SAN FRANCISCO -- The conflict between the nation's bond dealers and
Securities and Exchange Commission
over the lack of price transparency in the corporate bond market reared its head again today at the dealer association's annual meeting here.
In September, Levitt made a
speech calling for regulatory changes to address the fact that even institutional investors often fly blind when buying corporate bonds. Because there has been no comprehensive quote system for corporate bond prices, investors have lacked reference points for determining how much is too much to spend for a bond.
Levitt called on the
National Association of Securities Dealers
to adopt rules requiring dealers to report all transactions in U.S. corporate bonds and preferred stocks to the NASD, and to develop real-time price quotation systems. Investors, Levitt said, "have a right to know the prices at which bonds are being bought and sold."
Bond Market Association
, the dealer group holding its annual meeting at the sumptuous
, responded immediately, hoping to avoid the imposition of legislative or regulatory requirements. (In the
(R, Va.), chairman of the
, has introduced
legislation that would require essentially the same thing. The finance subcommittee passed it last week.)
The association solicited proposals and ultimately selected
, the organization of
primary dealers and interdealer brokers of Treasury securities founded in 1990 with the aim of improving price transparency in the government bond market, to build -- as quickly as possible -- a rudimentary price dissemination system for corporate bond trades.
Today, the association and GovPX unveiled the result. Dubbed Corporate Trades I, the system, which debuts Monday on GovPX's
Web site, will at the end of each business day publish a list of most of the corporate bond trades done by seven interdealer brokers, including the price at which the bonds changed hands and the approximate size of the transactions. In recent tests of the system, about 100 transactions a day have been reported, Anthony Susi of GovPX said.
After a final test of the system, expected to last several weeks, the association will make the data available on its
Web site in a searchable format, essentially duplicating the price transparency initiative it
unveiled for the municipal market in November. Each day, the association publishes in searchable format a list, compiled by the self-regulatory
Municipal Securities Rulemaking Board
, of municipal bonds that traded at least four times the previous day, annotated with the highest and lowest prices at which the bonds changed hands.
Corporate Trades I falls short of what Levitt is looking for in a several respects: It covers only trades by interdealer brokers. It covers only investment-grade bonds, excluding high-yield issues. It obscures details about the transactions, by indicating their approximate size as opposed to their actual size. (Trades are classified as under $5 million, $5 million to $10 million, $10 million to $20 million, or $20 million or larger.) And it reports the trades on a delayed basis, rather than immediately. (All dealers already report all the details of every trade to regulators for surveillance and enforcement purposes, but that information isn't publicly disseminated.)
"Of course it falls short," is the association's cry. By building Corporate Trades I, it wasn't trying to answer Levitt's every concern. Rather, it was trying to show that the industry, challenged, could respond quickly. That is, it could create something that would
to answer them.
"We recognized there was a need for this information, so we focused on providing the market with data that was not available elsewhere and would represent significant but achievable progress in responding to the calls for enhanced transparency within a short timeframe," association President Heather Ruth said at the unveiling, adding that Corporate Trades I should be seen as a "work in progress."
Trading Liquidity for Transparency?
But there's more to it than that. As the association sees it, there's little price transparency in the corporate bond market for a reason. As they see it -- somewhat counterintuitively -- lack of transparency is what keeps the market liquid. Consider this fundamental difference between the stock and bond markets, they urge: Most stocks trade every day; most bonds don't. Hence, the bond market is vastly less liquid than the stock market. To preserve what little liquidity there is, the association argues, traders have to be able to trade without the whole world seeing what they're doing.
testimony before the House finance subcommittee last month, association Executive Vice President Micah Green offered the following example: "Given the noncontinuous trading environment of the bond markets, a market participant attempting to unwind a large position would definitely not want the prices of sales posted before the position was fully liquidated. Often, a small number of institutions or dealers hold very large blocks of a particular issue, and thus, a liquidation of their position would be obvious to the market. Additionally, once the bonds are taken into inventory by a dealer, it could take days, or even weeks, to find a buyer for these less-liquid bonds."
The cost of impairing liquidity are high, the association warns. "Liquidity disturbances, such as those that occurred in the bond markets last fall," Green said in his testimony, "can lead to a higher cost of capital for bond issuers, and inhibit capital formation. Higher capital costs for America's corporations translate into less funding for capital expansion -- a significant factor affecting economic growth."
In its unveiling of Corporate Trades I today, the association made clear that it remains very concerned that full, immediate transaction reporting could impair liquidity. Ruth said she hoped that the system would serve as "a laboratory for learning more about the interaction between transparency and liquidity."
(Even end-of-day reporting of trade data could hurt liquidity in some cases, the association believes. The interdealer brokers who are reporting to Corporate Trades I have the option to flag up to 10% of their trades for super-delayed release, two Fridays after the Friday of the week in which they took place.)
Bond Mavens Wonder Who Needs It
In addition, there has been much grumbling among the attendees here about why price transparency is even necessary in the corporate bond market, which is dominated by institutional investors who they say routinely comparison shop for bids and offers on bonds, and aren't complaining about the status quo.
"Why would you want to play Russian roulette with one of the most efficient systems in the world," said association Chairman Nelson Civello, president of fixed-income capital markets at
in Minneapolis, at a press briefing Thursday afternoon.
So they can't have been pleased when Levitt took to the podium just a few hours after the unveiling of Corporate Trades I and redelivered his message of September, only more forcefully.
After reminding his audience of his Wall Street roots, Levitt, in his characteristic gentle but firm tone, scolded the corporate dealers for dragging their feet. Citing the progress the government and muni markets made with GovPX and the daily MSRB reports, he said: "Despite my expectation that participants in the corporate debt market would follow the lead of their peers and likewise embrace greater transparency, the results up to now have been disappointing."
As for Corporate Trades I, Levitt was unimpressed. "I know that many of you believe that the corporate debt market is sufficiently transparent and that improvements are unnecessary, redundant and probably costly to firms' profitability," he said. "Others of you may believe that the Corporate Trades I system sponsored by the association to report high-grade corporate debt transactions is sufficient progress. I simply disagree.
"The technology exists to gather all corporate debt transaction prices, distribute them and interpret them in a timely, accurate and efficient manner," Levitt continued. "The time has come to illuminate this needlessly dark corner of our capital markets."
Levitt conceded that enhanced price transparency "will impact" the corporate bond business in the short-term. Though he didn't specify how, it was clear he meant that profitability will suffer. But he insisted that transparency "increases confidence in the fairness of our markets. And that," he said, "means more efficient markets, more trading, more liquid markets and more business for bond dealers."
If only the bond dealers believed it.