The UK’s Financial Services Authority is looking at whether it needs to improve transparency in its secondary market for bonds.

The FSA has published a discussion paper that examines whether there is a need for the provision of greater pre- or post-trade price information in the secondary bond markets. The regulator says that the paper is designed to stimulate debate amongst market participants, and to enable the FSA to develop an appropriate policy on trading transparency in advance of the European Commission’s consideration of the issue, expected to begin early in 2006.

The question of improving transparency in the bond market has long been an issue in Canada too, where trade transparency lags far behind the equity market. The Bank of Canada has pledged to work with securities regulators to improve transparency for retail investors in the primary market. And, there have been other improvements, such as the launch of CanPX Inc. But there is mounting pressure for improved bond market transparency in world markets.

The FSA said it was prodded to consider the issue by the pending review by the EU, but also because the International Organisation of Securities Commissions has asked regulators to assess the appropriate level of transparency for their corporate bond markets and how this information is consolidated. Also, there has been increased interest from retail customers throughout IOSCO markets and, in the UK, an increase in retail investment in bond funds; increased institutional activity as many long-term investment funds have reweighted their portfolios in favour of bonds; and the implementation of a post-trade transparency system for corporate bonds in the United States.

In April 2007, a comprehensive pan-European Union transparency regime for the trading of shares on EU regulated markets will be introduced. Initially this will apply only to shares, but the European Commission will also consider whether the scope of these requirements should be extended to other asset classes including bonds.

“The FSA is publishing this paper now in order to encourage the development from first principles of a thoughtful approach to whether there is any need for increased transparency in the secondary bond markets,” Hector Sants, FSA managing director for Wholesale Business, said. “In developing our views, we will look in particular at the current role of transparency, and whether there are any possible market failures caused by a lack of transparency in the UK and EU bond markets. We will also be seeking views on the practicalities of any regulatory change in this area.”

The FSA’s paper does not propose any new rules in this area. The FSA says it believes there is a need to establish in the first instance if there are any market failures in bond markets being caused by insufficient transparency which need to be remedied by new regulations.

As part of its follow up to publishing the paper, the FSA will host a roundtable with market participants and fellow European regulators will be invited to discuss these issues further.