The ECB also helps to accompany the fundamental change in the financial sector by changing the market structure and infrastructure, e.g. by actively supporting the Legal Entity Identifier (LEI) initiative as well as enforcing financial integration via the Eurosystem’s TARGET2-Securities (T2S) project, which will make cross-border settlement identical to domestic settlement and hence the whole European securities market will become more attractive and cost effective. Financial regulation and transparency I will now expand on this morning’s discussion on “Making markets work: liquidity and regulation”. Apart from central bank and market initiatives, a number of measures in the field of financial regulation, which are intended to prevent another crisis on the scale of the one we have just witnessed, have been decided upon or initiated by various authorities. Such measures contribute to structural changes in the institutional set-up of financial markets and are expected to restore market confidence and, ultimately, to support growth. Yet the intended positive effects of regulatory measures have to be carefully weighed against their costs and unintended side effects. Market participants point out that the regulatory measures must be consistent with one another. The speed of regulatory innovation should not mean that too little consideration is given to the impact one measure will have when taken in conjunction with others. Also, consistency on the international level has to be ensured. Very importantly, financial regulations should be designed and implemented carefully in order to avoid potentially adverse effects on market liquidity and price formation.
The ECB also provided an opinion on the MiFID II proposal.5 As you know, the MiFID II proposal extends pre- and post-trade transparency requirements from equity instruments (MiFID I) to additional asset classes such as bonds, structured finance products, derivatives admitted to trading or traded on a regulated market, a multilateral trading facility or an organised trading facility and derivatives considered eligible for central clearing. The aim is to enhance price formation and to support the evaluation process of such instruments. The requirements cover pre-trade transparency – i.e. the provision of quotes and market depth to market participants ahead of a trade – and post-trade transparency – i.e. the timely publication of the prices and volumes upon trade execution. These mandatory transparency requirements represent a major change, especially for the fixed income market. For brevity, I will only address the issue of post-trade transparency. As we have known since the publication of the seminal work of the Austrian economist and philosopher Friedrich Hayek, prices reveal information that is dispersed among the numerous individual members of an economy. As a consequence, market outcomes are directly influenced by the time and degree to which prices and volumes are disclosed to the public. In reality, different markets are subject to different transparency regimes and disclosure requirements, which are a consequence of the existing heterogeneity among both financial assets and market participants.