Getting better bond transparency ahead of Europe’s consolidated tape

Published on 5 August 2020

Regulatory initiatives to enhance transparency in the bond markets have merit, but also have limits, says Jason Waight, head of Regulatory Affairs for Europe at MarketAxess. While these utility models increase the information available, Europe’s existing initiatives have added very little to the price formation process, making it vital that traders understand how else they can get access to data.

Transparency is available today through commercially available tools and those investment firms engaging with these solutions today can support themselves in choppy markets by being price makers as well as price takers, putting them on the front foot.

Dan Barnes Welcome to Trader TV. I’m Dan Barnes. Today we’re discussing transparency in the fixed income markets. Transparency is fundamental to finding the right price fixed income products at any one time and ultimately has an impact on end investors. Speaking with me is Jason Waight, head of regulatory affairs at Market Access. Jason, welcome to Trader TV.

Jason Waight Hello, Dan. Thanks very much for having me.

Dan Barnes What are the risks created by having too little transparency and what are the risks created by having too much transparency?

Jason Waight These topics are debated a lot. I don’t think there’s any easy answer, but if we think about it, too little transparency creates market asymmetry; so somebody has the information, somebody else doesn’t. So there’s always a possibility that some sector of the market may be losing out. And certainly a driver for the consolidated tape is policymakers fears that the retail investors may particularly be losing out in the absence of a consolidated tape. And they’re probably right because professional investors today probably do have a higher level of information. Too much transparency? Well, the bond markets are still dependent on dealers being prepared to take risk positions, and if that preparedness reduces because they don’t feel sufficiently protected by the transparency regime, then we have a liquidity problem. So it’s that balance.

Dan Barnes Whereabouts would you say there are weaknesses in bond market transparency at the moment?

Jason Waight I think the biggest weakness is how poorly it’s generally understood. There’s a lot more transparency available in the market than most people realize; for example, market access is predictive pricing tools generating around 30 million levels per day globally on what the next trader price is likely to be in around 25.000 bonds. So there’s a lot of pricing information out there. I think possibly the biggest issue is, do investors and dealers know where to access it from? And whether that’s really available to the retail investor market? Which I think is probably the primary driver for a number of the policy initiatives you’re seeing around things like the consolidated tape.

Dan Barnes Where there is a gap in information between the regulatory demands and people haven’t yet got a solution to filling that gap, what’s the impact of having inadequate data?

Jason Waight The biggest one is your ability to take advantage of the new trading protocols that are emerging, particularly all-to-all trading, like open trading offered by Market Access. And that’s particularly important in times like the market crisis we saw recently at the end of March, where we saw a massive increase in the amount of open trading activity as a genuine source of alternative liquidity. As in some traditional liquidity, providers struggled to work out where the market was at any given point in time. How we were able to do that is by using a more dynamic model for figuring out what bonds it’s safe to print trades in real time. So in access-all we do that intraday and we look at the level of activity in a bond and we say that bond is sufficiently liquid at this point to be able to share market information with investors and dealers. That enables us to print trades daily and around about 3000 bonds. Now under the more static MiFID II calculations, generally speaking, around 600 bonds will be deemed liquid on a quarterly basis and able to do that. And it’s really that gap in the length of time of the models that really makes the difference, and that’s why we find our clients get a lot of value out of access-all, because it can give you a lot more information and it probably better reflects the sort of episodic nature of liquidity in bond markets.

Dan Barnes And so it’s fair to say that there is data out there which is potentially available. The challenge is that investors need to know where to get it, how to get it, and you believe that the utility model is unlikely to actually resolve that issue for them?

Jason Waight One, it’s commercially unlikely that a utility would emerge. I think that may have to be mandated in some way, shape or form, certainly under the current regime. Commercially, it’s not a viable prospect. But I think that the bigger issue is – which I think is not getting enough press relative to the distribution mechanism, there’s a little bit like putting the cart before the horse – the fact that the regime itself is still very new. It’s very, very tightly calibrated, perhaps sensibly, as a way of starting off the regime. And the data quality issues that firms are experiencing with it is undermining the usefulness of that data. So there’s a lot of work to do in my mind before we talk about this utility, to get the regime to a place where it’s sufficiently bedded in and correctly calibrated. And my suspicion is distribution at that point would take care of itself because the real issue is lack of demand.

Dan Barnes What would be your ideal model going forward to create progress for the industry?

Jason Waight The first issue that is well known we need to address is the quality of information going into the transparency regime. I suspect it’s slightly easier for venues because the trades are agreed electronically. So I suspect the focus is going to need to be more on OTC information over the coming months and how we make sure that that information is reliable and that firms are confident to trade in the back of it and use it in their price formation process. That’s probably number one. I think we need to look carefully at the calibration of this regime. As I’ve mentioned before, it’s been carefully calibrated. The existing legislation actually includes a process to increase the amount of transparency as we go through in four stages, and I think carefully monitoring whether we can move through those ratchets over the coming years, I think would be the way forward. And I think the third thing that we should be looking to do is to bring a little simplicity to the method to regime. It’s very, very, very complicated, particularly when you compare it to, say, trace in the US operates on a much more simple basis. So maybe there’s something we can learn from that in terms of bringing a little more simplicity to our regime here.

Dan Barnes Jason, thanks very much, it’s been brilliant.

Jason Waight Thank you very much, Dan.

Dan Barnes I’d like to thank Jason for his expertize and, of course, for you for watching. To catch up on our other shows go to TraderTV.NET or ETFTV.NET.