Significantly increased post-trade transparency may result in a liquidity shock, says the International Capital Market Association (ICMA). Nevertheless, in its response to the UK’s Financial Conduct Authority’s (FCA) consultation for improving transparency in the bond and derivatives markets, it expresses its belief this effect is likely to be short-term, and suggests mitigation strategies that could be included in FCA’s proposal.

As an advocate for the establishment of a consolidated tape for bonds in Europe, ICMA writes that “a bond transparency regime should strike a balance between recognising the diversity of underlying market structures, dynamics, and liquidity profiles of different bond sub-classes and segments, and a need for relative simplicity in order to facilitate successful and consistent application”.

A short-term issue

It points out that significantly increased transparency could create liquidity shock in the bonds market as dealers “adjust to greater information symmetry”. Although ICMA believes this effect will only be short-term, it could “have negative structural impacts on certain parts of the market or with respect to some transactions, so potentially increasing the risks and costs borne by investors”.

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Therefore, the association suggests in its response modifications to the FCA proposal that target groupings, thresholds, and deferrals, all of which have been informed by data and analysis.

It emphasises that having a “well designed and suitably calibrated deferral framework” supporting the consolidated tape for bonds will “optimise the scope of real-time post-trade transparency while also providing protection for market participants”.