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Bond Transparency Controversy Heats Up at Puerto Rico Confab

The Bond Market Association argues that NASD plans spell trouble for illiquid markets.

RIO GRANDE, Puerto Rico -- The

Bond Market Association

will respond early next week to the

National Association of Securities Dealers'

TST Recommends

proposal for immediate disclosure of the details of corporate bond trades, officials said at their annual meeting here. It's expected to argue for a system that provides more disclosure than currently available but stops short of the wholesale approach that the NASD is proposing.

The

Securities and Exchange Commission

has been arguing in favor of more transparency (the ability for investors to see both sides of the market), and the NASD has proposed a system that would release pricing information on all investment-grade and high-yield corporate bond trades within 15 minutes of that trade.

David Warren, president of the BMA, says the association is in favor of a system that allows for immediate disclosure on larger, more-liquid corporate bonds (those greater than $500 million), but that also studies what effect it has on liquidity (tradability) of those and smaller issues, with the eventual goal of providing more information on smaller bond offerings.

"We think the NASD proposal was not well thought-out," says Dick Norton, chairman of the BMA's corporate bond division. The information "shouldn't all go up on day one without investigating the potential consequences. If there's no perceived effect to liquidity for $500 million issues, then let's drop it to $300 million."

The Trouble With Illiquidity

Transparency has been a contentious issue in the corporate markets for some time, with some opposing it on the grounds that it will hurt liquidity and increase market volatility. The lack of information has also been a competitive advantage for traders. SEC Chairman

Arthur Levitt

, however, has forcefully demanded more disclosure in this generally secretive market.

The flaw in the NASD's proposal, Warren and other association members say, is that it does not account for whatever dislocations may take place in the highly illiquid markets, such as the high-yield, or junk-bond, market.

"Consider what would happen if a distressed investor had to sell a large position in an illiquid security," Warren said in his comments. "Today, that trade can be done anonymously and quietly, without disrupting the market. Under the NASD plan, market volatility could be exacerbated by the immediate release of such illiquid trades. Dealers may be unwilling to commit capital to repurchase such illiquid securities, knowing they cannot quietly work out of such positions."

One high-yield professional says the illiquid high-yield market is not likely to be greatly disturbed. Simply disclosing pricing information about the most poorly rated credits won't replace investors' need for extensive research about a particular company's financials and management.

What's apparent at this conference, however, is that there's a bit of a turf war going on. The bond markets are resistant to signing onto the NASD's proposal for a regulated system to disseminate information, especially when outside the main conference ballroom, the halls are crammed with firms showing off various products that utilize Internet technology to disclose pricing information.

Eventually, Internet-based pricing systems may make the SEC's concerns a moot point. Officials here are resisting a mandated platform for trading information, as that change may be coming from within.