The Technology and Electronic Trading Subcommittee of the SEC’s Fixed Market Structure Advisory Committee (FIMSAC) issued its preliminary recommendation that a joint working group be formed to conduct a review of the regulatory oversight of electronic trading platforms in the corporate and municipal bond markets. The working group would consist of representatives from the SEC, FINRA, and the MSRB.
Regulatory differences. The subcommittee’s recommendation noted that e-trading platforms for credit and municipal trading bonds in the U.S. are subject to different regulations based on differences in trading protocols or business models. Some platforms are regulated as alternative trading systems (ATSs) while others are regulated as broker-dealers. The subcommittee also pointed out that other significant platforms operating similar models are not regulated at all. According to the subcommittee, these regulatory differences were driven in part by Regulation ATS and the establishment of a class of ATSs that were deemed to furnish services commonly performed by registered stock exchanges. However, the subcommittee advised that a number of aspects of the Reg ATS ruleset reflect the trading practices of the equity markets and not the fixed income markets.
Recommendation. In its recommendation, the subcommittee noted that, because electronic RFQ platforms for corporate and municipal bonds are excluded from Reg ATS based on the characteristics of the RFQ trading protocol, a significant number of corporate and municipal bond volumes occur on e-trading platforms regulated only as broker-dealers. These distinctions in regulatory oversight of e-trading in the fixed income markets complicate efforts to improve the efficiency and resiliency of these markets. Without a unifying regulatory framework for all fixed income e-trading platforms, the subcommittee advised, there is a danger of market structures further fragmenting as regulators adopt new regulations that apply only to one type of platform, such as proposed Form ATS-N and Regulation SCI.
The subcommittee’s recommendation lays out five considerations for the joint working group:
- Ensure that the regulatory framework best promotes the growth of fair and effective fixed income e-trading markets;
- Ensure that no regulatory caps or inconsistencies in the application of such regulation exist that increase the potential for investor harm, systemic risk, or unfair competition;
- Consider whether Reg ATS and other rules should be amended to account for differences in protocols regarding fixed income compared to equities;
- Ensure that regulation is not unfairly promoting or impeding specific trading protocols and business models over others; and
- Consider whether any existing regulation impacting fixed income e-trading markets is unnecessary from a cost-benefit perspective.