All broker trading desks for catastrophe bonds and insurance-linked securities (ILS) in the UK and Europe may have to report their secondary trade information to the U.S. Financial Industry Regulatory Authority, Inc. (FINRA) Trace Reporting and Compliance Engine (TRACE), as from January 3rd 2018 under the new MiFID II regime.
In the past it has only been certain trades emanating from the UK and European Union that have been recorded in FINRA’s TRACE system, reducing the transparency in the secondary market for insurance-linked securities (ILS). Conversely all U.S. trades have been recorded in Trace for some time now.
From 2018 the new MiFID II regulatory regime will mandate that all secondary trades from these desks are reported in the same way that U.S. broker trading desks do today, levelling the playing field, increasing transparency about the true liquidity and pricing in the secondary cat bond market, to the benefit of investors, ILS fund managers, deal sponsors looking for price intelligence and even the reinsurance market.
We’re told that under MiFID II desks will be obliged to report post-trade information. Under the current regime of MiFID I, only listed equity trades need to be reported, but under the incoming regime this will expand to include bonds and other structured finance products or securities.
The price, volumes and timing of trades will all need to be reported by UK and EU ILS trading desks that are FINRA members, our sources said, leveling the playing field with those desks that already report secondary trading data to TRACE.
A truly liquid market requires price transparency of the trades taking place and since some reporting of catastrophe bond and ILS trades began on TRACE it has always been disappointingly limited, only painting a picture of around two-thirds of the ILS market’s true secondary trading activity.
Questions have been raised in the past over the level of transparency in the ILS and catastrophe bond market and this new development, mandated by regulation, should help to increase the level of ILS market transparency, which ultimately benefits all participants.
The majority of ILS investment fund managers we spoke with have expressed a desire for greater transparency, seeing the reporting of secondary trades as largely positive.
Having full transparency of secondary trading will also benefit the reinsurance market, as it will be the only venue in it where a true value can be placed on a reinsurance or retrocession risk at any point in the cycle.
It will be fascinating if we can get to a stage where every secondary trade in ILS and catastrophe bonds is recorded, enabling the data to be analysed, trading patterns to be identified and providing much more clarity on the true liquidity, or otherwise, of insurance-linked securities (ILS).
Update: There seems some confusion regarding precisely what MiFID II will mean for cat bond trades made in the EU and UK. Some sources have come to light that question whether there will be a need to report post-trade information with questions raised over whether ILS will be deemed liquid or illiquid, although all broking desks appear to be ready to do so, should it become a requirement at any time in the future.
Join us in New York in February 2018 for our next ILS conference