On Monday, the International Capital Market Association, the International Swaps and Derivatives Association and the Bond Market Association released their joint response to the FSA's DP 06/03. This Discussion Paper sought comment on the best execution requirements, an integral part of the European Commission’s forthcoming Markets in Financial Instruments Directive (MiFID) released for implementation in November next year.
Whilst supportive of MiFID in general, there was strong opposition by the associations to the FSA's proposal that "robust" price benchmarking is the only valid means of achieving and demonstrating best execution. It was particularly critical of the IBM paper which forms part of the FSA's collateral, pointing out that no industry input was collected, no alternatives to benchmarking were given, and no incidences of market failures provided to justify the proposal. It prints a nine page response to this paper alone and comments that most of its assumptions are flawed.
The response focuses on that part of the market most relevant to the associations' members, the over the counter dealer markets in derivatives, structured products and bonds, where dealers mainly act on their own account. This is a very different market to exchange traded equities and the associations thought it necessary to include an eleven page annex explaining the fundamentals of the bond, derivative and structured product markets. They point out that there are no continuously executable prices in all instruments in these markets, no robust benchmarks for bonds, nor is it possible to benchmark many OTC structured products or derivatives as there is no price for these until two parties have got together to agree some form of risk transfer. The full response from the associations to the FSA's discussion paper on best execution within MiFID can be found here.
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