A study by the Dutch Authority for the Financial Markets (AFM) on the effectiveness of the MiFID II regulatory framework for the fixed income and derivatives markets shows price formation still needs to be more transparent. The MiFID II rules are also considered less suitable for the fixed income markets. The AFM does, however, note a shift towards on-venue trading for bonds and derivatives.
In anticipation of potential changes to the current MiFID II framework, the AFM has conducted an analysis of the fixed-income and derivatives markets focussing on the primary bond markets and the secondary fixed income markets. The AFM’s recommendations include increasing the degree of standardization in fixed income instruments. After all, transparent price formation requires a financial instrument to be sufficiently liquid, which in turn means a certain degree of standardization.
Efficient price formation
Transparent and liquid bond markets are essential for efficient price formation for both issuers and investors. This makes it easier to issue new fixed income instruments, which will ultimately lead to lower financing costs. Broadening the mix of available finance and reducing dependence on tailored bank loans fits within the philosophy of the Capital Markets Union.
A visible shift
The AFM notes there has been a shift of trading in bonds and derivatives towards trading platforms. Especially trading in derivatives subject to the clearing obligation has moved to multilateral platforms. They also observe an increase in the use of multilateral electronic trading platforms in the fixed income markets. Unfortunately, so far this shift has not led to greater transparency in price formation, due to the low liquidity of most of these instruments.