Tuesday, April 10, 2018

IOSCO offers recommendations to improve bond market transparency

By John Filar Atwood

In a report on the transparency of corporate bond markets, the board of the International Organization of Securities Commissions (IOSCO) emphasized the importance of ensuring the availability of information to regulators through reporting, and to the public through transparency requirements. In the report, IOSCO offers seven recommendations for improving the information on secondary corporate bond markets that is available to regulators and the public.

IOSCO’s recommendations are intended to ensure that regulators have better access to information and to enhance cross-border information sharing and understanding. The recommendations on transparency are designed to support the price discovery process and facilitate better informed investment choices.

In August 2017, IOSCO issued a consultation report in which it solicited public comments on bond market reporting and transparency. IOSCO received 16 comment letters which were considered in the preparation of the final report.

Changes to band markets. The report updates a 2004 report on the bond markets to reflect the many changes that have occurred in the past 14 years. These include changes in regulation as well as in market structure, the entrance of new participants, a shift from the traditional dealer-based principal model to an agency-based model, and the increasing use of technology.

The report examines data reporting requirements regarding corporate bond markets, and highlights the regimes in place and how the data is used to assist regulators in monitoring and analyzing markets. It also examines the current and proposed regulatory requirements relating to public pre-trade and post-trade transparency that have developed since 2004, the potential impact of transparency on market liquidity, and the steps regulators and legislators have taken to address the potential impact.

IOSCO recommends that regulatory authorities should ensure that they have access to sufficient information to perform their regulatory functions effectively. In addition, it recommends regulatory authorities should have clearer regulatory reporting and transparency frameworks to facilitate better cross-border understanding of corporate bond markets.

Recommendations. Specifically, IOSCO recommends that regulatory authorities be able to obtain the information necessary to develop a comprehensive understanding of the corporate bond market in their jurisdiction. This understanding should include the characteristics of the market and the types of bonds traded.

To facilitate cross-border understanding among regulators of corporate bond markets, IOSCO recommends that regulatory authorities create a clear framework and underlying methodology of regulatory reporting and transparency available. IOSCO also suggests that regulators have access to pre-trade information relating to corporate bonds, which could include information other than firm bids and offers, such as indications of interest.

Post-trade reporting. IOSCO believes that regulatory authorities should implement post-trade (transaction) regulatory reporting requirements for secondary market trading in corporate bonds. Taking into consideration the specifics of the market, the requirements should be calibrated in a way that a high level of reporting is achieved, ISOCO recommended. The requirements should include the reporting of information about the identification of the bond, the price, the volume, the buy/sell indicator and the timing of execution.

Another recommendation included in the report is that regulators consider steps to enhance the public availability of appropriate pre-trade information relating to corporate bonds, taking into account the potential impact that pre-trade transparency may have on market liquidity.

ISOCO recommended that regulatory authorities implement post-trade transparency requirements for secondary market trading in corporate bonds. Taking into consideration the specifics of the market, the requirements should be calibrated in a way that a high level of post-trade transparency is achieved, in IOSCO’s opinion.

The post-trade transparency requirements should take into account the potential impact that post-trade transparency may have on market liquidity, IOSCO stated. Post-trade transparency requirements should include at a minimum, the disclosure of information about the identification of the bond, the price, the volume, the buy/sell indicator and the timing of execution. Where there is transparency of post-trade data relating to corporate bonds, IOSCO recommended that regulatory authorities take steps to facilitate the consolidation of that data.

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