Less than three weeks after the SEC announced the formation and first members of its Fixed Income Market Structure Advisory Committee, SEC chairman Jay Clayton said he expects the committee will focus initially on the “complex issue of bond market liquidity.”
Speaking Tuesday before an audience of bond market professionals at a Federal Reserve Bank of New York conference on the evolving structure of the U.S. Treasury market, Clayton said the committee will focus on how bond market liquidity has been affected by reduced dealers’ inventories, electronic matching platforms and the growth in bond funds and ETFs. He also said the agency would consider whether regulatory changes are needed to address the potential liquidity effects of ETFs.
Clayton offered a list of other issues he would like the committee to consider, including the broader implications of the growth of bond funds and ETFs, the impact of algorithmic trading and the costs and benefits of pre-trade transparency in the fixed income market for regulators and the public.
The committee, nicknamed FIMSAC, is expected to hold its first public meeting in January at the SEC, said Clayton.
Clayton and Treasury Secretary Steven Mnuchin, who also spoke at the conference, highlighted the importance of the Trade Reporting and Compliance Engine (TRACE) data for the Treasury market. As of July 10, 2017, all Financial Industry Regulatory Authority member securities firms are required to report Treasury transactions to TRACE (they were previously required to report only corporate bond transactions.)
“Access to Treasury transaction data allows us to more swiftly and efficiently reconstruct, analyze and diagnose the causes and effects of market events such as those of Oct. 15,” said Clayton, referring to the 2014 flash crash when the yield of the 10-Year Treasury note fell 34 points to 1.86% in a matter of minutes. (To put that in perspective, the typical change in the 10-year yield from the market open to close in all of 2017 is between two and five basis points.)
But not all firms trading in Treasuries are required to report that data because they are not members of FINRA, so “TRACE currently does not provide a complete and detailed audit trail of Treasury market activity,” said Clayton.
Banks and proprietary trading firms (PTFs) are not required to report this data and broker-dealer operators of major electronic interdealer platforms that do report the PTF data don’t identify the firms.
“Gaps remain,” said Mnuchin about the limits in reporting Treasury trades to TRACE. He said the department is looking at ways to make the data more complete and noted that making the data available to the public “poses challenges that need to be weighed.” He said that Treasury is reaching out to market participants about the issue of making TRACE data available to the public.
The Treasury Department recently released a report on capital markets regulation that recommends that BDs operating electronic interdealer Treasury platforms identify PTFs in TRACE reports and that the CFTC share Treasury futures transaction data it collects from CME. The report also supports the Federal Reserve’s plans to collect data from banks transactions in Treasuries.
Clayton said he supports all those positions, including the identification of PTFs by BD electronic treasury platforms which would require approval by the SEC and FINRA.
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