The most important outstanding issue of MiFID is the application of pre- and post-trade transparency requirements to non-equity markets. Although the general conduct of business provisions apply to all financial instruments, the pre- and post-trade transparency requirements apply only to equity markets for the time being. Article 65.1 tasked the Commission with conducting a study to report by 31 October 2007 on whether the transparency requirements ought to be extended to classes of financial instruments other than shares.

This chapter presents the pros and cons of introducing greater transparency into non-equity markets, especially bonds. It highlights the insufficient level of data available to market participants and regulators on volumes and aggregate bond market activity, as well as the lack of appropriate information made available to retail investors, suggesting that dealers may have little time to come up with a solution, and that an industry code of conduct may be an appropriate avenue to introduce more transparency, preferable to legislative initiatives.

Introduction

The debate on bond market transparency is a difficult one, owing to the complex interaction and possible trade-offs between the policy objectives of market liquidity, transparency, stability, efficiency and investor protection. All of these are valid policy objectives; the critical challenge becomes one of finding the appropriate mix.

Pre- and post-trade transparency may equally enhance or harm market liquidity and efficiency, depending on how they are applied, by whom, for what instruments, in which markets and at which latency.