Companies in the European Union may face an “alarming” surge infunding costs if the bloc's markets regulator pushes too manytrades into the light, a bloc-wide business lobby said.

The European Securities and Markets Authority (ESMA) is fleshingout trading rules, including increasing pre- and post-tradetransparency requirements for non-equities such as swaps and bonds.A public consultation on implementation of the law known as MiFIDII ends on March 2.

“The potential impact of the rules is really alarming,” ErikBerggren, a policy adviser at Brussels-based lobbyistBUSINESSEUROPE, said last week in an interview. “It would beextremely worrying if an inappropriately calibrated transparencyregime would depress liquidity and result in increased borrowingcosts.”

Under the ESMA proposals, traders would have to disclose pricespublicly on at least 190 billion euros (US$220 billion) ofcorporate securities, Bloomberg calculations based on theregulator's guidelines show. The EU Directive on Markets inFinancial Instruments became law in June 2014. ESMA is seekingviews on how to put the legislation into practice in 2017.

The rules on pre-trade price disclosure target bonds traded onexchanges and other regulated platforms. They apply to instrumentsjudged to be liquid, with a system of exemptions in place to shieldsome trades, such as large block transactions.

For post-trade transparency requirements, the scope will bewider, as over-the-counter trades will also be caught if the bondhas previously been traded on a regulated platform. Deferral ofpublication can apply if certain criteria are met.

ESMA's draft implementing rules include standards fordetermining when a bond is liquid or not, and for applying thedifferent waivers and deferral rules.

Sidika Ulker, director for capital markets at the Associationfor Financial Markets in Europe (AFME), said it's too early topredict what the impact of the MiFID rules will be.

“No other region in the world has a pre-trade transparencyregime similar to that proposed by ESMA for fixed income,” so“there is nothing to compare with,” she said.

AFME represents international lenders including Deutsche BankAG, BNP Paribas SA, HSBC Holdings Plc, and Royal Bank of ScotlandGroup Plc.

BUSINESSEUROPE's Berggren called for ESMA to conduct an impactassessment on the rules to answer industry concerns. The lobbyinggroup represents national business federations in 33 countries.

Illiquid Markets

ESMA Chair Steven Maijoor objected to the idea that moretransparency will be costly for issuers.

“I don't agree with that, because in certain cases you need tohave more transparency to make sure that the market starts towork,” Maijoor said in a Jan. 19 interview in Hong Kong. “I fullyagree that in some cases, for example in very illiquid markets orin the case of large trades, that in those cases transparency willhurt.”

Maijoor said ESMA's goal is to make the bond market better andmore liquid. “You need to carefully apply transparencyrequirements,” he said. “There will be more than we have now. Itwill be applied to a select group of bonds.”

It falls to ESMA to propose draft implementing measures to makeMiFID II operational. It then submits its proposals to the EuropeanCommission, the EU's executive arm.

“Enhancing market transparency in bond markets is an essentialobjective” of the updated MiFID rules, the Brussels-basedcommission said. “This will allow for efficient and fair priceformation in these markets.”

Legislators faced competing calls from different parts of thefinancial services industry when discussing how far the rulesshould go in overhauling the bond market. While trading venuescalled for tough transparency rules, banks said some proposedmeasures could damage market liquidity. Fund managers also raisedsome concerns.

Transparency of corporate bond pricing “is very poor,particularly during periods of market stress and in the moresubordinated securities,” said Andy Li, a London-based fund managerat GLG Partners LP. “We would welcome any improvements in pricingtransparency.'

–With assistance from Alastair Marsh, John Detrixhe, and BenMoshinsky in London and Eduard Gismatullin in Hong Kong.

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