Pre-Trade Bond Transparency: Understanding the MiFID II Maze

The world of fixed income trading in Europe is changing – and fast. The European Securities and Markets Authority has now published its Regulatory Technical Standards (RTS) in relation to pre-trade transparency for bonds, requiring firms to make traditionally opaque processes transparent.

Establishing the relevant obligation per bond pre-trade together with new reporting and best execution requirements will require a wholesale switch to automated processes by many. Buy-side firms will now need to embrace automated workflows to ensure they can achieve compliance at point of trade. More automated flow and more data points will equal a reduction in information flow controlled by traditional bilateral trading desks. As a result, fixed income trading will slowly shift to a quasi-agency model from a capital intensive principal-based model.

The fact that the regulation is emerging at the same time as profound change within the European fixed income markets adds to its significance. Whether this is because of, or aside from, European regulation is up for debate; the reality is that the world order axis has already begun to pivot. European investment banks are fighting to keep a seat at the table, realigning capital to ensure they deliver a return on equity; changing both the products and services they are willing to offer their clients, as well as selecting which clients will be the beneficiaries.

As the sell side retracts, evaluating the clients and balance sheets they want to put to best use, buy-side dealing desks will be forced to look elsewhere for trading partners. Investors still need to find and access liquidity, but many fixed income electronic platforms are far from where they need to be. As the disruptors move in, the ability for the buy side to connect instantaneously with new sources of liquidity will challenge traditional fixed income businesses models still further. The winners on the sell side will be those that are lean and nimble, with the ability to create automated, scaleable business models.

Yet automation models based on equities trading will not provide the answers. Here automated processes are built around order facilitation – not order creation. Improving pre-trade information flows could build the potential to trade by unlocking nascent liquidity, as well as the need to focus on TCA and venue analysis for best execution purposes.

The crack in the dominance of traditional fixed income bilateral relationships is now self-evident. As execution ownership shifts to the buy side, how liquidity is formed and trades are executed will continue to evolve, necessitating a change in both the products and services required. Greater transparency in bond markets is under starters’ orders and the necessary innovation in technology to support this has only just begun. TABB Group have broken down the various constituents of the Regulatory Technical Standards to provide a detailed look at the new obligations and what they will entail for all market participants across the globe.