It can be hard to generate a sense of urgency around the dry topic of securities regulation. It is doubly difficult when the implementation of new rules is delayed.
Recent comments from national regulators suggest that the deadline for firms to comply with the European Union’s Markets in Financial Instruments Directive (Mifid) might have to be put back to 2008. As Mifid recedes over the horizon again (there has already been one 12-month deadline extension), debt market practitioners need to remind themselves that Mifid is coming, and it matters to them as much as to the equity markets.
In fact, the European Commission has until April 10 this year to report to the European Parliament on the directive. This month, the EC begins reviewing Mifid’s Article 65(1). This deals with transparency in the bond markets. And senior figures at the EC indicate that they favour introducing a statutory requirement for transparency.
This should not come as a surprise. Despite the EC’s assurances that it will only regulate when there is evidence of market failure, the market suspects that regulators simply enjoy regulating. It’s what they do.
As one observer says: “Persuading a regulator not to regulate is a bit like persuading an alcoholic not to drink. Sometimes you will manage it, but you go into the argument expecting to lose.”
When one City law firm did a rough audit recently, it found that Brussels and the FSA together were supplying it with 400 sides of A4 of draft legislation, actual legislation, consultation documents and other missives every week.
If the bad news is that there is a surfeit of unnecessary regulation, the good news is that the debt markets are responding. Tucked away on the UK Financial Services Authority’s website is a summary of the key points made during a seminar on transparency in the secondary bond markets in November. The arguments it contains over enforcement can be boiled down to one key point: is there a lack of pre-trade transparency because people do not want to disclose prices, or because there are no prices to disclose?
Many bonds only really trade for a few weeks after issue. If the EU wants to compel banks to publish prices for instruments in which there is only one trade a month, that’s probably not a problem. If it then intends to compel those banks to deal at those prices, it is. Market makers won’t want to risk their capital by providing continuous quotes.
The EU is instinctively pro-consumer. It might think that by imposing both pre-trade and post-trade transparency, it can create a bond market for retail investors. In fact, it will hurt retail investors, who will end up paying the increased costs.
The FSA now needs to make the industry’s case in Brussels. Otherwise, yet again, we risk seeing wholesale debt markets regulated to protect the legendary Belgian dentist – the cautious, middle-income retail investor. Time is running out.
