A new Securities and Exchange Commission chair, existing technology and focused enforcement action over the past year marks a trifecta for improving pre-trade transparency in the municipal market.
On top of those factors, volatility just a year ago at the onset of the pandemic means market integrity will be at the forefront of regulators’ minds, said Valerie Mirko, a partner at the law firm Baker McKenzie. She was among the speakers discussing the topic at a DC Bar Fixed Income Panel Tuesday.
“Between Gary Gensler and the existing commissioners’ backgrounds and the current market events, issues related to market structure and market integrity are going to be at the forefront of their minds,” Mirko said. “In terms of the application to the fixed income area, that is also where pre-trade transparency would have some interest.”
Incoming SEC Chair Gary Gensler previously chaired the Commodity Futures Trading Commission and is known for reforming the swaps market and a strong interest in Fintech.
Gensler is expected to be confirmed by the Senate.
Pre-trade transparency in the municipal market is not a new issue, and was a subject of the SEC's landmark Report On The Municipal Securities Market in 2012. Some market participants say there needs to be a consolidated one-stop-shop for getting pre-trade transparency information in the municipal market.
Mirko pointed to Commissioner Elad Roisman’s experience with exchanges. Before the SEC, Roisman was chief counsel at NYSE Euronext. Commissioner Hester Peirc a strong understanding of the pricing market, Mirko said.
“This is a potentially bipartisan issue on which the commissioners could come together,” Mirko said.
“Corporate bond markets and municipal bond markets do not have centralized pricing and without this architecture, we’re starting to see some material problems,” said Chris White, CEO of BondCliq, an electronic platform during the Tuesday panel. “The size of the municipal and corporate debt markets is rapidly expanding.”
“In order to create an environment for trading where retail investors can feel comfortable and feel informed, they have to able to see available pricing information,” White later told The Bond Buyer.
2020 was a record year in municipal bond issuance with a volume of $474 billion and over 12,000 deals.
“The question really is, do we think that the investment interest in municipal bonds will continue to grow — yes,” said Peter Chan, partner at Baker McKenzie and former SEC enforcer. “If so, what was may not be what will be.”
On top of that, the use of alternative trading systems has increased, accounting for 21% of all trades in 2020.
The SEC’s September concept release on expanding ATS regulation also shows the regulator’s focus on market transparency, said Alex Ellenberg, associate general counsel at the Financial Industry Regulatory Authority on Tuesday.
“There are real opportunities and there is currently real dialogue going on with the opportunity for public input on some of these foundational regulatory framework issues being led by the SEC,” Ellenberg said.
The SEC is looking at market structure as a whole, Chan told The Bond Buyer.
Over the past year, the SEC has also taken a stringent focus on enforcement cases involving pricing, particularly flipping, Chan said.
In
In a connected case, in
Those cases show concern with pricing mechanisms for muni bonds in both the underwriting stage and in secondary market trading, Chan added.
“The fact that these enforcement cases can happen basically shows that it is not that easy to figure out what the right price is for muni bonds and that’s part of the problem,” Chan said. “At least that’s what the SEC is saying.”
