Gensler calls for greater transparency, resiliency in fixed-income markets

By Lene Powell, J.D.

In remarks at City Week, SEC Chair Gary Gensler outlined targeted initiatives to improve transparency, resiliency, integrity, and access in fixed-income markets. Possible enhancements include expanding and speeding up trade reporting, broadening regulation of trading platforms, and making changes relating to fund liquidity, central clearing and registration of proprietary traders.

“Together, through driving greater transparency, modernizing rule sets for electronified platforms, and enhancing financial resiliency, we can help investors and issuers in the bond markets get the same benefits as many other parts of our capital markets,” said Gensler.

Vast and changing markets. There are no “meme” bonds and the fixed-income markets do not get as much media attention as stocks, but they are incredibly important, said Gensler. Together, the fixed income markets represent about half of the capital markets that the SEC oversees, making them just as big as the equity markets. This includes the $23 trillion Treasury market, $14 trillion of asset-backed securities, $10 trillion of corporate bonds, and $4 trillion of municipal bonds. The non-Treasury fixed income markets are more than 2.5 times larger than the commercial bank lending market, said Gensler.

The fixed income markets have seen significant changes over time, including increased securitization and electronification and a shift in bond ownership to registered investment companies. With these changes, Gensler sees areas ripe for improvement and modernization.

Transparency. According to Gensler, academic research overwhelmingly finds that post-trade transparency improves efficiency and competition, but information reported in the fixed-income markets has not kept up with market changes and technological advances.

Gensler offered suggestions to improve transparency:

• Shorten the time by which market participants must report transactions to TRACE and the MSRB from 15 minutes to one minute;
• Bring foreign sovereign bonds into TRACE. In the chairman’s view, the value of such a move is shown by the European Union’s debt crisis and Russia’s invasion of Ukraine;
• FINRA could consider allowing the investing public to see TRACE data on individual Treasury transactions. Currently this information is reported but not publicly disseminated. Gensler believes it would also be helpful for FINRA to consider codifying their existing dissemination protocols;
• Reporting on (1) the trading protocol and platform fees paid to do a trade, and (2) the “spread” relative to Treasuries, when that is the agreed-upon term of trade.

Platforms. Gensler believes it is important to consider revising the SEC’s rules to reflect the increased use of electronic trading platforms in fixed income markets. In January, the Commission proposed a new definition for “exchange” that would cover additional fixed income platforms as well as some systems that bring together buyers and sellers for other securities asset classes. In addition, Gensler has asked staff to consider ways to increase fair access to electronic trading platforms that would fall within the expanded definition of “exchange,” with the goal of making the benefits of these systems more widely available to investors.

With a view toward increasing pre-trade transparency on platforms, Gensler has asked staff to consider how quotes and pre-trade price information might be more broadly accessible, such as by updating Regulation ATS. Gensler further noted that in 2020, the Commission amended Rule 15c2-11 of the Exchange Act, which governs the publication or submission of quotations by dealers outside of national securities exchanges. This rule applies to most fixed income dealers, said Gensler.

Resiliency. Gensler pointed to several events raising issues of financial stability, including the start of the Covid crisis. In March 2020, prime money market funds, municipal bond funds, and taxable bond funds saw significant outflows as investors evaluated their liquidity and investment needs in response to the pandemic. There were also challenges in the Treasury market, said Gensler.

More recently, central banks have started to transition from an accommodating to a tightening policy stance in the midst of uncertain geopolitical events.

“In such times of uncertainty and transition, we don’t want the market to be ‘exciting’ for the wrong reasons, as Ian Fleming might have put it,” said Gensler.

Gensler noted that the SEC recently proposed amendments to rules governing money market funds, a key segment of the short-term funding markets. Gensler has asked staff for recommendations regarding the fund liquidity rule, fund liquidity risk management, and fund pricing of liquidity costs. He has also asked staff for recommendations around strengthening central clearing in Treasuries, both cash and repos. This could include better facilitating customer clearing, enhancing risk management of the clearinghouses, and broadening the scope of central clearing," said Gensler.

Further, the SEC has proposed to further define the kinds of activities that would cause proprietary trading firms and others that engage in certain liquidity providing activities to register with the SEC as dealers. Finally, last fall the SEC proposed to shorten the trade settlement cycle, which would cover many kinds of fixed income securities.

In closing, Gensler said that while the bond markets do not need to be as “exciting” as James Bond, he thinks the SEC can make them better for issuers and investors alike.