REFILE-US SEC's White calls for reforms in fixed income markets

Fri Jun 20, 2014 12:22pm EDT

(Fixes typographical error in first paragraph)

By Sarah N. Lynch and Lisa Lambert

WASHINGTON, June 20 (Reuters) - The top U.S. securities regulator on Friday set her sights on the less transparent multi-trillion dollar bond market, saying new reforms are needed to foster competition and reduce costs for investors.

"Trading in these massive fixed income markets...remains highly decentralized, occurring primarily through dealers where costs of intermediation are much more difficult to measure," said Securities and Exchange Commission Chair Mary Jo White in prepared remarks at the Economic Club of New York.

"I am therefore concerned that in the fixed income markets, technology is being leveraged simply to make the old, decentralized method of trading more efficient for market intermediaries."

Much of the SEC's focus in recent years has centered on concerns about issues in the equity market, such as high-speed trading and trading on "dark pool" venues.

Friday marked the first time White has delved more into concerns about fixed income markets, an area some say has been neglected and is in need of reform.

In her speech, White threw her support behind several reforms in the works that she said will be handled by the two industry-funded regulators that police the municipal and corporate bond markets.

One measure, which is being drafted by the Municipal Securities Rulemaking Board, will require municipal bond dealers to comply with best execution rules.

Best execution is a concept that is well-established in the U.S. equities markets, but is not required in the municipal bond markets. It essentially requires brokerages to execute customer orders at the best price in the shortest possible time.

Another measure will entail rule-writing by the MSRB and the Financial Industry Regulatory Authority to force dealers to disclose more about their compensation for a type of trade known as a "riskless principal transaction."

Such trades involve dealers purchasing securities from their customers and immediately reselling them to other dealers.

Dealers often charge a mark-up to customers for these trades, but are not required to disclose it.

"This information should help customers assess the reasonableness of their dealer's compensation and should deter overcharging," White said. (Reporting by Sarah N. Lynch and Lisa Lambert; Editing by Chizu Nomiyama)

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