European Commission Expert Group Report on Corporate Bond Market Liquidity
Corporate bond markets have proven a tough nut to crack for regulators looking for solutions to the relative lack of corporate bond market liquidity in Europe. Recently, a new report was prepared by the European Commission Expert Group on corporate bonds, of which CFA Institute was a member, and released by the European Commission.
CFA Institute attended the launch event on the 24 November, which featured strong attendance from stakeholders. The issue of corporate bond market liquidity is an important part of the Capital Markets Union (CMU) initiative, which aims to increase the share of public market capital allocation in the EU. During the November launch, Sean Berrigan, Deputy Director General of DG FISMA noted that European corporate bond markets are only one third the value of those in the United States.
CFA Institute has previously surveyed its members on the issue of corporate bond market liquidity and found some regional differences between the Americas, EMEA (Europe, Middle East, and Africa), and the Asia Pacific regions. On questions of macroeconomic and regulatory impact on bond market quality, respondents from the Americas and EMEA noted that bank capital and liquidity regulations have had a significant impact on bond market liquidity and that the focus of policymakers should be on removing impediments to the smooth functioning of institutional wholesale markets.
In this context, the report of the Expert Group on Corporate Bonds unsurprisingly focuses on those issues CFA Institute members found concerning. The Expert Group report culminated in 22 recommendations that pursue 6 objectives:
- Making issuance easier for companies
- For example, by enhancing EU Growth Prospectus regime in the Prospectus Regulation to encourage SME listings.
- Increasing access and options for investors
- For example, by encouraging greater convergence in national interpretations of investment fund regulations, including UCITS and AIFMD rules, to foster a more efficient and level playing field for bond fund investment.
- Ensuring the efficiency of intermediation and trading activities
- For example, by reviewing the requirement for market participants to initiate a buy-in process if they have failed to deliver a security on time to a central securities depository. This review could help minimize risks for liquidity providers, investors, and security lenders.
- Fostering the development of new forms of trading and improving the post-trade environment
- For example, by enabling new models to be tested in a regulatory sandbox, where temporary regulatory leniency is applied.
- Ensuring an appropriate level of information and transparency
- For example, by promoting the creation of a consolidated tape for corporate bonds, hosted by ESMA and accessible to market participants at a reasonable cost.
- Improving the supervisory and policy framework
- For example, by establishing a specialist industry group to advise regulators on adapting regulatory frameworks for corporate bonds.
The recommendations of the group are not binding, but next steps include further investigation on the extent of the liquidity squeeze in corporate bond markets and whether it is truly significant enough to merit intervention. There are suggestions that the European Central Bank’s corporate sector asset purchase programs, including its recent moves to begin tapering the purchases, are skewing the market and providing a misleading picture of liquidity and general market dynamics.
Despite the non-binding nature of the report, some of the recommendations are already being developed by the European Commission, including an SME listing package (see CFA Institute thought leadership on the Prospectus Regulation) and the European Supervisory Authorities review (see CFA Institute comment letter on the ESA review). In particular, the ESA review is examining the possible scope for increasing future supervisory and regulatory convergence in the EU, which is an important long-term objective of the European Securities and Markets Authority (ESMA), and one of the key recommendations under the objective of improving the supervisory and policy framework in the Expert Group report.
Further relevant corporate bond market developments already under way are due to the Markets in Financial Instruments Directive (MiFID II) that extends public price transparency to bond trades with mandated reporting into commercial consolidated tape providers, although the Expert Group report argues this tape should be owned by ESMA.
While welcoming the Expert Group report, CFA Institute believes that the group missed an opportunity in the report to more strongly emphasize some other recommendations that we consider to be very important to the demand for corporate bonds, specifically the following:
- Strengthening the e-trading ecosystem in order to facilitate fixed-income trading, enhance the quality of market trading information, and improve the quality of execution.
- Improving the quality of corporate bond disclosures and covenants in order to encourage investor comfort and increase investor participation through higher levels of investor protections.
- Improving the link between bond holder rights and enforcement regimes, once again to increase investor participation through improved investor protections.
A public consultation on follow-up actions to the Expert Group report will be launched in early 2018, and CFA Institute will continue to monitor and participate in this important policy discussion.
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