Several financial associations are backing the integration of credit ratings as the review of the European Union’s post-trade transparency for bonds by European Securities and Markets Authority (ESMA) enters its final stage.
ESMA and the European Commission are reassessing certain aspects of the review of the Markets in Financial Instruments Directive (MiFID II), and the Markets in Financial Instruments Regulation (MiFIR) defining the new post-trading regime, on the path to building a functioning Capital Market Union (CMU).
The review of the directives regulating the EU’s investment services and financial markets activities aims to increase transparency and improve access to market data to conduct transactions, overall making the EU capital markets competitive on a global stage.
The associations – which include German fund industry association BVI, the Association for Financial Markets in Europe (AFME), which represents European and global banks, the German Federal Association of Investment Firms (bwf), the European Fund and Asset Management Association (EFAMA), and the International Capital Markets Association (ICMA) – are urging policymakers to ensure that the EU will remain competitive within the global fixed-income market.
They noted that TRACE (trade reporting and compliance engine), the programme for reporting over-the-counter (OTC) transactions in the US, and the Financial Conduct Authority (FCA) in the UK use credit ratings for transparency.
The associations are asking for a distinction between investment-grade and high-yield corporate bonds, whose sensitivity to price volatility varies.
High-yield bonds meet lower credit quality standards and are more volatile in price than investment-grade bonds with higher credit quality, according to the associations. A different level of protection is necessary for those instruments more exposed to price volatility, and differentiating between investment grade and high-yield corporate bonds improves transparency “for instruments with different price volatility profiles”, the associations said in a joint statement.
In July the European Commission set up an expert stakeholder group on equity and non-equity market data quality including experts representing financial institutions, banks, companies, and EuroCTP (European Consolidated Tape Provider), a company set up by European exchanges to provide consolidated tape in the EU, to advise ESMA and the Commission on market data transparency and aggregation.
The stakeholder group recommended that ESMA considers the distinction between the two types of corporate bonds, having in mind the impact they can have on the EU’s attractiveness and competitiveness in contrast to third-country jurisdictions like the US (TRACE) and the UK, it said in a report on bonds published in October.
ESMA’s Securities and Markets Stakeholder Group has also recommended the European financial markets supervisor to use currency, maturity and credit rating, differentiating between investment grade and non-investment grade, as further liquidity drivers in addition to issuance size, it said in an earlier report.
This approach, according to the Securities and Markets Stakeholder Group, results in a more granular segmentation improving real-time transparency.
The latest digital edition of IPE’s magazine is now available
No comments yet