'New framework must put retail investors first'

Why IIAC believes rules about transparency in government debt markets must be carefully designed

'New framework must put retail investors first'

Retail investors must be the focus of a new proposal from the Canadian Securities Administrators to implement a transparency framework for government debt markets.

That is the overriding message from the Investment Industry Association of Canada who, in a white paper, laid out its own recommendations.

The CSA’s intention to establish a framework rather than rely on market forces was signalled in December, with the long-standing exemption to transparency requirements in government debt markets having expired on January 1.

Jack Rando, managing director, the Investment Industry Association of Canada, said that while market-led initiatives have been effective in delivering bond transparency to institutional investors and bond issuers, there is a gap in what is readily available to retail investors, who are reluctant to pay for a market data service to track a typically slow-moving bond market.

The likes of Bloomberg, for example, and electronic trading platforms provide transparency for institutional investors, Rando said, adding that they are also on the phone all day with their dealers, getting information on where markets are trading.

This leaves the average-Joe retailer in the dark by comparison, despite their increased participation in the likes of bond mutual funds and fixed-income ETFs.

Rando said: “The gap that we identify, in relation to bond transparency, really relates more to the retail investor, so there has been a lack of market solution catering to the needs of retail investors. That makes it a challenge for them to obtain timely bond information.”

Rando remains optimistic that the CSA will address this area when it unveils its proposal but he warned the framework needs to be carefully designed.

He said: “It needs to be easily accessible by the retail investor. It’s got to contain information that’s easily digestible and, most importantly, retail investors need to be made aware of it so they can use it for their decision-making. That’s what we tried to convey in the paper.”

The paper also highlighted the “transparency conundrum” and the belief that the CSA must be mindful of a tipping point where the benefits of incremental transparency are outweighed by the adverse effects on market liquidity and the quality of the fixed-income markets.

He said: “Fixed income in Canada continues to be largely over-the-counter markets – they rely on dealers to maintain infantries on their securities and make markets in these securities.

“If there is too much information made available too quickly, it could jeopardize dealers’ abilities to make markets and guard themselves when they are building these infantries. This might reduce liquidity in the market place. When it comes to developing a transparency framework it’s about finding that balance.”