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The SEC published a recommendation on July 16 from its Fixed Income Market Structure Advisory Committee (FIMSAC) for a joint working group addressing the oversight of electronic trading platforms for corporate and municipal bonds, based on the group’s meeting in Washington, D.C.
FIMSAC was established to provide a formal mechanism through which the SEC can receive diverse perspectives on the structure and operations of the U.S. fixed income markets, industry advice and recommendations on fixed-income market-structure issues. Their recommendation, which was prepared by the Technology and Electronic Trading Subcommittee, is for a joint working group, comprised of the SEC, Financial Industry Regulatory Authority (FINRA) and Municipal Securities Rulemaking Board (MSRB).
“Although the SEC hasn’t announced the formation of that group as of October 11, and irrespective of whether the group would include representatives of any other organizations, we felt it appropriate to take a hard look at the electronic trading environment in the fixed-income market in general and the possibility of regulating it in particular,” says industry veteran George Bollenbacher, head of fixed income research at TABB Group, in a market note, “Regulating Electronic Bond Trading Platforms.” The note examines how the secondary bond markets with their many types of platforms are evolving all the time and where the industry is in that process, followed by analysis of the FIMSAC’s recommendations based on the group’s agenda:
· Pre-Trade Transparency under MiFID II
· Current State of Pre-Trade Transparency in the US Corporate Bond Market
· Current State of Pre-Trade Transparency in the US Municipal Securities Market
· Electronic Trading Venue Regulation – Draft Recommendation
Both the corporate and municipal markets are divided into two segments: a relatively liquid segment and an illiquid segment, and as Bollenbacher points out, market structure and functions are extremely different between the two segments.
Reactingto FIMSAC’s recommendations, Bollenbacher says “The first thing we have to note is that the proposal lacks a working definition of ‘electronic trading platform.’ For example:
· Does electronic mean that the trade is executed without any human interaction?
· Does a system which displays indicative bids and offers on a screen but requires telephonic execution and confirmation qualify? If not, does a CTT system qualify?
· Are SDPs and MDPs both electronic platforms?
“They also have to wrestle with the difficult and financially-charged questions around who needs to be regulated,” he adds, “coordinating with other fixed-income and derivatives regulators in the US and around the world.”
“Regulating Electronic Bond Trading Platforms” is available now for download by TABB fixed income clients and pre-qualified media at https://research.tabbgroup.com/report/v16-047-regulating-electronic-bond-trading-platforms. For more information or to purchase the report, write to info@tabbgroup.com.
