Wire: Bloomberg News (BN) Date: Nov 20 2006 18:01:46 Regulator of Bonds in Europe Bows to Banks, Blocks Transparency By Steve Rothwell and Sebastian Boyd Nov. 21 (Bloomberg) -- The European Commission is rolling back a plan to provide greater protection to investors in the $15 trillion European market for corporate and government bonds, bowing to the world's biggest banks and the financial regulator in London. The Brussels-based commission, which makes rules for the 25 countries in the European Union, indicated that it will allow traders to police themselves instead of requiring the same data about bonds as for stocks. EU officials were rebuffed when the Financial Services Authority, led by John Tiner, said it opposes any rules that require banks to provide current prices or the value of securities they buy and sell. ``High levels of transparency aren't always beneficial for market users,'' the FSA, which oversees 70 percent of international bond trading, said in a Sept. 15 letter signed by David Lawton, head of market policy. When the U.S. made banks and brokers provide corporate bond prices in 2002, trading fees dropped by 50 percent. A similar rule in Europe could save investors as much as $10 billion a year, according to data compiled by Bloomberg. ``I'm not holding my breath,'' said James Gledhill, a fund manager who helps oversee $2 billion of bonds at New Star Asset Management in London. ``We'd like more transparency. There's no set official price at any time and those who hold that information guard it jealously.'' `Smaller Guys' More than $146 billion of European corporate and government bonds trade each day, twice as much as stocks in the region, according to the Centre for European Policy Studies in Brussels. Unlike shares, which are listed on exchanges that display the price of each transaction, fixed-income deals are negotiated privately. ``Smaller guys like ourselves would benefit'' from more information, said James Grayson, who manages a $165 million bond fund for Thesis Asset Management in Chichester, England. ``We don't really have any transparency at all.'' European Union officials have until July to draft new bond rules as part of a broader plan to reduce differences in securities regulations across the region, known as the Markets in Financial Instruments Directive, or Mifid. The EU said last week it is getting advice from national regulators and a panel that includes representatives from Paris-based BNP Paribas SA, Frankfurt-based Deutsche Bank AG, UBS AG in Zurich and four more securities firms. Side Effects Charlie McCreevy, the former Irish finance minister who's now the European Union commissioner responsible for financial markets, will recommend rules on bonds next year. The European Commission already agreed that it won't force banks to provide more bond information unless there are ``no harmful side effects,'' according to a statement released last week. London fought off previous attempts to regulate the bond market. In 1999, the U.K. government blocked European Union plans for a 20 percent tax on interest, arguing the rule would prompt investors to move money to countries with lower taxes, like Switzerland and Luxembourg. The Financial Services Authority, whose offices in London's Canary Wharf are sandwiched between Barclays Capital, the biggest underwriter of European bonds, and Bank of America Corp., No. 2 in the U.S., collects fees from the firms it regulates. Its board of directors includes Morgan Stanley's chief U.K. economist David Miles and former executives of Amsterdam-based ABN Amro Holding NV, HBOS Plc in Edinburgh, and New York-based Citigroup Inc. Davies, Tiner, Sants Howard Davies, the regulator's previous chief executive officer, is a vice chairman of Morgan Stanley in London. Tiner, the current CEO, is a former partner at Arthur Andersen LLP, the accounting firm. Chairman Callum McCarthy worked at Barclays before joining the public sector in 1998. Hector Sants, who runs the wholesale and institutional markets unit, is a former banker from Zurich-based Credit Suisse Group, and ran its investment bank in Europe before joining the FSA. The FSA doesn't see transparency as ``the problem or the answer,'' Lawton, the markets policy chief, said at a conference in Brussels last month. ``The concern on the side of the dealers is that if the details of their trades are published they will face greater risk,'' Tim Rowe, an FSA associate responsible for markets policy, said in an interview last week. ``Greater risk may mean that dealers will withdraw liquidity and clients won't be able to get trades done.'' In the U.K., only 1 percent of households are direct buyers of government bonds and fewer still own corporate debt, the FSA says. Between 20 and 30 percent of families own shares. Parmalat Losses Italian regulators led the push for more disclosure of bond prices after Collecchio-based dairy company Parmalat SpA and Argentina's government defaulted, costing more than 450,000 savers at least $15 billion, FSA data show. Individual investors in Europe's fourth-largest economy have about 40 percent of their savings in bonds, according to Datamonitor Plc, a London-based financial information provider. Ensuring transparency is a ``moral duty,'' said Claudio Salini, head of market and economic research at Rome-based Consob, the government's securities regulator. ``The market rarely suffers from greater transparency,'' he said at a conference in Brussels last month. Manlio Pisu, a Consob spokesman, declined to add to Silani's remarks. Italians struggle to get prices on the most-traded corporate bonds, such as those sold by Detroit-based General Motors Corp., said Stefano Cuccia, head of supervision at Milan- based TLX SpA, a bond and stock market for individual investors. TLX lists 800 bonds. There are 130,000 international bonds, according to the International Capital Markets Association in Zurich. More Confidence ``The typical situation in Italy is that a client goes to the bank and says I'd like to buy such-and-such of General Motors bonds listed in Luxembourg that's traded all over the world, and they don't find any kind of pricing for it,'' Cuccia said. More information can ``enhance retail investors' confidence in the market,'' he said. In the U.S., corporate bond traders are required to post prices 15 minutes after every deal through the NASD's Trade Reporting and Compliance Engine, or Trace. The system is responsible for reducing the amount institutional investors pay to trade bonds to $1.24 per $1,000 from $2.80, according Bloomberg data and a survey published in the Rochester, New York-based Journal of Financial Economics. ``We would find similar results if transparency is imposed'' on Europe's corporate bond market, said Kumar Venkataraman, a professor who lectures on portfolio management at the Southern Methodist University in Dallas and co-authored the Journal of Financial Economics study. Lower Fees Bond traders in Europe charge an average 53 cents per $1,000, according to the Centre for Economic Policy Research, or CEPR, in London. Cutting that fee to 27 cents would reduce annual commissions on bonds traded in Europe to about $10 billion. European fees already are lower because the U.S. market is dominated by five or six firms, while the European market has about 25 dealers for most bonds based in different countries that compete across national borders, the CEPR report said. ``Market sentiment is quite strongly to the effect that there are no or no significant problems, and that there are no proven market failures that would justify regulatory intervention,'' the European Commission said in the statement last week after receiving comments on its proposals from 59 banks, industry groups, exchanges and regulators. The Securities Industry and Financial Markets Association in New York and at least 10 more trade groups have spent two years trying to fend off the proposal. New York-based Goldman Sachs Group Inc., the most profitable securities firm, told regulators that imposing transparency is ``unnecessary.'' Deutsche Bank, Germany's biggest bank, warned of ``undesired'' consequences. ABN Amro said it may ``damage'' the market. Bloomberg LP, parent of Bloomberg News, said the FSA was correct in concluding that mandatory bond transparency is unnecessary in Europe. Higher Prices Individual investors in Europe typically pay higher prices for bonds than institutions. HVB Group in Munich offered to sell Duisburg, Germany-based steel trader Kloeckner & Co.'s 10.5 percent notes due 2015 to institutions for 118 cents on the euro, according to closing prices on Nov. 16. Close Brothers Sydler AG in Frankfurt, which caters to individuals, was charging 121.5 cents for the same bonds. The difference cost 43 basis points, or 0.43 percentage point, in yield. ``Self-regulation isn't enough,'' said Fernando Zunzunegui, a professor of banking and securities law at the Carlos III University in Madrid. Zunzunegui wrote a response to the Commission on behalf of FIN-USE, a Brussels-based forum set up by the EU to advise on financial consumer issues. ``We propose introducing the regulations in the equity markets to other markets with adaptations to the specific structures of the markets.'' --With reporting by Mark Pittman in New York, John Rega in Brussels and John Glover in London. Editor: Serkin Story illustration: Story Illustration: For all top bond news click {TOPH }. For new European bond sales click {NIM4 }. Click {TRAC } to see bonds on the TRACE system. To contact the reporter on this story: Steve Rothwell in London at (44) (20) 7673-2365 or srothwell@bloomberg.net or Sebastian Boyd in London at +44-20-7673-2075 sboyd9@bloomberg.net To contact the editor responsible for this story: Gavin Serkin at +44-20-7673-2467 or gserkin@bloomberg.net [TAGINFO] GS US CN DBK GY CN WHS LN CN PLT IM CN 1310Z AR CN NI GREET NI CREDIT NI EUROPE NI BON NI UK NI CORPFIN NI EUB NI BELGIUM NI ITALY NI FSA NI GBN NI SCR NI ABS NI CDRV NI EBN NI CONSOB NI GOV NI EMC NI RULES NI LAW NI MIFID #<582239.227424.1.0.23.26954.25># -0- Nov/21/2006 00:01 GMT -----------------------------====================------------------------------ Copyright (c) 2020, Bloomberg, L. P. ################################ END OF STORY 1 ##############################