The association called for a "rethink of proposed trading rules that would make it harder for investors to buy and sell bonds".
Plans for the Markets in Financial Instruments Regulation (MiFIR), which will introduce rules across Europe from January 2017, "could damage already strained levels of liquidity in the bond market, triggering higher transaction costs and borrowing costs for sovereigns and companies," it said.
Final proposals on MiFIR are expected soon, and "will include requirements for investors to inform the rest of the market in advance about their intended transactions", the Investment Association said.
The proposed regulatory technical standards that would apply to the regulation "would force investors to alert the markets ahead of trying to buy or sell bonds, even when these show relatively low liquidity levels – trading less frequently than once a day. Such frequencies are at odds with the liquidity threshold test contained in MiFIR itself, which calls for the existence of “ready and willing buyers on a continuous basis”, the association said.
It should also be made easier for transactions in individual bonds to qualify for waivers from transparency rules, to allow smaller trades to take place "without the risk of price disruption", the association said.
Public consultation is needed for at least 30 days, the association said.
EU authorities should also give market infrastructure time to develop. "Specifically, this means pushing back applications of the MiFIR rules from January 2017 to January 2018," the association said.