain information for an extended time (or indefinitely, in the case of sovereign bonds only) for post-trade reporting.