Waves belong on Bondi Beach, not in the bond market. But market participants can anticipate some ripple effects from planned changes to the Canadian fixed income markets over the next 18 months.

“A major focus in the coming months is to move from an industry-based approach to a transparent regulatory-focused approach,” says Ruxandra Smith, senior accountant at the Ontario Securities Commission (OSC), in a recent interview with The Analyst.

In 2014, OSC staff interviewed many market participants and reviewed data in the “quite sizeable and relatively opaque” fixed income markets. As of December of that year, $2.1 trillion was held in long-term securities (debt capital market), and $322 billion was held in short-term securities (money market). The following issues were identified in the April 2015 OSC report on the Canadian fixed income market: (1) trade data transparency, (2) market activity monitoring and oversight, and (3) new issue allocations. Participants feared market integrity was threatened by the information asymmetry. “The large dealers and the large buy-side participants had more information than the smaller ones,” says Smith.

Wanted: Data Access

The OSC was concerned about the lack of data the regulators could access, to the point that it was difficult to monitor fixed income markets. On September 17, 2015, the Canadian Securities Administrators (CSA)—the umbrella group for 13 securities regulators in all provinces and territories—announced a new system to report corporate bond trades. The system will be piggybacked on the front-line system for investment dealers and run by the Investment Industry Regulatory Organization of Canada (IIROC).

“We rely on IIROC to help us implement the standing requirements because the regulated dealers are required to report the data to them,” says Smith.

“We’re planning to have the details of the trades, such as price, size (with volume caps, so they don’t show the true value of the trade), name of the bond, and the transaction,” she says, talking about the data extract that will be made available starting in July of this year. “We want IIROC to disseminate the data, make it available for free so that everybody can … go on the website and see transaction information and bond information as well.”

CanPX is the current industry-based transparency solution. It’s a joint venture of the Investment Industry Association of Canada (IIAC) member firms and certain inter-dealer brokers operating in domestic debt markets. It covers approximately 450 corporate debt securities, comprising about two-thirds of corporate bonds traded. Member dealers send CanPX the data within an hour of their trades, and CanPX gives the data to two information vendors who package and sell to their clients. CanPX also puts an end-of-day file on its website that shows (from the previous trading day) the bond traded, the high and low prices, and the last day price—but only for the bonds traded.

“This is not unlike what they have in the U.S. for corporate debt, where … the U.S. has full trade reporting with TRACE, which is administered by FINRA,” says Smith. In 2002, the Financial Industry Regulatory Authority (FINRA) introduced TRACE (Trade Reporting and Compliance Engine) to increase price transparency in the U.S. corporate debt market.

“Everybody was supportive of our initiatives,” Smith says, but there was disagreement on certain details of the implementation. The OSC received (and posted on its website) a wide variety of comments from dealers, buy-side participants, and community associations.

Time Lag

The most controversy appears to centre on the time lag for the reported information, which will have a “dissemination delay” of two days following the trade (known as T+2). Some thought the timelines should be shorter, some longer, or that they should vary, depending on the different types of bonds. “We couldn’t really see consensus,” says Smith.

Why the wildly differing recommendations?

“The challenge for regulators is to find the right length of delay that gives investors timely information without jeopardizing market liquidity,” wrote Jack Rando, managing director of IIAC, in his comments to the OSC proposal.

“The CSA has taken the view that all corporate bonds traded in the domestic markets should be subject to transparency. If the CSA … includes highly illiquid corporate debt securities in the transparency regime, the T+2 delay may not be sufficient for these bonds, given the transaction infrequency and likelihood of dealer balance sheet exposure for extended periods,” he continued.

Some commenters suggested calibrating the time delay to the liquidity of the bond, so that illiquid bonds would have a longer delay, whereas highly liquid bonds would have a short (say, one-hour) delay.

“We can’t quite assess whether the hour is ideal. We are planning on studying it … see if it remains appropriate or if it needs to be calibrated for the different bonds,” Smith says.

Other Concerns

The Portfolio Management Association of Canada (PMAC), among others, questioned why government debt was excluded from the proposal. As of December 2014, the federal government held $479 billion in debt securities, and the provincial governments held $530 billion. “For government, we have an exemption in place until January 1, 2018. We want to study international markets and see what they’re doing,” Smith notes.

Others say data should be made available. Joe Morin, chair of the Canadian Bond Investors’ Association, suggests disclosing the yield differential. “[We] strongly encourage the disclosure of the spread (yield differential between the corporate security and underlying Government of Canada issue of a similar maturity) at which the corporate issue traded. This is a key metric used by the institutional and investment dealer community to price corporate bonds.”

There is general acceptance of volume caps for individual trades. However, some would like to see aggregate volume information. Katie Walmsley, president of PMAC, wrote, “In our view, transparency should focus on the price and volume details of the trade. … PMAC recommends that … the following post-trade information be made available: some volume information (e.g., release on a monthly or quarterly basis volume information to the market), market price at time of trade, and spread (price relative to yield data).”

Some transaction information should be protected. Walmsley wrote, “We do not believe that specific information on the buyer/seller is needed, but clarity on whether the transaction was with a retail versus institutional buyer would be helpful.”

In a similar vein, Rando wrote, “We also question the need to differentiate… between inter-dealer and client trades, as this could reveal participants’ positioning in the market. For dealers, this could, for example, impair their ability to facilitate large trades for their customers. We recommend that trades only be distinguished as ‘institutional’ or ‘retail.’”

“The challenge for regulators is to find the right length of delay that gives investors timely information without jeopardizing market liquidity.”

Allocation

Fairness in allocation was not addressed in this most recent OSC proposal. “The smaller buy-side [participants] were very concerned with the allocation of the initial offerings of the fixed income markets. They felt that, again, the large investors might have preferential access. … We don’t know if … the regulators should intervene, but we are looking at it,” Smith says.

For now, the sea remains calm and the ripples are being closely monitored. Smith says the OSC will be publishing a notice with an update and response to comments in the next few months.