Colombian government debt trades supposedly worth hundreds of billions of euros are at the centre of a mystery in Europe’s bond markets, where tough new reporting requirements continue to puzzle traders and analysts alike.
While examining regulatory data, George Bollenbacher, head of fixed income research at capital markets consultancy Tabb Group, identified that €491bn-worth of trading in one Colombian government bond was executed in the European Union in the second half of 2018.
Under EU rules that came into force at the start of last year, trades in such debt instruments must now be reported to national regulators if they are deemed liquid enough to support price formation and oversight in fixed income markets.
The Colombian trades offer a fresh example of the difficulties regulators have obtaining clean data, as their value appeared to Bollenbacher to be far higher than the market would expect to see in trading of such securities.
In a report on Europe’s bond markets published this month, Bollenbacher said: “There is clearly something wrong with the data for Colombia bonds... which obviously casts significant doubt on the accuracy of all the data.”
The analyst’s suspicion is that the trades were reported in Colombian pesos, not converted, and then presented as euros, greatly exaggerating their value — one Colombian peso is equivalent to €0.0002.
Bollenbacher was studying data from the European Securities and Markets Authority, the regulator responsible for gathering these numbers from national authorities, such as the UK’s Financial Conduct Authority. Bollenbacher said in his report that he had asked Esma for an explanation but not received a response.
A spokesman for Esma told Financial News that the regulator was aware of the issue and working with national authorities to reduce the occurrence of errors like this in the future.
Esma has been collecting this data since the introduction of the EU’s revised Markets in Financial Instruments Directive in January 2018. Mifid II is intended to bring more transparency to markets. It requires traders to publish live data on the price and size of the most heavily traded — or liquid — bonds to ensure regulators have a clearer view of the opaque market for these assets. The Esma spokesman said the reporting error on the Colombian bonds had not impacted their liquidity status.
The quality of the data being reported has repeatedly been called into question as traders attempt to adapt to the new EU requirements.
Little more than a year after the introduction of Mifid II, Markus Ferber, a prominent politician who helped craft the rules, raised concerns about a “worryingly low” number of bonds being subject to real-time reporting requirements. Shortly after Bloomberg, the financial data company, changed the way it gathers information on European bonds in another example of Mifid II teething problems.
In a December 2018 report, trade body the International Capital Market Association said there had been a “number of shortcomings” in the “accessibility and quality of pre and post-trade data” in the first year of Mifid II.
Constantinos Antoniades, head of fixed income at Liquidnet, the trading network, said data produced for corporate bonds since the introduction of Mifid II is of “very little value” to banks and investment managers because “pre-trade transparency and real-time post-trade transparency has only been mandated for a very small number of super liquid securities”.
Paul Reynolds, head of fixed income at TradingScreen, a technology provider, said: “Esma's original objective to bring transparency was good but it hasn't succeeded because the solution will not come from a conversation with the bank dealers or the buyside. The solution will come from a conversation between Esma and a proper data firm. They're speaking to the wrong people.”