07.17.2018
By Rob Daly

FIMSAC Recommends E-Trading Regulatory Reform

The US Securities and Exchange Commission staff might be toying with the idea of regulating electronic fixed-income trading venues at self-regulatory organizations, according to the line of questioning from the latest Fixed-Income Markets Structure Advisory Committee open meeting.

During the last panel discussion, Brett Redfearn, director of the Division of Trading and Markets at the SEC, posed questions to the subcommittee on technology and electronic trading how they would address regulating the electronic fixed-income market starting from a clean slate.

He raised the issues of which key regulatory objectives there should be, whether regulations should support operational transparency, system integrity, resiliency standards, as well as other typical topics that SROs face currently.

The subcommittee went as far as proposing that the SEC, Financial Industry Regulatory Authority, and the Municipal Securities Rulemaking Board create a working group tasked with reviewing the regulatory framework for the corporate and municipal bond markets’ electronic trading platforms.

The proposal also noted that any revised regulatory framework should ensure fair and effective markets without any regulatory gaps or hamper the innovation of new trading protocols and business models.

At the same time, the proposal’s authors also recommended that the SEC should amend Regulation ATS and any other applicable rules to take in the account the nature of fixed-income market structure and trading protocols as well as the cost-benefit of existing and future regulations.

Ben Macdonald, Bloomberg

Ben Macdonald,
Bloomberg

“It might have cost the industry $2.5 billion to implement MiFID II just to arrive at pre-trade transparency for about 400 bonds,” Ben Macdonald, global head of enterprise products at Bloomberg and president of Bloomberg SEF. “The cost-benefit of that is worth bearing in mind. With that said, what I think MiFID II does very well is laying the foundation of an ecosystem of trading that ultimately provides a funnel of post-trade reporting.”

“There are a lot of lessons to be learned from that process,” agreed Doug Friedman, general counsel at Tradeweb. “The regulation must recognize the differences in how markets trade, the impact of trading, and reporting on liquidity, the time and cost of resources associated with any implementation, and also the opportunity costs. You have to prioritize regulatory and compliance over what might be commercial innovation potentially.”

No matter what happens, regulators need to address the arbitrary nature of the existing regulatory framework regarding electronic fixed-income trading, stressed Rick McVey, CEO of MarketAxess and chairman of the subcommittee.

Depending on whether a venue caters to click-to-trade retail investors or institutional investors who prefer requests-for-quotes, the SEC and FINRA may regulate them as an ATS operator or a broker-dealer, he noted.

“There is at least one example of an e-trading participant in both retail and institutional markets that are not regulated by either FINRA or ATS regulations today,” McVey added. “The committee believes that the differences are based on trading protocols and not business models and, to a certain extent, revenue models.”

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