The UK’s asset management trade body has proposed a set of measures to increase transparency in fixed income markets in light of new regulatory requirements for managers to demonstrate “best execution” of bond orders.
The Investment Association (IA) also called for a “more nuanced” approach to bond trading, saying execution had to be understood in the context of the investment process.
“If this context is absent in the analysis, it will simply not make sense, like trying to make sense of a story based only on the last page,” the trade body said in a paper.
Under MiFID II, asset managers have to be able to demonstrate that they have taken “all sufficient steps” to achieve the best possible result for clients when executing trade orders.
A lack of data in the fixed income market posed a challenge to this, however, according to the IA.
“The absence of data in parts of the fixed income universe can make best execution difficult to frame,” it said.
Using a quantitative methodology derived from the equity markets in illiquid fixed income markets was “a blunt instrument” without the data to support it.
Although the bond market would be able to move towards a more quantifiable model of assessing best execution as it became increasingly electronic, this evolution was taking place “slowly and unevenly” and data was still “excessively expensive”, according to the association.
Calls to action
To increase the availability of data in the fixed income market and improve transparency, the IA recommended the development of a “consolidated tape”, an electronic system that would provide real-time data on trading volume and price.
It also recommended regulators take steps to reduce data costs.
Galina Dimitrova, director of investment and capital markets at the IA, said: “Asset managers are concerned that the poor availability of data in the bond market is undermining transparency.
“Our recommendations aim to improve the availability of data, which will ultimately deliver better returns for end investors.”
Another welcome measure, according to the IA’s fixed income traders committee, would be a limited easing of capital requirements on brokers to allow them to hold more inventory and enhance market liquidity.