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02 March 2015

ICMA responded to ESMA’s MiFID II Consultation Paper

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Due to its complexity, ICMA considers the only true way to calibrate liquidity is daily (trading) behaviour. Any other methodology, the Association warns, will generate a high proportion of false liquidity.

ESMA’s proposals need considerable refinement if they are to become ‘fit for purpose’ in serving the needs of all market participants in the international bond markets, including investors. ICMA also understands ESMA’s ambition to devise a regime for classification which is reasonably simple to implement. 

The ICMA response is two pronged. First, they consider it is necessary - if the classification is to be sensitive enough - to include elements of the Instrument by Instrument Approach (IBIA) alongside COFIA (Class by Class) in a ‘Hybrid’ approach. ICMA has deliberately designed the ‘Hybrid’ approach as far as possible to meet ESMA’s ‘simplicity and predictability of calculation’ criterion. ICMA considers that it is not possible to protect the interests of market users properly using COFIA alone. If ESMA continues to be of the view that COFIA alone is necessary - in the interest of regulatory simplicity, it will be vital to at least reduce the ‘Large in Scale’ (LIS) and ‘Size Specific to The Instrument’ (SSTI) thresholds for determining market transparency obligations.

A major reason why ICMA has proposed a hybrid IBIA/COFIA model as a preferred method of determining liquidity is that on page 104 of the Consultation Paper in Table 5, 42% - 74% of the instruments listed by ESMA as liquid are in fact illiquid. Throughout ESMA’s discussion of COFIA, ESMA has materially understated the importance and number of false positives (inaccurate classification of instruments and trades as liquid when in fact they are illiquid) that COFIA throws up. Such a high level of false positives (between 42% and 74%) would clearly be inappropriate, and will be highly damaging to the markets, including investors.

ICMA disagrees with the subclass criteria defined in the Consultation Paper. ICMA considers that ESMA’s definition of a liquid market for bonds needs more granularity in order to define more homogeneous classes. ICMA considers that ESMA’s definition of a liquid market and its parameters and thresholds for bonds needs refinement. ICMA disagrees with ESMA’s view as to where it is appropriate to set the boundary between liquid and illiquid classes, and considers that ESMA’s definition of a liquid market for bonds needs more refinement and calibration (including criteria, parameters and thresholds).

Full ICMA response


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