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Innovation and Change in Fixed Income Markets: Building a Unique Market Structure Solution

By: Sean Davy and Rob Toomey

On May 24, SIFMA hosted the Fixed Income Market Structure Seminar, bringing together market participants to discuss the latest developments in fixed income markets including: new and future regulations; Treasury’s RFI; liquidity and data transparency; and technology and electronic bond trading platforms.

U.S. capital markets are the deepest and most developed in the world; today, technological change and innovation has added to their complexity. Add to these developments, newspaper headlines on the “flash rally” of October 2014, and market structure and its regulation have become a hot topic. Market participants, policy makers, regulators and the public have a stake, and increasingly an opinion, on the ideal structure for our fixed income markets.

Randy Snook, SIFMA’s Executive Vice President for Business Policy and Practices, opened the Fixed Income Market Structure Seminar, noting the need for industry and regulators to work together to understand and adapt to technological changes in fixed income markets.

“One thing is very clear: there is change taking place in both infrastructure and in the profile of market participants. As is often the case, this change comes with a great deal  of innovation and experimentation, and that can be a healthy process as markets and participants adapt. The official sector plays a key role in overseeing our markets and by necessity seeks input from the industry to better understand how they can foster healthy markets.”  

Snook further added that as new regulations are developed they must seek the right balance, calibrating policies that keep pace with an increasingly connected and technology driven financial marketplace.

He also noted:

“SIFMA has a central role in stimulating discussion on market structure with key stakeholders, as this seminar today does.  We bring both buy and sell side voices to the table, providing input to regulators on issues that directly and indirectly impact market structure.  As we look at market structure and regulation, it’s important to clarify there are clear distinctions between the Treasury, corporate and equity markets.  While there is an optimal market structure for each, there is no one-size-fits-all solution.”

Emerging Issues in the Functioning of the US. Treasury Market

In January of this year, the U.S. Treasury Department announced a Request for Information (RFI), asking industry stakeholders for their view on changes in Treasury market structure, the implications for market functioning, and risk management policies and practices.

At the Fixed Income Market Structure Seminar, Daleep Singh, Treasury’s Acting Assistant Secretary for Financial Markets, delivered the keynote address, reviewing findings from the RFI. Mr. Singh emphasized that the Department remains committed to continuing dialogue with industry on a number of fronts in the post-RFI environment.

A panel of market participants from both the buy and sell side followed Mr. Singh, discussing the RFI as well as a paper which SIFMA commissioned by Promontory on the subject entitled, Emerging Issues in the Functioning of the U.S. Treasury Market.  Central to the report and to the panel discussion, was the issue of liquidity in the Treasury market and what industry and regulators can do to affect it. Panelists Ryan Primmer (KCG) and Chris Amen (Tradeweb) agreed that the more participants in the market, the better for liquidity.

The discussion also centered on the controversial subject of the dissemination of Treasury market data. Most respondents to Treasury’s RFI support official gathering of trade data, but SIFMA and other industry stakeholders have stressed that rapid and highly specific post-trade reporting to the public would impair liquidity. Treasury’s Singh assured attendees that the Department is not currently developing a policy on the public availability of data.

“To reiterate, we do not anticipate developing any policy proposal on the public availability of data until the official sector has access to cash market transaction data.”

Innovation in Corporate and Municipal Bond Electronic Trading

In February of this year SIFMA published results from a survey of 18 electronic bond trading platforms. The goal of the survey entitled, Electronic Bond Trading Report: U.S. Corporate and Municipal Securities , was to increase transparency in this increasingly important space of the market.

Results from the survey suggest that fixed income market structure is evolving and adapting given regulatory and market constraints, and reflects a significant market focus on electronic trading as an emerging part of fixed income market structure.

A panel of senior executives from several electronic platforms discussed the role electronic trading has had on fixed income market structure. The panel confirmed the importance of electronic bond trading for fixed income markets, particularly noting the role they play in generating alternative sources of liquidity.

Certain aspects of fixed income market structure are debatable; while some are outright contentious. However, on one aspect, industry stakeholders can and do agree: fixed income markets are unique. As regulators and market participants work together to create an appropriate regulatory infrastructure for fixed income markets they should keep this in mind. Policies which guide our equity markets must not be transposed to the fixed income markets. There is no “one-size-fits-all” ideal market structure.