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ICMA Wants EU Consolidated Tape For Bonds

The International Capital Market Association, a trade body, said a low or minimal cost consolidated tape of raw transaction data would benefit the cash bond market in the European Union.

In its latest quarterly report ICMA said data quality and accessibility are arguably the biggest challenges arising from the implementation of MiFID II, which came into force in the European Union at the start of last year.

“Our recommendation is that a low or minimal cost consolidated tape of raw transaction data would benefit the cash bond market,” added ICMA. “We also provided detailed reflections on a governance structure which would permit an appropriate level of official sector oversight.”

In July the European Securities and Markets Authority launched a consultation on the cost of market data and the launch of a consolidated tape for the region, which ended last month. ICMA’s consolidated tape working group and task force involving the buy side, sell side, trading venues and data providers, submitted a response.

“While the consultation focuses specifically on the development of a consolidated tape for equity products, ICMA views this as a valuable opportunity to highlight market considerations with respect to a consolidated tape for EU bond markets, which, in many respects, are quite distinct from those of equities,” said ICMA. “There are approximately 33 times more listed bonds than listed equities.”

ICMA’s response said a cash bond consolidated tape should be the  “golden source” for reliable, trustworthy, good quality post-trade data in the market. As a result, market participants would benefit from robust transaction cost analysis and improving best execution analysis.

“The greatest benefit of a European cash bond consolidate tape is the protection it would provide for smaller or retail investors who may not have (or be able to have) access to several systems or the ability to pay for an aggregator,” added ICMA. “Finally, a European consolidated tape promotes a unified view across European cash bond markets for all market participants, large or small, professional or retail, making Europe more competitive and facilitating the goals of the capital market union initiative.”

The taskforce also said it may be useful for Esma to explore and analyse Trace, the consolidated tape for bond markets in the US, which has resulting in a better understanding of trading activity and execution costs.

“It is important that Esma understands that an equity consolidated tape (which is solving for different problems and has a different operational market structure) should not be used as a precedent for a cash bond consolidated tape,” said ICMA. “Trace should be the precedent to analyse.,”

ICMA will produce a discussion paper for the European Commission on a cash bond consolidated tape and meetings are already taking place to present early findings to regulators.

Citadel said in its response to the Esma consultation that the US has successfully implemented a post-trade consolidated tape in both equities (e.g. the SIP) and non-equities (e.g. Trace for corporate bonds, Emma for municipal bonds, and the DTCC DDR for over-the-counter derivatives), which are comprehensive, real-time, and low cost, or free.

“In the US corporate bond market, for example, academic research has found that post-trade transparency has improved liquidity and has reduced transaction costs,” added Citadel. “Post-trade transparency has benefited not only retail investors, but also institutional investors transacting in larger size, as customer bargaining power increases and liquidity providers can be held more accountable.”

The response continued that post-trade transparency has caused “trading costs to decline significantly for the entire bond market.”

The Federation of European Securities Exchanges wrote in its response to the consultation that there may be merit in considering that what becomes the norm for equity and equity-like instruments should potentially become the norm for fixed income.

“Enhanced transparency and competition in European bond markets could be instrumental in attracting non-European investors to the EU, fostering CMU and making the euro more attractive,” added FESE.

Secondary market research

ICMA also said in the report that it has almost completed research for its third study into the European investment corporate bond secondary market.

“Intended to update on the seminal 2016 report, the new study seeks to address three key questions: (i) What is the current state and expected course for market liquidity? (ii) How is the structure of the market evolving? (iii) What are the expectations for future market developments ?”added ICMA.

The report is due to be published in this quarter.