FIMSAC Recommends First Pilot
The US Securities and Exchange Commission’s Fixed Income Market Structure Advisory Committee recommended a pilot for disseminating block trade data during the committee’s second meeting.
Under the proposal, the SEC would establish a one-year pilot for all TRACE-eligible corporate bonds that would raise the dissemination caps for investment-grade bond trades to $10 million from $5 million and to $5 million for high-yield bond trades, which has a $1-million threshold.
At the same time, FINRA would continue to disseminate post-trade data immediately upon receipt for trades that are less than their respective dissemination caps. Trades that are above their dissemination caps, FINRA will delay publishing the data for 48 hours after it receives trade reports.
FINRA also would publish actual sizes of the capped trades three months after the quarter in which it received the reported trades.
After a lively discussion amongst the full committee and the regulators, the motion to forward the recommendation passed, 15-8.
The recommendation’s lack of a control group, which the subcommittee included for simplicity and not wanting to determine “winners and losers,” raised the concern of Kumar Venkataraman, a professor at Southern Methodist University’s Cox School of Business.
“Fairness is moot if you do not know if it is going to work,” he said.
If there were to be a “stress event” during a pilot without a control group, it would be difficult to attribute any impact on liquidity to the pilot, he added.
Mihir Worah, CIO asset allocation and real return at Pimco and who chaired the subcommittee, noted that the topic came up during the subcommittee’s meeting and there were still some disagreements.
However, he added that “finance and economics work in the real world and that the Federal Reserve does not raise interest rates on half the country to see its effects. It raises them for everyone and then figures out the impact.”
When asked by SEC Commissioner Michael Piwowar whether the subcommittee thought of including additional factors like holding periods shorter than 48 hours, Worah stated that the 48-hour hold on dissemination was the consensus of the subcommittee.
Within 48 hours, Citi can recycle 50% its risk in investment-grade bonds, according to Brian Archer, managing director and head of global credit trading at Citi.
“At T+0, we can recycle 30% of the risk, and by T+6 we can recycle 66% of the risk,” he added. “We ran a similar exercise for high-yield and saw a similar curve.”
It may take some time before the pilot sees daylight, according to Brett Redfearn, director of Trading and Markets at the SEC.
“This is a recommendation, which will be forwarded to the Commission to consider it,” he said. “If it approves the recommendation, FINRA would have to write the rules that would have a comment period.”
Electronification of the municipal bond market also presents a large opportunity.
The success of Northbound trading showed electronic execution is way forward for the bond market.
IRS trading volumes have fragmented without an equivalence agreement.
Increased electronification has created useable and accessible real-time and historic trade data.
Members are evaluating payment-versus-payment for currencies not yet eligible for CLSSettlement.