Canadian regulators face obstacles in bringing greater transparency and competition to the fixed income market, due largely to the size of the market and the hefty capital required to participate in it.

“Unlike equities, where a maverick disruptor could show up with limited capital but a new technology, in fixed income it’s such a capital intensive market that it’s tough for a new player to come in the game,” said Doug Clark, managing director of research at ITG Canada. “So the question is how do we get this to be less capital intensive? How do we get real-time clearing?”

The Investment Industry Regulatory Organization of Canada (IIROC) re-issued for comment in January its revised Debt Transaction Reporting rule proposal for more timely surveillance and enhanced oversight of Canadian debt market activity. The original rule proposal was issued in February 2013.

The proposed reporting requirements would be implemented in two phases. At the completion of Phase 1, which is targeted for April 2015, more than 90% of Dealer Member debt trading activity will be subject to regulatory oversight.

“IIROC’s proposed reporting requirements will bring greater regulatory transparency to the Canadian debt markets. The changes will enable more effective oversight of debt trading, resulting in enhanced market integrity and investor protection,” said Wendy Rudd, IIROC senior vice president, market regulation and policy, when the revised proposed rule was published.

The proposal includes a new reporting system that would replace the existing Market Trade Reporting System (MTRS) and facilitate the collection and analysis of detailed transaction data related to debt trading by Canadian dealers. This will allow IIROC to better monitor and enforce compliance with existing investor protection and market integrity rules.

The purpose of the proposed rule is to strengthen market supervision of debt trading in Canada. Due to the nature of debt trading in Canada, IIROC will not require real-time reporting; however, in order to enforce fair pricing and to identify potential market manipulations, timely and accurate trade reporting will be required.

“IIROC compromised with dealers,” Clark said. “They have to get an end of day report on all trades and the prices. Even that seems to be pushing the limitations of some dealers. Compared with the equities world, where you get millisecond by millisecond updates of everything the dealer does going to IIROC, the difference is staggering.”

One comment letter received by IIROC to the original rule proposal stated that the concept of best execution in OTC transactions is less clear than in the equity world.

“IIROC is trying to do something with fixed income that they would have done in equities in the early 90s, and [dealers] are not ready for it,” Clark said. “It’s going to be a while before they have real-time data so they can here’s what the market is. They’re on the right track, but they are far behind the equity market.”