The Securities and Exchange Commission (SEC) Fixed Income Market Structure Advisory committee met on 9 April 2018 to discuss a proposed pilot for a more calibrated approach to the existing transparency regime for large trades, in order to improve the market for corporate bond investors.
In particular, the proposed pilot would raise the current Trade Reporting and Compliance Engine (TRACE) caps for investment grade and high-yield bonds while also delaying the public dissemination of trade reports above those caps for 48 hours. The proposal is that the block size cut-off for investment-grade bonds moves from US$5 million to US$10 million. In the high-yield market, the proposal is to move the cut-off for block trades from US$1 million per trade to US$3 million.
Based on 2017 data, by proposing to raise the caps, it is expected that the recommendation would enhance transparency into the precise size of over 20% of trades for investment-grade bonds and over 25% for high-yield 25 bonds.
At the same time, by delaying public dissemination for larger trades, the recommendation is designed to assess whether this change in the dissemination protocol would enhance market quality and liquidity for corporate bond investors.
“Data from FINRA shows on average, from 2013 to 2017, 96.6% of all trades were below $5 million,” said Mihir Worah, CIO Asset Allocation and Real Return, at PIMCO. “And so all information was reported. Moving the cut-off from 5 million to 10 million means about 99 percent of all trades in terms of the number of trades, and 67 percent in terms of volume, all information would be reported.”
He added that moving the cut-off to US$3 million means it would cover 93-94% of all trades, in terms of instant dissemination. In terms of volume of trade size, 15% were below the prior threshold of a million dollars.
The Municipal Bond Subcommittee reported it did not have sufficient consensus to propose any rules for that market at present.
John Bagley, chief market structure officer for the Municipal Securities Rulemaking Board (MSRB) said that when market participants were approached, a couple of market structure differences between munis and corporate bonds were the reasons cited for not thinking a pilot was necessary in the municipal market.
“There being not nearly as many large blocks of munis as there are in corporates, because of the nature of the way the muni deals come to market, and also the difficulty in hedging municipal bonds made people feel that dealers would not spend more of their capital in a down market, which was the only time people were worried about liquidity,” he said. “As a general rule, people thought liquidity was pretty good in munis and they thought the transparency rules worked for them the way they are now and did not think that changes were necessary.”
As the dissemination of trades reported to TRACE is managed by the Financial Industry Regulatory Authority, pursuing the pilot program will require FINRA to amend its rules which as a self-regulatory organisation, which would then need to be filed with the SEC for approval, including a public comment period on the proposed changes.
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