Regulators Address Transparency in Fixed Income


Regulators in the United States and Europe are moving ahead with initiatives to boost transparency in the fixed income markets, one of the world’s largest and most liquid, with U.S. Treasury volumes alone accounting for over $500 billion in daily trading volume.

The U.S. Securities and Exchange Commission is holding a roundtable on April 16, with speakers representing a cross-section of the capital markets, to focus on price transparency.

Currently, there is no national system for disseminating price quotes in U.S. fixed income securities, as there is for equities, although bond trading platforms such as MarketAxess, Tradeweb, and others do provide such information.

MarketAxess, which operates an electronic trading platform to trade corporate bonds and other types of fixed-income instruments, has about 1,000 active institutional investor clients (investment advisers, mutual funds, insurance companies, pension funds, bank portfolios, broker-dealers and hedge funds), and 87 broker-dealer market-maker clients who provide liquidity on the platform and include most of the leading broker-dealers in global fixed-income trading.

In Europe, the Markets in Financial Instruments Directive (MiFID II), which is now making its way through “trialogue” with the European Commission, European Parliament and the Council of the European Union, proposes that all quotes that investment firms agree to provide must be firm, that these quotes be disclosed to other clients and, below a certain size, be publicly disseminated.

Anthony Belcher, director of EMEA valuations, Interactive Data

Anthony Belcher, director of EMEA valuations, Interactive Data

“MiFID provides pre-trade transiency for fixed income instruments, which is not present with the U.S. markets,” said Anthony Belcher, director of EMEA pricing and reference data at Interactive Data Corp.

Interactive Data delivers daily evaluations for investment-grade and high-yield corporate bonds, governments and agencies, securitized debt issues (asset-backed securities), and municipal bonds.

The MiFID II proposal to force all quotes in fixed income instruments to be firm and disclosed to the market will have a negative impact on trading activity and reduce liquidity, according to research from the Association for Financial Markets in Europe (Afme).

“Many investors believe MiFID’s pre-trade transparency proposals will have damaging effects on trading activity, especially with regard to large trades,” said Christian Krohn, a managing director at Afme, in a statement. “The European Council and Parliament amendments to limit MiFID requirements to trades below a certain size are to be welcomed.”

In Afme’s Investor Survey of Fixed Income Liquidity, 56% of investors polled said they believe the MiFID II pre-trade transparency regime will have a negative impact on market activity through a decline in trading volumes; a reduction in transaction size, compromising the execution of large orders; an increase in the cost of trading; or a stop to trading altogether.

“There have been some concerns expressed over the impact on liquidity from greater transparency,” said Belcher. “Dealers are no longer holding inventory of fixed income, and have instead become brokers.”

The SEC roundtable will explore whether pre-trade transparency in the corporate and municipal bond markets can be enhanced through wider dissemination of pricing information on ATSs, whether it should apply to all ATSs or only those with significant trading volume, and whether public dissemination should provide flexibility with respect to block trades.

It will also consider whether public dissemination of pre-trade pricing information should be made available directly by the ATSs and other trading centers, or distributed centrally (e.g., through Finra).

The Trade Reporting and Compliance Engine (Trace) is the Finra-developed vehicle that facilitates the mandatory reporting of over the counter secondary market transactions in eligible fixed income securities. All broker/dealers who are Finra member firms have an obligation to report transactions in corporate bonds to Trace under an SEC approved set of rules.

Under MiFID II, post-trade transparency in fixed income will be “pushed to more of a real-time basis,” said Belcher, with transactions of less than a million being reported in real-time, those between one and five million reported on a T+1 basis, and those above 5 million reported with minimal disclosure.

“The European Commission wants everything to be reported in real time, so there clearly will be negotiations,” Belcher said, noting that Finra Trace has no disclosure requirements for transactions greater than 5 million.

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