04.15.2019
By Rob Daly

Corporate Bond Transparency Pilot Inches Closer

The corporate bond market could see a block-size trade-dissemination pilot as early as the first half of 2020, if FINRA’s recent pilot proposal does not meet regulatory or industry headwinds.

The 38-page proposal, which the self-regulatory organization filed on April 12, has a 60-day comment period. After it’s completed, the SRO plans to take a few months to review the industry’s feedback before filing a rule change with the US Securities and Exchange Commission. If the SEC approves the rule change, FINRA would have 90 days to announce the effective date of the rule, which would go into effect no later than 270 days after its publication.

“Between FINRA’s comment process and the SEC’s comment process, we are looking at a six-month period before it is wrapped up,” said Brett Redfearn, director at the SEC’s Division of Trading and Markets, during the FIMSAC’s meeting on April 15. “Also, probably longer than that.”

The proposal is similar to the Fixed Income Market Structure Committee’s proposal in that it aims to determine whether increasing the size or frequency of block trades would improve market quality.

“We sought to describe the impact on the various market participants, including central and non-central dealers, large and small institutional clients, retail investors, and those trading derivative securities like ETFs,” said Jonathan Sokobin, chief economist at FINRA.

FINRA’s proposed pilot would last one year and include all TRACE-eligible corporate bonds, including 144A and new issues. Investment-grade bond trades that are $10 million or more, as well as non-IG corporates bond trades of $5 million or more, would have delayed dissemination. The pilot also would increase the size cap for IG corporate bonds to $10 million from $5 million and to $5 million from $1 million for non-IG corporate bonds.

“The full size would b disseminated immediately for trades falling below those caps,” he added.

However, the SRO made some changes to the FIMSAC proposal to balance its design for causal inferences while limiting its complexity.

FINRA added two additional test buckets to FIMSAC’s proposal that would test the impact of the dissemination delay and cap increase separately.

“The original FIMSAC recommendation incorporates two different changes in the transparency regime that have potentially offsetting effects,” noted Sokobin. This choice of having these offsetting changes creates a few issues in pilot design. Testing for both of those changes at the same time is, in effect, a joint hypothesis at the specific cut off levels in the recommendation,”

To populate the pilot’s test and the control groups, FINRA proposes to assign CUSIPs to each bucket based on their 144-A status, issue size, age of issuance.

SIFMA has recommended that FINRA use the securities’ CUSIP-assigned check digits and assign them based on whether they are odd or even, according to Sokobin.

To avoid the possibility that only some securities or issuers are subject to the increased transparency regime, FINRA suggests rotating the groups halfway through the pilot.

“All bonds originally assigned to the test group would become the control group after six months and vice versa, with the exception of new bonds without sufficient trading histories,” he added.

FINRA does not recommend changing the lagged release time for uncapped trade sizes from three to six months, which was in the original FIMSAC proposal since it would add to the pilot’s complexity and would be challenging to evaluate the results due to the pilot’s expected 12-month length and planned six-month rotation.

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