EFAMA supports achieving greater transparency through reform of the bond deferral regime. We would like to offer some feedback that suggests a different calibration on both liquidity thresholds, and the determination of trade size buckets.

We appreciate the analysis carried out by ESMA, which offers a solid basis for the review of the bond deferral regime. Nevertheless, we would like to provide some feedback on the proposed approach, which we believe can be further finetuned:

• While we agree that greater transparency, particularly for smaller trade sizes within more liquid instruments, we question the starting point of ‘90% of trades’ being subject to real-time transparency. This appears somewhat arbitrary and should be reconciled with other considerations like avoiding undue risk for liquidity providers.
• The groupings for the bond categories can also be streamlined:
  • We believe that the 6 largest sovereign issuers (DE/IT/FR/ES/US/UK) need to be in their own grouping. The liquidity of different currencies also varies and should be reflected in the final groupings within the sovereign bond category. Putting all sovereign issuers in one basket is highly distortive and produces inadequate results when trying to determine thresholds. 
  • Therefore, we propose 2 groupings of sovereigns: the 6 largest as group1, and group2 which would be considered as more illiquid sovereign bonds, e.g., illiquid EM (emerging markets)
  • Other public bonds should have their own grouping and not be merged with sovereigns.
• One important element is missing from the proposed methodology: the notional time to trade out of risk is not taken into account. We believe that analysis of average daily volume data for the proposed bond category can help determine if the calibrations are adequate and the resulting deferrals appropriate given the number of days required to trade out of positions. - The AMF study on French corporate bonds also uses this ADV methodology to arrive at a quantitative measurement of trade out times. It needs to be clear, however, that quantitative measurement of trade out times only measures the status quo but not trade out times that are only reflecting the time needed to trade out of undue risk. Trade out times in practice are driven by a number of factors such as commercial profit and capital requirement considerations. Trade out times therefore could be shortened in a number of categories. 
• Analysis of trade data also showed that undue risk was especially present for the illiquid instruments, again demonstrating a need for different thresholds. 
• The analysis undertaken by ICMA and AFME, unequivocally points to different issuance size thresholds, and trade size thresholds. The former (liquidity thresholds) should be higher, and in many cases, the latter (trade sizes) should be higher. The one exception, borne out by the data, for smaller trade sizes, is the 6 largest sovereign issuers. 
• For categories 3 and 4, it would make more sense for those large trade sizes to opt for publication on price at T+1, instead of current End of Day. 
• Finally our members believe that the liquid 6 largest sovereign issuers (DE/IT/FR/ES/US/UK), especially fixed coupon and less than 11 year maturity straight bond issues, do not require a T plus 4 weeks price and volume deferral. These could be substantially shortened.

The European buy-side is exploring an alternative model, based on the ESMA proposal. However, given the timing of the consultation over the summer, and the fact that the review of thresholds and trade sizes requires precise quantitative analysis, we are unable to include anything, though we may publish a proposal separately, in coming weeks.