SEC Roundtable on Fixed Income Markets — Agenda

The Commission expects that the information provided to it in connection with this discussion may inform any decision by the Commission to engage, or not engage, in rulemaking in this area. Neither these panel discussions, nor any of the questions posed, implies that the Commission has determined whether or not to take any action regarding the structure of the municipal securities market, the corporate bond market, or other fixed income markets.

Panel 1 — Current Market Structure for Municipal Securities

Panel 1 will focus on the characteristics of the municipal securities market today, and how that market has evolved in recent years. Discussion topics are expected to include the levels of price transparency and liquidity in the municipal securities market, the ways in which transactions are effected, transaction costs for individual and institutional investors, and the relationship between the primary offering process and secondary market trading. A series of possible discussion questions is set forth below.

General Background

How has trading in the municipal securities market evolved over the past decade? To what extent have advances in technology and communications been incorporated into the process of trading municipal securities? How have these developments improved the ability of market participants to obtain pricing and other information about individual municipal securities? How have they facilitated the process of finding a buyer or seller with whom to trade?

If a retail customer wishes to buy or sell a municipal security, how would the transaction typically be handled by the customer’s broker? What is the process for identifying an appropriate security, and finding potential sellers or buyers? To what extent would the services of other dealers, brokers’ brokers, or ATSs be used? What is the process for establishing a reasonable transaction price? Does negotiation over price typically occur and, if so, how? Does the customer’s broker generally conduct the transaction on a riskless principal or agency basis?

How does the process of buying and selling a municipal security differ for an institutional investor?

To what extent do municipal bond dealers take on inventory risk? What have been the trends in dealers taking on an inventory in municipal bonds? Do dealers take on more or less inventory risk today than historically? Why? If dealers take on less inventory risk today, who holds the inventory? How did dealers manage inventory during the financial crisis of 2008 or other periods of market stress? How long are typical inventory holding periods for dealers? On what factors do they depend? Do they vary across bonds? What is the historical trend in inventory holding periods?

Does the market for Build America Bonds (BABs) differ significantly from the market for other municipal securities? If the markets differ, why?

Trading Venues

What is the role of alternative trading systems (ATSs) in today’s municipal securities market, and to what extent has that changed in recent years? What type of trading interest is disseminated on ATSs (e.g., dealer inventory, customer offers to sell, dealer or customer offers to buy)? Is the trading interest available on an ATS typically a firm offer, or simply an invitation to negotiate? Do ATSs in the municipal securities market provide relatively open access, or do they tend to restrict participation to certain types of market participants? Why do ATSs appear to play a much smaller role today in the municipal securities market than they do in the equity market?

How important are inter-dealer brokers to the municipal securities market? Are they used more or less today than they were in the past? Do inter-dealer brokers tend to be used more for certain types of transactions or by certain types of broker-dealers?

How much do retail investors generally know about the ways in which their transaction in municipal securities might be effected, and the potential advantages and disadvantages of each?

Price Transparency

What was the impact of the MSRB’s introduction of the Real-Time Transaction Reporting System (RTRS) in 2005, which made information about completed transactions in municipal securities publicly available in a timely manner? How has the market changed since? What impact has post-trade transparency had on transaction costs and liquidity? How has post-trade transparency affected dealer competition? How has it affected the number of dealers or the services provided by dealers?

What other types of pricing information are commonly used today by municipal securities market participants (e.g., prices of comparable securities, benchmark yield curves, pricing services)? How does the pricing information typically available to a broker-dealer differ from that available to an institutional or retail investor?

Liquidity

Studies have indicated that, while there tends to be a modest level of trading in a municipal security during the initial distribution period, thereafter trading in the secondary market occurs only infrequently. What accounts for this? Is it due primarily to the limited amount of any particular municipal security, to the investment goals of those who tend to purchase them, or to other factors?

To what extent is market structure a contributing factor? Do certain types of municipal securities tend to be more frequently traded throughout their term than others? If so, which ones and why?

Transaction Costs

Studies also have indicated that, in contrast to some equity markets, transaction costs for retail investors in municipal securities tend to be higher than those for institutional investors. What do you believe accounts for this difference?

Are transaction costs in certain types of municipal securities (e.g., conduit bonds, BABs) materially different than in other municipal securities?

Primary Offering Process

How well does the primary offering process for municipal securities work today? How are primary offerings placed with investors? Do both institutional and retail investors have access to the most attractive offerings? Are there particular issues or concerns relating to the pricing of primary offerings of municipal securities? What types of pricing information are typically relied upon to determine the initial offering price? How is the initial offering price for municipal securities disseminated? In general, how close is the relationship between the initial offering price and the prices of subsequent trades during the initial distribution period? Does this relationship tend to be tighter with distributions of certain types of municipal securities, or distributions to particular types of investors, than with others? What has been the effect of the MSRB’s recent narrowing of the “not reoffered” (NRO) designation, which had the effect of making pricing information about additional municipal securities transactions available to the public? What effect do tender option bond programs have on the pricing of municipal securities?

Panel 2 — Current Market Structure for Corporate Bonds

Panel 2 will focus on the characteristics of the corporate bond market today, and how that market has evolved in recent years. The discussion will include a comparison to the municipal securities market. The Panel also may discuss the market for asset-backed securities (ABS) and other fixed income products. A series of possible discussion questions is set forth below.

General Background

How large is the corporate bond market? What is the distribution of trade sizes? How diverse is the universe of corporate bond issuers and products? How large is the institutional investor presence?

How has trading in the corporate bond market evolved over the past decade? To what extent have advances in technology and communications been incorporated into the process of trading corporate bonds?

How do the core characteristics of the corporate bond market differ from the municipal securities market? Have these differences impacted the market structure of the corporate bond market as compared to the municipal securities market?

If a retail customer wishes to buy or sell a corporate bond, how would the transaction typically be handled by the customer’s broker? Does the process for buying and selling a corporate bond differ for an institutional investor? Does the process differ materially from a municipal securities transaction?

To what extent do corporate bond dealers take on inventory risk? What have been the trends in dealers taking on an inventory in corporate bonds? Do dealers take on more or less inventory risk today than historically? Why? If dealers take on less inventory risk today, who holds the inventory? How did dealers manage inventory during the financial crisis of 2008 and other periods of market stress? How long are typical inventory holding periods for dealers? On what factors do they depend? Do they vary across bonds? What is the historical trend in inventory holding periods?

Does trading in corporate bonds differ depending on whether the bonds were sold in offerings registered under the Securities Act or in private offerings, including Rule 144A eligible offerings? Does trading differ depending on the type of purchaser for the corporate bonds? Do different types of corporate bonds (e.g., plain vanilla, convertible bonds, structured debt) trade differently? Do investment grade bonds trade differently from non-investment grade bonds?

Trading Venues

How extensively are ATSs used in the corporate bond market? Do they tend to be used more for certain types of transactions or by certain types of market participants? Is access to them relatively open, or is it generally limited to certain types of market participants? What type of trading interest is disseminated on ATSs (e.g., dealer inventory, customer offers to sell, dealer or customer offers to buy)? Is the trading interest available on an ATS typically a firm offer, or simply an invitation to negotiate?

How important are inter-dealer brokers to the corporate bond market? Are they used more or less today than they were in the past? Do inter-dealer brokers tend to be used more for certain types of transactions or by certain types of broker-dealers?

What is the role of exchanges in the corporate bond market? How extensively are they used? Are they used more or less than ATSs? Is it common for broker-dealers to have established connections to exchanges for transacting in corporate bonds? If not, why not?

Price Transparency

What has been the impact of FINRA’s dissemination of transaction information through the TRACE system? How has the market changed since TRACE was introduced? What impact has post-trade transparency had on transaction costs and liquidity? How has post-trade transparency affected dealer competition? Has it had an impact on the number of dealers or the services provided by them?

What types of pricing information are used by corporate bond market participants? How does the information available to dealers, institutional investors and retail investors differ? How do market participants make relative value comparisons of corporate bonds?

What role do derivatives play in the pricing of corporate bonds? What other factors affect the corporate bond pricing?

Liquidity

What are the liquidity characteristics of the corporate bond market? Do some types of corporate bonds tend to be more liquid than others? If so, which ones and why?

Do corporate bonds tend to be more liquid during the time period around their original distribution? Do certain types of corporate bonds tend to be more frequently traded throughout their term than others?

To what extent does the market structure for corporate bonds contribute to their liquidity characteristics?

What is the impact of derivatives on the liquidity of corporate bonds?

Transaction Costs

How do transaction costs in the corporate bond market compare to those in the municipal securities market, both for retail and institutional investors? For example, some studies have indicated that transaction costs for municipal bonds, compared to those for corporate bonds, are on average 50% higher for retail-sized trades and 100% higher for institutional-size trades. Is this consistent with your experience? What do you think accounts for any differences in transaction costs?

Are transaction costs for certain types of convertible bonds (e.g., convertible bonds, high-yield bonds) materially different from other corporate bonds?

Primary Offering Process

How large is the primary market for corporate bonds? How large is the private debt market available to corporations? Does the primary offering process differ depending on whether it is registered under the Securities Act or made in reliance on an exemption from registration, including Rule 144A eligible offerings? Does it differ based on the type of debt being offered? What are the significant trends in the primary market for corporate bonds? What are the trends in private debt and how do they affect the public debt markets? Are there concerns about the availability of corporate bonds in primary offerings? Are there ways to improve the availability or timing of information on the corporate bond issuer that is made available to investors?

Does the pricing of primary offerings or do prices in the secondary market differ depending on whether the bonds were sold in registered offerings or in exempt offerings, including Rule 144A eligible offerings? Does pricing differ depending on the type of purchaser for the corporate bonds? Are different types of corporate bonds priced differently? If so, what do you think accounts for these differences?

What types of pricing information are typically relied upon to determine the initial offering price? How close a relationship does the initial offering price tend to bear to secondary market trades occurring soon thereafter?

Asset-Backed Securities

How does the market for asset-backed securities (ABS) differ from the municipal securities and corporate bond markets? What types of pricing information are used?

What has been the impact of introducing post-trade transparency on TRACE for certain ABS transactions?

How extensively are ATSs or broker’s brokers used in the ABS market?

How do transaction costs compare to the other markets?

Are there distinctions in the ABS offering process depending on whether the offering is registered under the Securities Act or whether it is made in reliance on an exemption from registration, including Rule 144A eligible offerings?

Panel 3 — Potential Improvements to the Market Structure for Municipal Securities

Panel 3 will focus on a discussion of whether there are any steps that might be taken to improve the transparency, liquidity, efficiency, or other aspects of the structure of the municipal securities market. Discussion topics are expected to include the ideas presented for consideration in the Commission’s 2012 Report on the Municipal Securities Market, such as those that could impact pre-trade and post-trade price transparency and alter brokers’ existing obligations to provide investors with best execution and fair pricing. A series of possible discussion questions is set forth below.

General

Are there weaknesses in transparency, liquidity, efficiency, execution quality, or other aspects of the municipal securities market? To the extent there are, are there steps the Commission, the MSRB, or the industry should take to improve the transparency, liquidity, efficiency, execution quality, or other aspects of the structure of the fixed income markets?

In what ways does the existing regulatory structure impact the municipal securities market, both positively and negatively?

Pre-Trade Transparency

Could pre-trade transparency in the municipal securities market be enhanced by making the trading interest that is shown today to select market participants through ATSs broadly available to the public? If so, should any public dissemination requirement be limited to firm bids and offers, or should priced indications of interest or responses to “requests for quotes” (RFQs) also be made available? Should any public dissemination requirement apply to all trading interest on an ATS, or only the best prices? Should it apply to all ATSs, or only those with significant trading volume? What types of municipal securities could benefit from pre-trade transparency? Please explain.

Would pre-trade transparency be more costly for certain types of municipal securities? Please explain. Should any public dissemination requirement provide more flexibility with respect to large “block” trades? If so, how should a block trade in municipal securities be defined, and how should its treatment differ?

How should any public dissemination of pre-trade pricing information occur? Should it be made available directly by the ATSs and other trading centers, or distributed centrally (e.g., through the MSRB)?

What are the potential benefits and risks to ATSs or other trading centers if a requirement to disseminate pre-trade pricing information was imposed upon them? Would a public dissemination requirement encourage some market participants to post trading interest on ATSs because of the wide exposure that interest would receive? Would it discourage others from doing so because they wish to reveal their trading interest only to select market participants? If both, which would be the predominant reaction?

If municipal securities ATSs are required to publicly disseminate trading interest on their systems, so that the broader market has the benefit of this pricing information, should they also be required to provide market participants “fair access” to their trading systems so that they have the potential to interact with that trading interest?

Would ATS subscribers tend to react positively or negatively to a requirement that ATSs disseminate pre-trade pricing information, and how might they adjust their trading behavior?

Should similar requirements be considered with respect to electronic networks operated by brokers’ brokers? If so, should the requirements differ in certain respects from those imposed on ATSs? If these requirements were imposed on brokers’ brokers, how would you expect them and their customers to react?

Should the Commission consider regulatory initiatives that would encourage the use of transparent execution venues in the municipal securities markets, such as ATSs or brokers’ broker networks that publicly disseminate trading interest on their systems? For example, what would be the benefits and drawbacks of requiring brokers to affirmatively offer retail customers the option of exposing their orders on one or more of these transparent execution venues? Are there better ways to foster price transparency in the municipal securities market?

Post-Trade Transparency

Could post-trade transparency for municipal securities be enhanced, beyond the basic transaction information currently made available by the MSRB through RTRS, in a manner that would be beneficial to market participants? Would the reporting of “yield spreads” (i.e., the difference between the yield on the municipal security traded and the yield on an applicable benchmark security) assist broker-dealers and investors in making relative value comparisons? If so, what would be the appropriate benchmarks, and how could their reliability be assured on an ongoing basis? Would the usefulness of yield spread reporting be diminished if multiple benchmarks were used? If so, should a single benchmark be designated for reporting purposes? What would be the benefits and burdens of requiring the reporting of yield spreads through RTRS?

Are there other initiatives that could assist broker-dealers and investors in making relative value comparisons?

Better Investor Information

Should investors be provided more information about the compensation of broker-dealers trading in a principal capacity? What would be the benefits and burdens of requiring the disclosure of dealer markups to customers? Are certain types of transactions more suited for markup disclosure, such as riskless principal transactions? How should a riskless principal transaction be defined in the municipal securities context? What would be the most effective way to provide markup disclosures to customers?

Do steps need to be taken to help assure that investors know about the various execution options available to them for transacting in municipal securities and the potential advantages and disadvantages of each? What would be the relative merits of requiring broker disclosure of those options at the time of the transaction, as compared with periodic disclosure (e.g., at account opening and annually thereafter), or general investor education efforts?

Do steps need to be taken to help assure that investors have pricing information relevant to their municipal securities transaction? What would be the relative merits of requiring brokers to provide customers with relevant pricing information (e.g., recent transactions or current quotations in the same or comparable securities) at the time of the transaction, as compared with providing this information at some later date (e.g., on the account statement), or general investor education efforts as to the public availability of pricing information? Would the usefulness of quotations in comparable securities be enhanced if the MSRB were to adopt guidance for dealers in determining comparability?

Best Execution

Should there be a “best execution” rule for the municipal securities market that would require brokers to seek to obtain the most favorable terms reasonably available for a customer? Would such a requirement be effective in bolstering existing fair pricing obligations?

Are there particular characteristics of the municipal securities market that would need to be addressed in connection with implementing a best execution rule or related guidance?

Should best execution be viewed differently when a customer is buying a bond than when he or she is selling a bond?

To what extent would potential market structure improvements, such as those discussed above, facilitate compliance with best execution obligations?

Primary Offering Process

Would some or all of the potential improvements in price transparency discussed above enhance the primary offering process for municipal securities? What would be the benefits to, and burdens on, the primary offering process of pursuing some or all of the potential improvements in price transparency discussed above? Are there other regulatory initiatives that might have a more significant positive impact on primary offerings?

Panel 4 — Potential Improvements to the Market Structure for Corporate Bonds and Asset-Backed Securities

Panel 4 will focus on a discussion of whether there are any steps that might be taken to improve the transparency, liquidity, efficiency, or other aspects of the structure of the corporate bond and other fixed income markets. Discussion topics are expected to include the extent to which, if at all, any of the ideas presented in the Commission’s 2012 Report on the Municipal Securities Market may be relevant to the corporate bond and other fixed income markets. A series of possible discussion questions is set forth below.

General

Are there weaknesses in transparency, liquidity, efficiency, execution quality, or other aspects of the corporate bond or ABS markets? To the extent there are, are there steps the Commission, FINRA, or the industry should take to improve the transparency, liquidity, efficiency, execution quality, or other aspects of the structure of these markets?

In what ways does the existing regulatory structure impact the corporate bond and ABS markets, both positively and negatively?

Pre-Trade Transparency

Would enhanced pre-trade transparency improve the market structure for corporate bond or other fixed income securities? Could pre-trade transparency in the corporate bond market be enhanced through wider dissemination of pricing information on ATSs? Should any public dissemination requirement apply to all trading interest on an ATS, or only the best prices? Should it apply to all ATSs, or only those with significant trading volume? What types of corporate bonds could benefit from pre-trade transparency? Please explain.

Would pre-trade transparency be more costly for certain types of securities? Please explain. Should any public dissemination requirement provide more flexibility with respect to large “block” trades? If so, how should a block trade be defined, and how should its treatment differ?

How should any public dissemination of pre-trade pricing information occur? Should it be made available directly by the ATSs and other trading centers, or distributed centrally (e.g., through FINRA)?

What are the potential benefits and risks to ATSs or other trading centers if a requirement to disseminate pre-trade pricing information was imposed upon them? Would a public dissemination requirement encourage some market participants to post trading interest on ATSs because of the wide exposure that interest would receive? Would it discourage others from doing so because they wish to reveal their trading interest only to select market participants? If both, which would be the predominant reaction?

Would ATS subscribers tend to react positively or negatively to a requirement that ATSs disseminate pre-trade pricing information, and how might they adjust their trading behavior?

Are there steps that can or should be taken to facilitate exchange trading of corporate bonds and other fixed income securities? Were ATSs required to disseminate pre-trade pricing information, would there be an impact on exchange trading of corporate bonds? If so, what would be the impact?

Should the Commission consider regulatory initiatives that would encourage the use of transparent execution venues, such as exchanges or ATSs that publicly disseminate trading interest on their systems? For example, what would be the benefits and drawbacks of requiring brokers to affirmatively offer retail customers the option of exposing their orders on one or more of these transparent execution venues? Are there better ways to foster price transparency in these markets?

Post-Trade Transparency

Could post-trade transparency for corporate bonds and other fixed income securities be enhanced in a manner that would be beneficial to market participants?

Currently, FINRA’s TRACE system does not have a protocol for reporting riskless principal transactions.  Should it?  What would be the advantages of TRACE establishing riskless principal reporting?  What would be the disadvantages?  What criteria should FINRA adopt for two offsetting fixed income trades to be considered a single riskless principal transaction?

Are there other measures that the Commission or FINRA should consider to enhance post-trade transparency in the fixed income markets?  Are there other asset classes that are not yet subject to public last-sale reporting that should be?

What would be the benefits and burdens of pursuing any of these initiatives to enhance post-trade transparency?

Better Investor Information

Should investors be provided more information about the compensation of broker-dealers trading in a principal capacity? What would be the benefits and burdens of requiring the disclosure of dealer markups to customers? Are certain types of transactions more suited for markup disclosure, such as riskless principal transactions? How should a riskless principal transaction be defined for corporate bond or other fixed income transactions? What would be the most effective way to provide markup disclosures to customers?

Do steps need to be taken to help assure that investors know about the various execution options available to them and the potential advantages and disadvantages of each? What would be the relative merits of requiring broker disclosure of those options at the time of the transaction, as compared with periodic disclosure (e.g., at account opening and annually thereafter), or general investor education efforts?

Do steps need to be taken to help assure that investors have pricing information relevant to their fixed income security transaction?

Best Execution

How do brokers comply with FINRA’s best execution rule, which today applies to corporate bond transactions? Do market participants consider liquidity available on exchange venues when considering their best execution obligations? If not, why not? How do market participants assess execution quality for corporate bond trades? Are there areas where additional guidance would be helpful?

Primary Offering Process

Are there ways to improve the pricing of corporate bonds in primary offerings? Would some or all of the potential improvements in price transparency discussed above enhance the primary offering process for corporate bond or other fixed income securities? What would be the benefits to, and burdens on, the primary offering process of pursuing some or all of the potential improvements in price transparency discussed above? Are there other regulatory initiatives that might have a more significant positive impact on primary offerings?

http://www.sec.gov/spotlight/fixed-income-markets/fixed-income-markets-agenda.htm