Fewer than 200 covered bonds will probably qualify as liquid for the purposes of MiFID II pre-trade transparency, according to the head of ESMA’s markets department, who said a recently-announced delay to implementation should not be used to rewrite proposed rules.

The number of covered bonds facing pre-trade transparency requirements under MiFID II/MiFIR was detailed by Rodrigo Buenaventura, head of markets department, European Securities & Markets Authority (ESMA), speaking at an AFME Spanish funding conference in Madrid on Thursday of last week (11 February). He said that the number is equivalent to fewer than 3% of covered bonds in the EU.

The new Markets in Financial Instruments Directive/Regulation is aimed at improving transparency and thereby liquidity in financial markets, extending requirements that previously applied to equities to fixed income products, derivatives and some other instruments that are traded on trading venues in the EU. However, many covered bond market participants have argued that the requirements of the planned regime could be counterproductive.

Buenaventura noted that there has been a debate as to whether ESMA’s plans are too stringent or too lax. He said that there have been calls from some parties for the rules to be written in such a way that fewer than 1% of covered bonds would face pre-trade transparency.

“We disagree,” he said, “as otherwise it is not a meaningful pre-trade transparency regime.”

He stressed that the rules will “bite” in “a very small part” of the market, noting that for MiFID II in general exemption from pre-trade transparency requirements is in practice “the rule and not the exception”.

For those securities that are considered liquid, pre-trade transparency will only be required for trades under a threshold (the size specific to the instrument, or SSTI) that for covered bonds is to be set at a lower level than for other instruments. The SSTI for covered bonds is to be set at a level whereby 40% of trades are included, whereas for other instruments the cut-off is to encompass 60% of trades.

The general regulatory treatment of covered bonds, beyond transparency, is “peculiar” but often “on the favourable side” under a variety of frameworks, noted Buenaventura, who cited their “excellent track record” during the crisis. He said that covered bonds are also being given their special treatment under MiFID II in recognition of the specificities of the market.

“The key question is what regulatory approach covered bonds should have to foster this market in a secure and sound manner,” said Buenaventura.

The day before Buenaventura spoke, the European Commission announced a one year delay, to 3 January 2018, of the date by which regulators and market participants have to comply with the new regime, citing technical implementation challenges.

“Meanwhile, we are pressing ahead with the level II legislation to implement MiFID II and expect to announce those measures shortly,” added Jonathan Hill, Commissioner for Financial Services, Financial Stability and Capital Markets Union.

ESMA was responsible for drafting technical standards for the new regime and Buenaventura said that he hopes that the European Commission will adopt the current proposals without any changes. He added that reopening the level I legislation would be a “Pandora’s box squared”.