Panacea or Problem?

In light of the ongoing review of the Markets in Financial Instruments Directive (MiFID II), this latest research from TABB Group investigates the potential impact of the review’s pre-trade transparency proposals on the fixed-income market, its participants and the real economy.

TABB Group’s research on fixed-income markets illustrates an industry struggling under the weight of the current economic climate, a decline in risk appetite and concerns over impending regulation. This sentiment comes not only from banks and dealers, but also from institutional investors frustrated at their inability to find liquidity, companies frozen out of the debt markets, and sovereign issuers that are progressively becoming reliant on domestic investors as international financiers retreat.

TABB Group, which was founded in 2003, is a global financial market research firm that conducts research based upon an interview-driven methodology. Our research for this report is gathered from comprehensive interviews with market participants covering a wide spectrum of investors (both institutional and retail), trading venues, market makers, as well as company and government issuers. In addition to the interviews conducted for this report, TABB has also drawn on other surveys conducted during the past six months regarding similar regulatory issues for the fixed-income market, which include a further 100-plus interviews. The majority of market participants interviewed expressed their concerns about the proposed regulation further hampering liquidity, increasing trading costs, and ultimately making it more difficult for issuers to raise capital and for investors to achieve the necessary yields over time.

For this report, TABB Group examines the current structure of the debt markets and the increasingly important role they play in the wider economy. The study explains why debt markets are distinct and cannot be viewed in the same light as equity markets, and why they require different investment, distribution and trading structures. We then investigate the various types of debt trading structures, the notion that fixed-income markets are primarily institutional, the role of primary versus secondary market activity, and how the secondary market operates in relation to indicative pricing, firm quotes and actionable orders. The final section of the study looks at the regulatory changes proposed in MiFID II and the effects they will have on pricing, disclosure, order execution and the ability to raise capital.