The International Capital Market Association (Icma), the International Swaps and Derivatives Association (Isda) and The Bond Market Association (TBMA), argue that there are no robust benchmarks for most fixed income products, and that benchmarking is incompatible with OTC derivatives and structured products.

The industry groups have raised their concerns in response to an FSA discussion paper released two months ago on the possible extension of MiFID-style best execution requirements to the bond markets.

The Associations argue that the proposals on benchmarking contradict recent statements by the FSA calling for flexibility in the regulation of fixed income markets.

They warn that the imposition of benchmarking would be expensive to implement in practice and could potentially lead to withdrawal of liquidity.

Instead, they call for a principles-based approach based on “intelligent copy-out” of the MiFID provisions on best execution, supplemented by MiFID Connect industry guidance.

This, they maintain, would recognise that "execution quality depends on other factors in addition to price, that the relative importance of these factors varies between clients, and that firms have some flexibility in determining their order execution policy".

They further suggest the FSA adopt a practical interpretation of what constitutes the execution of a client order in dealer markets, since this determines when the best execution obligation and therefore the benchmark proposal may apply.

Bertrand Huet, European legal and regulatory counsel, TBMA, says: "The FSA needs to recognise that there is no such thing as continuously executable price available from a predominant source of liquidity in dealer markets. Its approach needs to be mindful of current market structure, promote the competitiveness of EU financial markets and ensure that information remains available to wholesale and retail investors."