The Financial Industry Regulatory Authority will likely test the market impact of delaying the disclosure of large corporate bond trades after some of the biggest investors argued that such a move would improve liquidity.
FINRA last week proposed running a pilot program that would give traders 48 hours before having to reveal their so-called block trades to other investors. The effort would allow the industry-funded brokerage regulator, which is overseen by the U.S. Securities and Exchange Commission, to evaluate how delayed transparency might affect corporate bond trading.
Current rules require that block trades be reported within 15 minutes. Brokers and investment firms such as BlackRock Inc. and Pacific Investment Management Co. (which is an affiliate of Allianz A.G.) have long said that such rapid disclosure can make it harder for a dealer to offload securities it’s bought, because market participants know exactly what was bought and at what price.
The idea for the pilot was suggested by a group of industry executives that advises the SEC. The Securities Industry and Financial Markets Association, Wall Street’s biggest trade group, has expressed support for the proposed test as did JPMorgan Chase & Co. and Eaton Vance, according to FINRA. At the same time, the regulator said that two market makers for exchange-traded funds have expressed concern that the changes would reduce price transparency.
“There are some concerns around liquidity and this is an effort to try to improve it,” said Mihir Worah, chief investment officer of asset allocation and real return at Pimco and a member of the advisory group.
Brokerages have said “there is some amount of trading that is not being done today because the dissemination affects the ability of the broker who’s committing capital to recoup a fair return,” FINRA Chief Economist Jonathan Sokobin said in an interview on Monday. “But, that’s an open question — that’s the story that’s being told.”
Sokobin said that generally there’s evidence that disseminating more data is beneficial to markets. FINRA’s pilot would test specifically if that’s true when data is kept private for 48-hours on trades of more than $10 million in investment-grade debt and trades greater than $5 million for speculative-grade bonds.
Randall Parrish, head of credit at Voya Investment Management, which manages $205 billion, said he thinks it’s reasonable to give dealers a way to get out of a large trade without jolting the market, but said that blocks of $5 million to $10 million are too small to warrant a period of secrecy.
“It’s a question of thresholds,” Parrish said. “Those are not trades where a dealer needs time to work out of a position without everyone knowing.”
FINRA will seek public comment for 60 days on whether to move forward with the pilot.
A copy of the regulatory notice is available here.
—With assistance from Sridhar Natarajan and Natalya Doris.
— Read Legal & General Unit Fund Manager Predicts Credit Slump Will Worsen, on ThinkAdvisor.