June 11, 2019
Submitted electronically to: [email protected]
Marcia E. Asquith
Office of the Corporate Secretary
1735 K Street, NW
Washington, DC 20006-1506
Re: Proposed Pilot Program to Study Recommended Changes to Corporate Bond Block Trade Dissemination
Dear Ms. Asquith,
SIFMA1 is pleased to submit comments on FINRA’s Regulatory Notice 19-12, “FINRA Requests Comment on a Proposed Pilot Program to Study Recommended Changes to Corporate Bond Block Trade Dissemination”.2 This proposal would implement the SEC Fixed Income Market Structure Advisory Committee’s recommendation for a pilot program that would adjust the TRACE framework to test if changes would spur liquidity in block-size trades of corporate bonds.
In 2018, SIFMA submitted a letter to the FIMSAC that was supportive of such a pilot program.3 We believed, and continue to believe, that the FIMSAC correctly recommended a pilot program to test changes to the TRACE framework for block trading to determine if block trading liquidity could be increased.
In our 2018 letter we noted that:
“[i]t is particularly concerning to our members to observe the decline in the proportion of block trades to total volume during a period associated with an increase in the average and median size of corporate bond new issues. Accordingly, our members indicate that block size transactions have become substantially more difficult to execute and counterparties are more frequently choosing to break up blocks into smaller transactions or delay transactions to avoid market frictions.”
These concerns remain. A market participant submitted the following comment to the SEC and FINRA regarding the FIMSAC’s discussion of a pilot, and we believe that it aptly summarizes the current situation in block trading of corporate bonds:
“It has been impossible to isolate the impact of this transparency requirement at the same time that many other changes are occurring in the market, and the research has been inconclusive in terms of impacts. Spreads have tightened, which would suggest better liquidity, but the average trade size for the 1,000 most active issuers has dropped almost 35% between 2007 and 2013, and the portion of block trades greater than $5mm has declined over this same period by almost 15%.4”
Block trading is important and this decline in block liquidity has harmed market participants. As FINRA knows, buyside counterparties of FINRA member dealers at times have large positions to liquidate or purchase. Being able to transact in larger blocks is an important tool to effectively manage their liquidity needs, and can be the most cost-effective, efficient, and responsive manner in which to trade. When a firm needs to break a large trade in to several (or more) smaller size trades in order to avoid moving the market (or in some cases even to even find a counterparty willing to do the trade), trading costs increase, operational risk increases and efficiency decreases.
The current price transparency regime is not supportive of block trade liquidity because it impairs the ability of broker dealers to lay off the risk they take on in service of their clients. Larger positions equate to larger amounts of market risk, and under the current regime dealers are faced with near-immediate dissemination of their trading activity. Volumes are masked but the trade prices are disclosed, and when combined with valuations and market color, it can be easy to identify when a block trade has taken place. Accordingly, dealers have tended to pare back their willingness to take on risk, and when combined with regulatory changes over the past decade, the ability of investors to transact in size has been reduced. While this specific proposal is focused on corporate bonds, we note that this concern is broader – it has been felt in other markets such as the TBA MBS market as well.
The FIMSAC recommendation represents a balance of competing changes to transparency in a package. On one hand, it adds to transparency by raising the actual trade size dissemination thresholds and shortening the time until unmasked trade information is released in the academic data set. On the other hand, it temporarily reduces transparency by instituting a dissemination delay intended to allow market makers time to work off large positions that they purchase from clients.
We have laid out our members’ views on certain aspects of the pilot and provided responses to some of FINRA’s specific questions below. Due to the variety of business models employed by our members, a broad variety of perspectives, views and concerns have been brought to the table. While our members have divergent views on certain aspects of the pilot, such as appropriate measures of success or the likely impact on various sectors of market participants, one area where they agree is that the proposal’s approach is far too complex and may have significant negative impacts on the corporate bond markets.5
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1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate on legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.
2 Available here: https://www.sec.gov/spotlight/fixed-income-advisory-committee/finra-regulatory-notice-trace-19-12.pdf
3 The SIFMA letter is available here: https://www.sec.gov/comments/265-30/26530-4186770-172770.pdf
4 Letter from Sandra E. O’Connor, Chief Regulatory Affairs Officer, JPMorgan Chase & Co. to the SEC and FINRA, at 3, available here: https://www.sec.gov/comments/265-30/26530-3974442-167144.pdf
5 Please note that we have labeled FINRA’s questions in accord with the format presented in Appendix 2 for clarity. In addition to those questions specifically referenced, we believe this letter also addresses the following questions:
Section (A) – 1, 2
Section (B) – 1, 3, 4, 5
Section (C) – 1, 3, 6, 7, 8, 9, 10, 11, 12, 13, 18
Section (D) – 6, 8, 10, 11
Section (E) – 1, 5