The European Securities and Markets Authority (ESMA) last week published a newly available liquidity dataset for bonds subject to the pre- and post-trade requirements under MiFID II and MiFIR.
Its quarterly liquidity review covers bonds available for trading on EU venues, with some 520 liquid bonds included this time. The assessment of the bonds is based on a range of liquidity criteria, such as the daily average trading activity (trades and notional amount) and percentage of days traded per quarter.
The total number of liquid bonds freely trading on exchanges this quarter is slightly down from six months ago, when 594 bonds were subject to transparency requirements, and significantly down from May 2018, when nearly 1,000 bonds were considered liquid for reporting purposes. Post-trade reporting is not required where the securities do not have a liquid market, or where the transaction size is above large-in-scale thresholds (LIS).
Such a shift underlines the concerns of policymakers that many bonds are becoming more and more illiquid, as banks and other intermediaries step back from their traditional market making role and some managers lean toward higher yielding, less tradable assets.
In particular, illiquidity could become a major issue in the high yield space, according to ESMA, with the regulator revealing last September that up to 40% of European high-yield bond funds wouldn’t have enough liquid assets to meet investor redemptions if a market shock occurred.
Meanwhile, the ongoing Woodford fallout suggests it’s not just illiquid fixed income sectors that could become troublesome in the future. With ESMA and the FCA recently putting firms on notice, liquidity will remain a key focus ahead of new stress test rules being rolled out later this year.