CESR publishes today a consultation paper on the transparency of non-equity markets (Ref. CESR/08-1014). Given the recent market crisis, the consultation seeks to gather views that will assist CESR in analysing the role of trade transparency on markets for corporate bonds, structured finance products and credit derivatives. In relation to corporate bonds, the objective of CESR’s work is to review whether CESR’s conclusions on trade transparency in bond markets, published in August 2007 (Ref. CESR/07-284b), remain appropriate in light of the experiences from the recent market turmoil. Regarding structured finance products and credit derivatives, the key question CESR seeks to consider is the extent to which post-trade information plays a role to support price formation, reinforce valuation practices and provide supplementary information about the scale of credit risk transfers.
Transparency of corporate bond markets
In its advice to the European Commission on trade transparency in the non-equity markets (Ref. CESR/07-284b) in August 2007, CESR noted that it had not seen evidence, at that stage, of a market failure in relation to trade transparency which would have warranted mandatory transparency for bonds. However, CESR concluded that some re-distribution of the existing transparency information could be useful to help retail participants and noted that there were some market led initiatives that, once in place, should be evaluated to establish if these had addressed potential concerns.
Given the recent financial crisis, CESR decided however to re-evaluate these conclusions as a matter of urgency and consequently, in its consultation paper published today, notes that it is not of the view that insufficient post-trade transparency was the key reason behind the problems of the corporate bond market, nor does it believe that additional post-trade transparency would be able to solve these problems as a singular measure. However, CESR believes that there would be value for market participants in receiving access to greater post-trade information. CESR notes that it is willing to explore with market participants whether additional post-trade transparency could play a role in supporting a return to more normal market conditions in the corporate bond markets and be of value thereafter. CESR is therefore seeking to hear from market participants, as to whether they share this view and whether they consider that an approach which distinguishes between the needs of participants active in the wholesale market from those active in retail market might be appropriate.
Market participants are also asked to provide their views on the sufficiency of trade information available on corporate bond markets, and in particular whether more trade information would be required in order to comply effectively with best execution requirements. Furthermore, in this context, CESR is also seeking to identify the experience of market participants who use the U.S. Trade Reporting and Compliance Engine (TRACE) and to establish what conclusions, if any, can be drawn from this.
CESR has also analysed the existing market-led solutions and noted that they focus on aggregated and delayed data and have a limited coverage in terms of issues and transactions covered as well as institutions providing the data. However, at this stage CESR considers that market-led solutions in this area could still be appropriate provided that they can deliver an adequate level of post-trade transparency in a timely manner and are subject to close external monitoring.
Transparency of structured finance product and credit derivatives markets
In order to analyse whether a post-trade transparency regime could be envisaged for structured finance products and credit derivatives, the consultation paper describes the main characteristics of those markets, providing background on the recent turbulence and highlighting the expansion of new financing techniques based on securitisation.
CESR is of the opinion that post-trade information plays a role in these markets, although CESR notes that insufficient post-trade transparency may not have been the key reason behind the recent market turmoil and additional post-trade transparency would not be able to solve the different problems experienced in the structured finance market as a single measure on its own. However, the appropriate level of transparency should be calibrated taking into account the relevant instruments, their trading methods as well as market participants active in the markets for these instruments. In light of the above, CESR is particularly interested in receiving the views of market participants on any specific technical, market impact or efficiency reasons that might limit the introduction of a post-trade transparency framework for these instruments.
Consequently, CESR puts forward a number of questions in order to further develop its conclusions on the extent to which post-trade information plays a role to support price formation, reinforce valuation practices and provide supplementary information about the scale of credit risk transfers for Asset Backed Securities, Collateral Debt Obligations, Asset Backed Commercial Papers and Credit Default Swaps in Europe’s secondary markets.
CESR invites responses to the consultation paper. All contributions shall be submitted online via CESR’s website (www.cesr.eu) under the section "Consultations" by 19 February 2008. In addition to general comments, we would appreciate receiving your views on the specific questions presented.