(Refiles to fix capitalization in name of SIFMA trade group in
By Sarah N. Lynch and Lisa Lambert
WASHINGTON, June 20 The top U.S. securities
regulator on Friday called for hefty reforms of the less
transparent multi-trillion dollar bond market - putting traders
and brokers on notice that they cannot use technology to hide
pricing and cost information from investors.
In a speech in New York, Securities and Exchange Commission
Chair Mary Jo White for the first time laid out her regulatory
vision for fixed income - a huge slice of the capital markets
that has in recent years taken a back seat to the equity
markets, as regulators turned their sights toward high-speed
trading and trading in unlit "dark pools."
"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 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
White's speech shows the SEC is finally stepping up efforts
to implement some recommendations from its 2012 sweeping report
on the $3.7 trillion municipal securities market, which was
spearheaded by former commissioner Elisse Walter, who also
temporarily served as chair of the SEC.
Most notably, White announced the agency is launching an
initiative to start requiring electronic dealer networks such as
alternative trading systems to publicly disseminate their best
prices for corporate and municipal bonds. The initiative would
focus on providing pre-trade pricing information especially to
smaller retail investors.
"This potentially transformative change would broaden access
to pricing information that today is available only to select
parties," she said.
In addition, White threw her support behind several other
reforms in the works that she said will be handled by the two
industry-funded regulators for the municipal and corporate bond
One measure, being drafted by the Municipal Securities
Rulemaking Board, will require municipal bond dealers to comply
with best execution rules.
Best execution is well-established in equities markets, but
is not required in the municipal market. It essentially requires
brokerages to execute customer orders at the best price in the
shortest possible time.
The best execution rule was also recommended in the 2012
report, although some critics are wary of trying to create the
standard in a highly illiquid market. The market's lead trade
group, the Securities Industry and Financial Markets
Association, has said that since municipal bonds are not traded
on a central exchange and they are very diverse any standard
"cannot mirror that for equities."
White said the MSRB and the Financial Industry Regulatory
Authority, which oversees brokers and corporate bond trading,
will also work on guidance for achieving best execution.
"The development of a workable best execution rule for both
the corporate and municipal bond markets is vital for the
protection of investors and enhancing price competition," White
Any rules by FINRA and the MSRB will need to go through a
public comment process and be approved by the SEC.
RISKLESS PRINCIPAL TRADES
White said she also supports a pair of rules that the MSRB
and FINRA are currently completing that will 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.
White's support of a rule to require disclosure of mark-ups
for riskless principal trades now virtually guarantees it will
come to fruition.
Earlier this year, two other SEC commissioners - Republicans
Michael Piwowar and Daniel Gallagher - called for similar
"Her speech today highlights important reforms that could
dramatically improve retail investor protection by enhancing the
manner in which fixed income securities trade," Piwowar said.
Additionally, Virginia Democratic Senator Mark Warner and
Oklahoma Republican Senator Tom Coburn earlier this year also
introduced legislation to address the issue.
(Reporting by Sarah N. Lynch and Lisa Lambert in Washington;
additional reporting by John McCrank in New York; Editing by
Chizu Nomiyama and Nick Zieminski)