Consultation Paper CESR Technical Advice to the European Commisssion in the Context of the MiFID Review: non-equity markets transparency

Transcription

1 BVI Eschenheimer Anlage 28 D Frankfurt am Main Mr. Carlo Comporti Secretary General CESR Committee for European Securities Regulators Bundesverband Investment und Asset Management e.v. Contact: Rudolf Siebel Phone: / Fax: / June, 4th, 2010 Consultation Paper CESR Technical Advice to the European Commisssion in the Context of the MiFID Review: non-equity markets transparency Dear Mr. Comporti, BVI is grateful for the opportunity to participate in the consultation on transparency in non-equity markets. BVI Bundesverband Investment und Asset Management e.v. represents the interest of the German fund and asset management industry. Its 84 members manage currently assets in excess of EUR 1.7 trillion both in investment funds and mandates. 1 The current structure of the corporate bonds market is not based on an exchange trading model but relies heavily on broker/dealers. Our members in principle favour increased trading of corporate bonds on liquid exchanges and Multilateral Trading Facilites (MTFs). They support initiatives for the establishment of new and liquid corporate bond trading venues as established by Deutsche Börse AG and Paris Europlace (project Cassiopeia). By moving more bond trading on regulated markets, investors will also profit from the increased levels of transparency usually associated with exchanges. Director General: Stefan Seip Managing Director: Rudolf Siebel 1 For more information, please visit BVI is filed in the EU register of interest representatives ( ). Eschenheimer Anlage 28 D Frankfurt am Main Postfach D Frankfurt am Main Phone: Fax: info@bvi.de

2 Page 2 of 2, Date June, 4th, 2010 Please find attached the consolidated responses of our members to your questions. Yours sincerely BVI Bundesverband Investment und Asset Management e.v. Rudolf Siebel, LL.M Frank Schöndorf

3 CESR-Consultation on Transparency in non-equity markets Question 1: On the basis of your experience could you please describe the sources of pre- and post-trade information that you use in your regular activity for each of the instruments within the scope of this consultation paper: Our members use Bloomberg, Reuters, Banks, Brokers, Rating Reports, prospectuses and independent research. One member observes the average bid-ask spread, the number of investment banks that provide regular pricing and the frequency of quoted pricing as a proxy for liquidity (pre-trade) and the market impact of sizable orders that our member executes (post-trade). Question 2: Are there other particular instruments that should be considered as corporate bonds for the purpose of future transparency requirements under MiFID? Some members suggested improving the transparency of secondary trading of syndicated bank loans (e.g. leveraged loans). Question 3: In your view, would it be more appropriate, in certain circumstances, to consider certain covered bonds as structured finance products rather than corporate bonds for transparency purposes? Please explain your rationale. Most of the respondents see corporate bonds and covered bonds as separate asset classes with different pricing characteristics. Corporate Bonds are predominately unsecured obligations of the issuer. Hence, market pricing for corporate bonds reflects the quality of the issuer s cash flows in relation to the debt obligations. In case of default, the recovery value tends to be low (loss-given-default is high). In contrast the market price for secured debt instruments like covered bonds reflects both the credit quality of the issuer and the quality of the collateral pool of the bond (loss-given-default is low). Indeed covered bonds have many elements in common with a structured finance product. Transparency standards for covered bonds should be more in line with these structured products than with corporate bonds. However, one member stressed that a clear categorization of covered bonds would be sufficient. Question 4: On the basis of your experience have you perceived a lack of pre-trade transparency either in terms of having access to pre-trade information on corporate bonds or in terms of the content of pre-trade transparency information available? Especially in cases of low liquidity and times of increased market volatility it is difficult to get sufficient pre-trade transparency in the broker/dealer market. Question 5: In your view, do all potential market participants have access to pre-trade transparency information on corporate bonds on equal grounds (for example, retail investors)? Please provide supporting evidence. Our members do not believe that retail investors have access to the same degree of pretrade transparency information as institutional investors. Normally retail investors have only access to pre-trade information as indicated by selected exchanges. The degree of pre-trade transparency available to institutional investors also varies depending on their size. 1

4 Question 6: Is pre-trade transparency efficiently disseminated to market participants? Should pre-trade information be available on a consolidated basis? Most of the respondents do not consider pre-trade transparency efficiently disseminated, above all in cases of low liquidity. A standardisation of how information is to be disseminated would be desirable. Most of the volume of the ca corporate bonds is not available for trading, but is owned by by and hold investors. As a result transparency on the volume available for trading of a single bond is of high importance. Question 7: What are potential benefits and drawbacks of a pre-trade transparency regime for: a) the wholesale market; and b) the retail market? If you consider that there are drawbacks, please provide suggestions on how these might be mitigated. a) The benefits of a pre-trade transparency regime would be efficient pricing and increased liquidity. It is questionable whether broker/dealers would be willing to support a full pre-trade market transparency. b) The information asymmetry between retail and institutional investors could be mitigated and the liquidity would increase. No drawbacks are anticipated. Question 8: What key components should a pre-trade transparency framework for corporate bonds have? What pre-trade information should be disclosed? Pricing, liquidity, volume and volatility should be key components of the framework. The transparency should also contain information on best/bid ask, and lot sizes. The depth of information should depend on the free float of bonds available for trading and it should be cross-border. One member suggests that there should be a general requirement to attach the prospectus and certain other information to the security pages of the widely used information providers such as Bloomberg, Reuters, etc. as well as to all brokerage platforms where mostly retails investors and notionals trade. For each security this information should include an issuer originated or approved standardized term sheet (that also comes in easily downloadable data format such as excel) that includes legal information (subordination to other securities, clauses, issue entity structure, etc.) and basic financial (Balance Sheet, P&L, Cash Flow, etc) and other operationally relevant information (e.g.securities identifier). The requirement should also contain standardized term sheets from rating agencies in which the rating and the decision process leading to the specific rating conclusion on each is laid down. Another member recommends implementing a similar trade reporting for the European corporate bond market as the US Trade Reporting and Compliance Engine (TRACE ).The Trade Reporting and Compliance Engine is a vehicle that facilitates the mandatory reporting of over the counter secondary market transactions in eligible fixed income securities. All broker/dealers who are FINRA member firms have an obligation to report transactions in corporate bonds to TRACE under an SEC approved set of rules. Question 9: Do you think that notional value would be a meaningful piece of information to be made accessible to market participants? Is there any other information that would be relevant to the market? Most of our members believe that notional values should be made available to the broader investment community. 2

5 Question 10: Do you agree with the initial proposal for the calibration of post-trade transparency for corporate bonds? If not, please provide a rationale and an alternative proposal (including supporting analysis). We agree with the initial proposal. Question 11: Should other criteria be considered for establishing appropriate posttrade transparency thresholds? A further threshold, e.g. 20 million, would give more information on the liquidity of the bond. Question 12: Given the current structure of the corporate bond market and existing systems, what would be a sensible benchmark for interpreting as close to real time as possible? In any case a maximum delay for price publication from time of trading should be defined, e.g. three hours. Question 13: On the basis of your experience, have you perceived a lack of pre-trade transparency in terms of access to and the content of pre-trade information available in the market for ABS? Depending on the collateral class, there is significant lack of pre-trade transparency both in terms of access and content. While pre-trade information is generally sufficiently available for Residential MBS and Auto ABS, access and content are often insufficient for CDOs and Commercial MBS. Usually, historical CDO investor report information which is necessary to evaluate the current status of a transaction is only available on a restricted trustee or CDO manager s website. To get access to information on a specific deal, usually a certificate of ownership is required. Logically, when you are looking to invest in a new deal, there is no pre-trade access to the underlying information. This considerably hampers secondary market liquidity. For Commercial MBS, investor reports are often available on Bloomberg. However, in our opinion, for many transactions the amount of available information is not sufficient to allow for a deep understanding of the inherent risk of the structure. For Residential MBS, the amount of information available varies from country to country and by individual securitization vehicle. Question 14: Is pre-trade transparency information readily available to all potential market participants? We feel that in many areas there is still considerable asymmetric information. Lack of availability and standardization negatively influences secondary activity. 3

6 Question 15: Is pre-trade information currently available in the ABS market consolidated and effectively disseminated to those market participants who make use of it? Generally, we would answer the question: No. Again, this depends on the asset class. Detailed cash flow and investor report information sometimes is only available on expensive information platforms like Intex. These platforms are often slow in updating investor report information. Widely used information providers such as Bloomberg contain only limited cash flow information and investor reports. Unfortunately, it generally seems that the more complex a structure is, the less information is publicly available. Question 16: Which potential benefits and drawbacks of a pre-trade transparency regime do you see for the ABS market? If you see drawbacks, please explain how these might be mitigated. A pre-trade transparency regime would de-mystify many perceptions of the securitization markets, would improve secondary liquidity, reduce asymmetric information patterns and improve the reputation of securitization in general. The drawbacks relate to the practicality of updating live executable prices for the thousands of diverse securities in the ABS universe. Nonetheless, this should be possible at least for the subset of ABS securities that is traded actively by a large number of brokers. Question 17: Which key components should a pre-trade transparency framework for ABS have? Which pre-trade information should be disclosed? In general, all necessary pricing information, bond characteristics and detailed cash flow information should be available. Depending on the asset class, there should be a standardized set of pool information, usually the same which is available to the rating agencies (cf. our response to IOSCO consultation on Asset Backed Securities (dated August 10 th, 2009)). The target should be to facilitate a thorough understanding of the underlying risk, both in terms of legal structure and securitized asset pool. The information should be published by information providers (Bloomberg, Reuters, etc) and broker/dealer firms. Question 18: On the basis of your experience, have you perceived a lack of pre-trade transparency in terms of access to and the content of pre-trade information available in the market for CDOs? See Question 13 Question 19: Is pre-trade transparency information readily available to all potential market participants? See Question 14 Question 20: Is pre-trade information currently available in the CDO markets consolidated and effectively disseminated to those market participants who make use of it? See Question 15 4

7 Question 21: Which potential benefits and drawbacks of a pre-trade transparency regime do you see for the CDO market? If you see drawbacks, please explain how these might be mitigated. See Question 16 Question 22: Which key components should a pre-trade transparency framework for CDOs have? Which pre-trade information should be disclosed? See Question 17 Question 23: Which of these criteria to determine the first phase of the phased approach do you consider most relevant? Are there other criteria which should be taken into account? Our members opinions on the subject are split. Some favour the criteria proposed. The original rating is most relevant and is also likely to be an indicator of likely trading frequency. Trading activity is roughly segmented into three groups: AAA, non-aaa and unrated. ABS class might also be a useful criterion: RMBS will generate much more data points than CMBS or CLOs. However, the proposed criteria are not free from criticism: a) Rating: The role of rating agencies in the past years has been a questionable one. Many ratings have changed. Furthermore, as most securitizations contain tranches with different ratings, there should be available information for the whole structure disregarding of the individual tranches. b) Issuance size: Does this relate to the total issuance size of a securitization or the individual tranche sizes? In case of the latter, that would mean that the largest = most senior = less risky tranches would be phased in first. c) Frequency of secondary trading: Difficult to observe; in addition, the more complex the structure, the harder to find secondary information. However, the transparency of more complex structures needs to be improved first. Some members suggest to take into account other criteria such as price, volume and trade time. Question 24: Do you have specific ideas on which kind of ABS and which kind of CDOs should be covered by the first phase? The most traded products should be the first to be covered. Also some specific instruments could be selected, e.g. CDOs, CLOs, CMBS. Question 25: Do you consider that it would be appropriate to use the same framework for post-trade transparency for corporate bonds and structured finance products? Please elaborate. Corporate bonds and structured finance products need different sets of post-trade information. Maturity is less relevant in identifying individual securities in the ABS/CDO space. The issuer name might include the tranche identifier (A1, B, C, etc.). The Bloomberg mnemonic plus the tranche is the standard identifier in the reporting system. The original notional of the tranche is a more commonly used indicator of size than volume. The actual volume is influenced by the pool factor and price, which can be quite low a low volume would not necessarily reduce the informational value of the trade. 5

8 Question 26: If so, do you agree that the same calibration parameters should be used for structured finance products as for corporate bonds? Or do you think different size and time thresholds should apply? The same time thresholds could be used as for corporates. However, the size thresholds for ABS should relate to the original notional rather than traded volume due to the mentioned effects of pool factor and price. Generally, sizes under notional are considered odd lots and are somewhat less valuable as a market indication. Question 27: On the basis of your experience, have you perceived a lack of pre-trade transparency both in terms of access to and the content of the information available in the market Yes, the CDS market itself is not transparent. In stress situations the availability and quality of information is even much lower than in normal times. BVI supports the idea of the EU Commission to clear all eligible-standardized CDS transactions on a CCP. Question 28: Is pre-trade transparency information readily available to all potential market participants? Our members put forward that there is still considerable asymmetric information. Question 29: Is pre-trade information currently available in the CDS market consolidated and effectively disseminated to those market participants who make use of it? No, such information is not consolidated and effectively disseminated. Question 30: Which potential benefits and drawbacks of a pre-trade transparency regime for CDS do you see? If you see drawbacks, please explain how these might be mitigated. The most important benefits would be efficient pricing and increased liquidity. No drawbacks were identified. Question 31: Which key components should a pre-trade transparency framework for CDS have? Which pre-trade information should be disclosed? Pricing, liquidity, volume and volatility are basic elements. Other components could be collateral, currency, rating of issuer and counterpart. Pre-trade transparency mechanisms might be similar to the ones in the interest rates futures (such as Bund, Bobl, Schatz, Buxl-Futures) that, for instance, have a cheapest to deliver bond and expire at certain dates. So far, single issuer CDS can only be bought on a customized basis which decreases liquidity in the market. 6

9 Question 32: In your view, would the post-trade transparency calibration parameters (i.e. transaction size thresholds, information to the published and timing of publication) proposed for corporate bonds in Section IV be appropriate for a) Single name CDS? and b) Index CDS? If not, please elaborate the reasons and propose alternative parameters (including justifications). Our members agree with these proposals. Question 33: In your view, should sovereign CDS be included within the post-trade transparency framework for CDS? And if so, should the calibration parameters for single name and sovereign CDS be aligned? If not, please explain why they should be different and propose an alternative approach for sovereign CDS (including justifications). Yes, sovereign CDS should be included and the calibration parameters should be aligned. Question 34: On the basis of your experience have you perceived a lack of pre-trade transparency in terms of access to pre-trade information on a) interest rate derivatives, b) equity derivatives, c) commodity derivatives and/or d) FOREX derivatives and the content of the information regarding these products available in the market? Most of our members do not see a lack of pre-trade transparency in the OTC derivatives market. However, we suggest that improvements could be realized by increased trading ot the above mentioned OTC-instruments at exchanges and trading platforms. Question 35: Is pre-trade transparency readily available to all potential market participants? Availability of transparent pre-trade information depends on the particular investors sophistication, resources, and the derivative product in question. A sophisticated institutional investor can achieve a high degree of pre-trade market transparency. An unsophisticated retail investor on the opposite will have less pre-trade information and transparency, but shouldn t be active in complex derivatives anyway. Question 36: Is the pre-trade information currently available in these markets consolidated and effectively disseminated to those market participants who make use of it? If necessary, please specify your answer by product. Most of our members agree that in general the information currently available is consolidated and effectively disseminated. Question 37: Which potential benefits and drawbacks of a pre-trade transparency regime for a) interest rate derivatives, b) equity derivatives, c) commodity derivatives and/or d) FOREX derivatives do you see? If you see drawbacks, please explain how these might be mitigated. A potential benefit of an increased pre-trade transparency regime for equity and commodity derivatives could be a reduction of implied trading costs for investors, producers and consumers. A potential drawback of increased market transparency could be a rise in derivative prices, because market makers could find it increasingly difficult to hedge themselves in a very transparent market environment. 7

10 Question 38: Do you believe that pre-trade transparency would be desirable for some or all types of OTC derivatives (i.e. equity, interest rate, forex and commodity derivatives)? Which key components should a pre-trade transparency framework for any of these above mentioned derivatives have? Which pre-trade information should be disclosed? Increased pre-trade transparency for OTC derivatives needs to take the following aspects into account: Pre-trade information is derived from historical trading data: volumes, prices and pricing factors should be disclosed. Pre-trade transparency of derivatives depends largely on the pre-trade information available for the underlying security and other factors/markets that affect the price of the derivative, e.g. interest rates, volatilities, etc. Increased pre-trade transparency could lead to higher derivative prices for investors, consumers and producers. A very high degree of pre-trade transparency could increase the cost of executing a large order substantially. Question 39: On the basis of your experience have you perceived a lack of post-trade transparency, both in terms of access to relevant information and the content of this information for any of the following markets: a) interest rate derivatives, b) equity derivatives, c) commodity derivatives and d) FOREX derivatives? In the view of most of our members there is no lack of post-trade transparency. Question 40: Do you believe that additional post-trade transparency would be desirable for all of the above instruments? If not, which ones would benefit from greater post-trade transparency? Increased post-trade transparency might be desirable for the OTC instruments. However, the BVI believes that disclosure of individual company positions to the public should be avoided in order to protect proprietary portfolio information. Disclosure of information on standard products (not custom-made products) aggregated at a sufficiently high level could be considered. However, it must be noted that disclosure of derivatives positions without information on other portfolio positions they could be hedging is of doubtful use and could actually be entirely misleading. A high level of post-trade transparency might lead to higher costs for derivatives end users (e.g. buy side firm) as soon as positions are disclosed to the public and closed only at higher costs for the market maker. In order to increase the credibility of derivative markets with the general public, high levels of aggregate statistics on positions, price and transactions should be disclosed by the CDR and/or relevant user group trade associations. Question 41: Is post-trade transparency readily available to all potential market participants? Does this vary by asset class? Post-trade transparency varies with investor sophistication and by asset class. Post-trade transparency is widely available for sophisticated and/or large investors. Transparency tends to be quite poor in the commodity markets. 8

11 Question 42: Which potential benefits and drawbacks of a post-trade transparency regime for a) interest rate derivatives, b) equity derivatives, c) commodity derivatives and d) FOREX derivatives do you see? If you see drawbacks, please explain how these might be mitigated. Increased post-trade transparency enhances the creditability of a derivative market. There is enough post-trade information available for exchange traded derivatives. Increased posttrade information for OTC-derivatives is desirable for equity and commodity derivative markets, but should be made public only at an aggregated and anonymous level. This could be mitigated if the individual information is only made available to the regulatory authorities. Question 43: Which are the key components (e.g. qualitative or quantitative criteria) which should be taken into consideration when designing such a post-trade transparency framework? Quantitative criteria could be trade date, volume, price, pricing factors affecting the price of the derivative. A qualitative criterion could be the disclosure of the type of market participant, but only on an aggregated level. Question 44: Do you think that a post-transparency regime could have some additional valuable externalities in terms of valuation, risk measurement and management, comparability and other uses in price discovering process on related underlying reference instruments? Some members believe that a post-trade transparency regime could add value in terms of valuation and risk measurement in the structured finance area. In other areas of derivative trading our members see less added value because of the time lag and technical market structure features. 9