Canadian Regulators Push for Bond-Market Transparency

Terry Flanagan

The Ontario Securities Commission has published a report on the Canadian fixed income market and has set out the steps it will take to enhance the transparency and regulation of fixed income markets.

According to the report, there were approximately $2 trillion in outstanding fixed income securities as of December 2014. The Canadian bond market, which many investors consider opaque and inefficient, is dominated by large issuers and institutions, with limited direct participation from individual investors. The adoption of electronic trading and alternative trading systems has been slight.

“With this report, we have compiled research that confirms our focus on enhanced post-trade transparency and regulation of the fixed income markets in Canada,” said Howard Wetston, chair and CEO of the OSC, in a release. “Our priority now is to develop regulation that will promote more informed decision-making for market participants regardless of size, improve market integrity and ensure that the market is fair and equitable to all investors.”

The report, which is based primarily on publicly-available data, is the first phase of the OSC’s review of the fixed income market and delivers on a commitment in the OSC’s Statement of Priorities to better understand this market.

There is a limited amount of data available on the market which is fragmented across a number of sources, which makes it difficult to conduct a comprehensive assessment of the fixed income market, the report said.

The fixed income market is a decentralized, over-the-counter (OTC) market where large investors have significantly more information and bargaining power than small investors. Adoption of electronic trading and alternative trading systems has been limited, especially for corporate bonds. Direct retail participation in the primary and secondary market is low and retail investors typically access the fixed income market by purchasing investment funds.

Bond offerings in the US by Canadian-based high quality firms were more than twice the size of the average offering in Canada ($246 million compared with $91 million).

The domestic market is not large enough to absorb the largest offerings, because there are fewer asset managers in Canada than in the U.S. and because domestic asset managers have smaller portfolios than their U.S. peers, the report noted.

Investment banking fees, as a percentage of total issuance cost, decline as the size of the issuance grows. In general, investment banking fees comprise the greatest portion of the cost of issuing bonds.

In the coming year, the OSC will take additional steps to enhance regulation in the fixed income market as set out in OSC Staff Notice 21-708 and to identify opportunities where changes to regulatory approaches could improve transparency and better protect investors.

Featured image via Dollar Photo Club

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