The issue of bond market transparency is evolving in the US and EU. The Financial Industry Regulatory Authority will begin disseminating prices on privately sold corporate debt at the end of this month in the U.S. The European Parliament recently approved rules in April that the European Securities & Markets Authority will define.
Whether or not Canada will keep pace with the reforms is yet to be seen.
In Europe a recent survey of 200 buy-and sell-side market participants found that 58% of institutional market participants believe that there is not enough transparency in European corporate fixed income markets. Most of the poll participants noted corporate debt capital markets need to be more transparent. The group was undecided as to whether the transparency regime will improve or harm liquidity—46% felt it would diminish liquidity, 41% believe liquidity would be improved.
The issue of liquidity is a key one in the debate around bond market transparency. Marian Passmore is director of policy of the Canadian Foundation for Advancement of Investor Rights, or FAIR. She says firms typically worry too much transparency in the market would decrease liquidity as sellers of large blocks of bonds would avoid transacting. Bonds trade relatively infrequently. The appearance of a large deal in the market can have real and material effect on prices. Dealers can be "front run", decreasing portfolio values. "The industry is worried about this,” says Passmore.
Nevertheless, FAIR is concerned investors are short-changed on bond sales. Because there is no central exchange for bonds as there is with stocks, there is no way to know bid and ask prices in real-time. "The average investor has no idea there is a commission embedded in the sale," says Passmore. "We would like to see more transparency."
In Canada, the OSC announced a review of fixed income markets as a way of address concerns. "I haven't seen results of the study yet,” says Passmore. In 2011 Investment Industry Regulatory Organization of Canada (IIROC) released a letter suggesting a fair pricing policy on corporate bonds. Coming July 15 of this year new client relationship management rules, so-called CRM2 regs, will see advisors disclosing more information around bond prices. But as for a central, transparent marketplace, no dice.
“The IIROC tk was a start," says Passmore. “But there is more to be done. I think they're ahead of the curve in the U.S. Canada doesn't tend to be a leader on these things.”