WASHINGTON — Securities and Exchange Commission chairman Mary Jo White is pushing for bond market transparency initiatives before year's end, adding her weight to calls for major changes affecting muni dealers and investors.
Speaking at the Economic Club of New York Friday, White embraced the ideas of a best execution standard for muni bond dealers as well as requiring them to disclose markups in so-called "riskless principal" transactions that occur when a dealer almost simultaneously buys and sells securities, thereby taking on little or no risk that the market will move against the firm during that short time. Experts said that although White's support is a strong nudge forward, the road to final rules could be a slow one.
White said she was concerned that technological advances in the fixed income markets haven't been benefiting retail investors as much as institutional ones, and is therefore directing the SEC staff to work with the Municipal Securities Rulemaking Board and the Financial Industry Regulatory Authority to develop rules to make sure dealers aren't taking advantage of less sophisticated investors. She wants to see those rules developed by the end of the year, White said.
"The need for markup disclosure is increasingly important as riskless principal transactions become more common in the fixed income markets," she said. "And the importance of markup disclosure is especially pronounced in the current low-yield environment, where the amount of an intermediary's compensation can have a measurable impact on the yield that an investor receives."
Commissioners Michael Piwowar and Daniel Gallagher have been especially vocal about riskless principal in recent months, noting that the concept was included in the SEC's 2012 muni market report.
"I applaud chair White for raising the level of discourse regarding both equity and fixed income market structure," Piwowar said. "In particular, her speech today highlights important reforms that could dramatically improve retail investor protection by enhancing the manner in which fixed income securities trade. I was very involved with price transparency initiatives in the corporate bond and municipal bond markets as an economist at the agency, and I have been advocating additional fixed income reforms, including disclosure of markups and markdowns in riskless principal transactions, since I arrived as a commissioner. I am pleased that chair White has instructed the staff to continue to work with the MSRB and FINRA on fixed income measures that will benefit investors."
Paul Maco, a partner at Bracewell & Giuliani LLP in Washington, said White's support is significant but does not mean that changes will come swiftly.
"Generally, when the chairman says something is on her to-do list, it's something she's going to try to get done," Maco said. He added, however, that the process will involve economic analysis and coordination between regulators. To the extent that the SEC's efforts would involve the MSRB, that body has to do its own economic analysis and has its own process to follow before it can send things to the SEC for approval.
"SEC rulemaking is a complex process," Maco said.
Maco noted that the commission declined to require disclosure of riskless principal markups in the mid 1990s, tabling it pending developments with electronic transparency platforms.
Michael Decker, co-head of the municipal securities group at the Securities Industry and Financial Markets Association, said White's ambition to see progress on riskless principal rules is a new development. While the MSRB has already proposed a best execution standard, it has also been working on the riskless principal issue for some time, Decker said.
"The issue itself isn't new," Decker said. "We did know that the MSRB was working on it."
Decker said that it is unclear how realistic White's year-end goal is without knowing how far along with its work the MSRB might be, but said the support of dealers would largely depend on how the regulators decide to define "riskless principal." While no transaction is truly riskless, Decker said, dealers can probably get comfortable with a definition that encompasses deals where a dealer has a firm customer order in hand before it commits to the trade. A definition that is based only on how long a dealer holds a security would not be likely to get support, he said.
White also said she is pushing a broader transparency initiative that the MSRB has also been looking into — making more pre-trade data available.
"More broadly, we must take steps to ensure that the benefits of technological advances are realized by all investors in the fixed income markets," she said. "Accordingly, I have asked the staff to focus on a regulatory initiative to enhance the public availability of pre-trade pricing information in the fixed income markets, particularly with respect to smaller retail-size orders," White said. "This initiative — referenced in the commission's 2012 report on the municipal securities market — would require the public dissemination of the best prices generated by alternative trading systems and other electronic dealer networks in the corporate and municipal bond markets. This potentially transformative change would broaden access to pricing information that today is available only to select parties."
