The bond market has radically improved in price and trading disclosure over the past 35-odd years but remains fragmented and in need of more disclosure, according to John (Jack) Brennan, chairman emeritus and senior advisor of The Vanguard Group.
Speaking at the Financial Industry Regulatory Authority’s Fixed Income Conference in New York, the former Vanguard chairman said the bond market would benefit from better transparency beyond what is available today on electronic platforms like the Bloomberg terminal and what has been disclosed by TRACE (FINRA’s Trade Reporting and Compliance Engine), which covers corporate bonds, Treasuries and agencies as well as asset-backed securities.
TRACE, which was first implemented in 2002 and has expanded its coverage in recent years, “is not perfect and should be assessed regularly but has it has been transformational in instilling confidence in the market,” said Brennan. “It entices more people into the market, new players who add liquidity and are trusted.”
Under TRACE, every trade in the bond market must be reported to FINRA within 15 minutes of pricing.
“Transparency begets liquidity which begets trust, which in the end is what we all should be striving for,” said Brennan.
The bond market, unlike the stock market, remains largely non-electronic, dominated by over-the-counter trading rather than exchange trading, involving intermediaries. Regulation of the bond market is also more fragmented than regulation of the stock market, said Brennan.
Still, if the buy and sell sides of the bond market and its regulators, including the SEC, Commodity Futures Trading Commission, Federal Reserve, Office of the Comptroller of the Currency and FINRA, can work toward a common goal, all parties will benefit, said Brennan. “Nothing is better than collaborative engagement.”
Brennan did not comment specifically on recent recommendations by the SEC’s Fixed Income Market Structure Advisory Committee. The panel favors a unified regulatory framework for all fixed income electronic trading platforms and an increase in the size of block trades exempt from the most restrictive TRACE reporting requirements.
It recommended increasing to the size of block trades whose prices could be disclosed within 48 hours of execution rather than the usual 15 minutes. The block size would increase to $10 million from $5 million for investment-grade bonds and to $5 million from $1 million for high-yield bonds, allowing mutual funds and other financial institutions to buy and sell large numbers of bonds without disclosing prices soon after. All block trades below those levels would have to disseminate pricing within 15 minutes of execution.