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SECONDARY MARKETS
Issue 30 | Third Quarter 2013 www.icmagroup.org
in Member States, whereas the Regulation becomes part of the body of European law once it is passed. The MIFID II package will have important implications for the structure, practices and regulation of fixed income markets in Europe and of the international markets. As regards both (1) the development of detailed Level 2 legislation and technical standards, and (2) member firms’ practical preparations for the new regime, ICMA expects to play a part, helping the market develop its views, communicating them to the authorities, and participating in technical discussions. In the priority areas that ICMA members have identified, the position at this stage is broadly as follows: Organised Trading Facilities (OTFs): The OTF category is important to the international capital markets because it will offer an additional way of bringing multilateral trading on to organised trading venues. The European Parliament proposes to restrict OTFs to non-equity markets; to prohibit a firm from deploying its own capital in an OTF that it operates, even to facilitate client business; and to narrow the scope of non-transparent OTC business. The Council proposes to retain the Commission’s broader scope for OTFs, encompassing equities as well as non-equities; it proposes to allow matched principal trading within OTFs for non-equities only. In a late amendment, the Council proposes to allow a broader range of principal trading to facilitate liquidity for illiquid sovereign bonds: a welcome recognition of the importance of the principle of enabling intermediaries to facilitate liquidity, which we hope can be extended also to corporate bonds, which are often less liquid than sovereigns, and are crucial to help fund economic recovery and support the Commission’s long-term investment strategy. Price transparency: It remains crucial that the proposed new requirements on pre-trade transparency and post-trade reporting of fixed income and other non-equity trades are carefully calibrated to reflect the different characteristic of the asset classes which are in scope. The liquidity profile of the different instruments is a key feature that needs to be taken into account, there is a need to protect the orderly functioning of the debt markets including the sovereign bond markets, and post-trade publication requirements need to take account of the impact on market makers. We hope it will be possible
for the trilogue to consolidate the elements of the Council’s and Parliament’s texts which reflect these principles. Third country firms: The Council proposes to remove the Commission’s proposed ESMA registration requirement for third-country firms operating in wholesale markets, whereas the Parliament proposes to retain it. The Parliament tightens several aspects of the Commission’s proposed restrictions on third country firms’ access to EU markets, though it also proposes important improvements to the transitional arrangements for the Commissions’ proposed condition that only third-country firms based in countries with “equivalent” regulation and supervision be permitted to participate in European markets. If an “equivalence” regime is introduced, it is essential that it works in a way that facilitates the smooth continued participation of third country investors and issuers in international and EU markets. Clearing access: The basis on which Central Clearing Counterparties (CCPs) are required to provide clearing services to trading platforms, and can obtain from the trading platforms feeds of the data relating to the trades which they are being asked to clear, was one of the most complex in the Council discussions, reflecting the difficulty of reconciling two models of market structure in Europe: the “vertical” model, common in derivatives, in which the trading platform and CCP are tightly coupled, and there is only one CCP per market place, though a CCP may clear for more than one market place; and the “horizontal” model, increasingly common in cash equities, under which CCPs compete to provide clearing services for a market place. This design principle will be important as trading of international bonds migrates to electronic order books. Such order books are typically anonymous, so that a CCP is needed to manage counterparty risk, even for the relatively short period of three business days between the trade date and the due date for settlement. The Council’s text proposes a general right of access, but with a number of caveats and transitional exemptions. The Parliament proposes to limit access to money market and cash instruments. Contact: John Serocold and Timothy Baker john.serocold@icmagroup.org timothy.baker@icmagroup.org