The regulatory changes keep coming this month, with ESMA’s new supplementary deferrals coming into effect on the 4th May as well as an additional update on what constitutes an ‘EU Bond’.
In the above criteria, the EU referred to bonds issued out of the European Union Legal Entity (to be precise, under Legal Entity Identifier: 529900FZRK8FGMPEOM08).
On 12th May, ESMA released an update to their Manual on Post Trade Transparency1.
ESMA updated page 312 (footnote 52 of the manual) which changes the criteria for ‘EUSB’ bonds within the Group 1 category and now states:
As a result of the ESMA update, additional legal entities along with the European Union are eligible for inclusion as an EU Bond, these are:
The above three issuers have sat in Group 2 up until now, and Chart 1 below illustrates the typical deferral breakdown.
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EIB is by far the most active issuer, but proportionally has the highest amount of very large deferred activity. This is because there is more large institutional volume on this issuer than on ESM and EFSF.
As this analysis reflects the data available to date, we do not see trades using the new supplementary deferral guidelines. As these instruments move into ESMA’s Group 1 category, it is likely the OMIS (volume omission) and FULO (full details) flags will increasingly be used as adoption rises (these flags were discussed in Propellant Insights Issue 33).
Having seen the current situation, we now turn our attention to the future - specifically, how a shift into Group 1 could affect the deferral profile for these three issuers. Chart 2 below seeks to illustrate the potential impact.
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In Chart 2, it is apparent that the deferral buckets are not impacted in a uniform fashion. This suggests the typical deferral time is expected to decrease because many trades previously categorised as ‘Large Liquid’ would be ‘Medium Liquid’ in Group 1 (and therefore subject to shorter deferral periods).
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“Chart 3 shows that bonds issued directly by the European Union make up the vast majority of secondary activity for EU Sovereign Bonds. The other three issuers, with EIB the biggest, collectively contribute around 8% of volume. The increased transparency within this subset of issuers will be welcomed by those keen to see activity in a shorter time frame.”
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