OPINION: FIMSAC’s Road Ahead
A journey always starts with a single step and the US Securities and Exchange Commission’s newly minted Fixed Income Market Structure Committee looks to have an extremely short or an extremely long road ahead of it.
The general mandate for the committee is to make recommendations to the SEC that will make the US fixed income market “better.” FIMSAC could say that the current market structure is as good as it gets outside of further market evolution and submits their travel expenses. The markets might not be operating as they did five, ten or 20 years ago, but they are not broken like they were in 2008.
On the other hand, FIMSAC could take a page from the recently retired Equities Market Structure Advisory Committee and do a few deep dives into market structure issues that will result in a couple of industry-wide pilot programs.
It might be best for everyone if FIMSAC chose the former over the latter. It is always dangerous to view fixed income markets through an equities lens. Electronic trading reduces transaction costs and makes trading liquid instruments far more efficient whether it is an equity, exchange-traded product, or bond but that is where the similarities end.
There is not much that FIMSAC will be able to take from EMSAC’s experience besides committee and subcommittee best practices.
EMSAC had a much more well-defined subject to address. Although it had to balance the interests of those trading liquid and illiquid stocks at retail- and block-order sizes, at least they were trading the same type of instruments in the same market.
Besides balancing the interests of retail and institutional investors, FIMSAC has to balance the needs of three different markets- US Treasuries, corporate bonds, and munis. Each one comes with its own nuances that make a “one size fits all” approach a dangerous proposition at best.
The most significant difference between fixed income and equities is that equities trading operates under Regulation NMS while fixed income remains an over-the-counter market.
Does the SEC want FIMSAC to do the initial spadework for a version of Regulation NMS for the credit markets?
The discussion during its first meeting vacillated between “if it is not broken, don’t fix it” and working on standard trade data reporting/dissemination and defining new responsibilities and enticements for specific market participants.
If the SEC expects recommendations regarding the market structure’s foundation, it is going to be a long haul for FIMSAC. If it is just a matter of tiding up the edging, it might meet its mandate sooner than in three years.
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.