Now let's just have a look at MiFID non-equity market transparency (and the suggestions to fix what isn't broken)! says Guido Ravoet
When the first level of the Markets in Financial Instruments Directive (MiFID) was being negotiated in Brussels a number of years ago, the jury appeared to be out on whether or not MiFID's thorough pre- and post-trade transparency requirements should apply to non-equity, as well as equity, instruments. Some saw the possibilities of increasing retail participation in non-equity products as being linked to providing retail customers with more information about the product. Others feared that new and stringent transparency requirements applied to a market that thrives on having a degree of opacity could drive liquidity from Europe's non-equity markets to the detriment of all classes of investor. All agreed that the issue is very complex and required careful and further consideration.
This question is now being tackled by legislators, supervisors and interested stakeholders but some of the heat could yet be taken out of the debate as public policy and stakeholders appear to be converging about the optimal solution to address the question.
Policy intervention at this stage, in respect of mandatory pre-trade transparency in the non-equity markets, is not necessary. Additional transparency in post-trade reporting may be possible but banks currently remain to be convinced about the market failures mandatory post-trading rules are supposed to address. Price transparency rules applied to equity markets are not suitable to be transferred to bond markets; in markets reliant on dealer-provided liquidity, such as in non-equity markets, greater transparency could increase the risk of committing capital and providing prices. Ultimately this could result in a net withdrawal of liquidity, to the detriment of all participants.
The dearth of a market failure, and since non-equity market transparency cannot be readily considered a public good, are strong enough reasons against an extension of mandatory pre- and post trade transparency across Europe through MiFID. Other elements of investor protection that MiFID delivers, such as the assessment of suitability and appropriateness, will help to orientate retail investors towards the most appropriate investment decisions, irrespective of the levels of transparency that accompany different financial instruments. Timing considerations are also important since stakeholders agree that any extension of MiFID should be based upon a sound understanding of the strengths and weakness of the MiFID regime, as designed to be implemented by 1 November this year.
If there is any debate it should be about who is best placed to deliver. To answer that question, for the banks, it should be the industry who is entrusted with the responsibility of finding an appropriate degree of transparency for financial instruments whose natural home is the wholesale market, especially since at the European level these markets are eminently competitive and are working well. This fact alone will benefit retail consumers more than producing tomes of pre- and post-trade data, which would eventually come at a high cost to all, with little benefit.
