CESR: advice to the European Commission on non-equities transparency and report on commodity and exotic derivatives

CESR published its advice to the European Commission on non-equities transparency and report on commodity and exotic derivatives. This is a crucial step towards the next evolution of the regulation of European financial markets. I can understand where the CESR is coming from, at end of the day, "transparency is always good". It is when you start hiding things, is where inefficiencies crop up. When inefficiencies crop up, that's where corruption flourishes, power centres form, competition suffers and finally citizens get hurt by making their financial products expensive as well as from an indirect perspective, makes their tax burden greater.

So pushing for transparency while accepting the need for market led initiatives is good and is recommending that these initiatives be studied before regulatory action is imposed. The issue arises because some instruments (such as bonds, commodities and derivatives) do not have liquid markets and therefore prices of these instruments are not what I would call as having executable action or form a "market" price (unlike equity markets). So the Commission posed the following 6 questions to CESR: (No link to this, click on full document to access)

Question 1: Does CESR consider there to be convincing evidence of a market failure with respect to market transparency in any of the instrument markets under review? ANSWER: BROADLY NO.
Question 2: What evidence is there that mandatory pre- or post-trade transparency would mitigate such a market failure? ANSWER: NOT THAT MUCH
Question 3: To what extent can the implementation of MiFID be expected to change this picture? ANSWER: MiFID will improve transparency and investor protection.
Question 4: Can CESR indicate and describe a significant case or category of cases where investor protection has been significantly compromised as a result of a lack of mandatory transparency? ANSWER No
Question 5: Could it be feasible and/or desirable to consider extending mandatory transparency only to certain segments of the market or certain types of investors? ANSWER: slicing is possible but be very careful in the design and implementation, some suggestions are given
Question 6: What criteria does CESR recommend should be applied by the Commission in determining
whether self-regulatory solutions are adequate to address any of the issues above? ANSWER: The CESR suggested the question should more be WHO can deliver solution, and the suggestion is that the market is better placed, check and review and monitor their solutions before deciding on regulatory action.

So, all in all, I think this is a good step forward, very pragmatic indeed.