Will a reviewed European Markets in Financial Instruments Regulation (MiFIR) Make Single-Name Credit Default Swaps more Transparent?

Abstract

Regulation (EU) 2024/791 (“MiFIR Review”) amended the European Markets in Financial Instruments Regulation (“MiFIR”) intending to make EU financial markets more transparent and increase their competitiveness. This article discusses the MiFIR Review concerning the transparency requirement for single-name credit default swaps. The article concludes that the MiFIR Review is notf ar reachin making these derivatives more transparent given that single-name CDSs not referring to Globally Important Systemic Banks (G-SIBS) (i.e. around 92% of the market) are not majorly impacted and these referring to G-SIBS but not centrally cleared could also remain opaque. A very large fraction of the single-name CDS market is thus not affected or can continue to be subject to pre-trade transparency waivers or post-trade deferrals foreseen in MiFIR. Yet, based on an extensive literature review, this article claims that even more transparency compared to what the MiFIR Review envisages might not be beneficial for market quality in the first place. In the case of a market in which there are few buyers and sellers willing to trade continuously, more transparency could lead to even less liquidity. In case of enhanced transparency, the limited number of available liquidity providers would be obliged to make their trading strategies available, which gives them incentives to trade even less. The MiFIR Review thus strikes an appropriate balance between reducing the level of opaqueness while not harming liquidity.

Keywords: credit default swaps, financial regulation, transparency, derivatives, investor protection

JEL Classification: K22, K23