Delayed Disclosure of Biggest Corporate Bond Trades Stalls

(Bloomberg) -- U.S. regulators have halted a plan to test whether delayed disclosure of corporate bond trades would boost market liquidity after a powerful group of investors, including Vanguard Group Inc., Citadel and AQR Capital Management, slammed the proposal.

A Wall Street trade group informed its members late last year that the Financial Industry Regulatory Authority’s controversial plan had been put on hold, said two people familiar with the matter. The brokerage watchdog could still make changes and go forward after consulting with the Securities and Exchange Commission, another person said.

The move comes after widespread opposition from financial titans with considerable clout. Vanguard, Ken Griffin’s Citadel and Cliff Asness’s AQR are among more than a dozen firms that wrote letters to Finra arguing that delayed reporting would increase costs for most investors and give the biggest bond funds unfair advantages over other traders. They were joined by officials who trade debt for local governments.

Finra’s plan was to review the impact of giving traders two full days before having to reveal so-called block trades -- the largest transactions. Some of the biggest money managers, such as Pacific Investment Management Co. and BlackRock Inc., have argued that a requirement that block trades be reported within 15 minutes has made it harder for banks to profit from facilitating buying and selling. That has prompted Wall Street securities firms to retrench, making it harder for buy-side participants to execute trades.

Reviewing Comments

Finra first proposed its study in April 2019 and gave the public until June 11 of last year to provide feedback. The regulator has said little about the test in the seven months since the comment period expired.

“We’re continuing to review the comments received and consider potential next steps,” Finra spokesman Ray Pellecchia said.

The idea to examine keeping trades secret for 48 hours was pushed for by a panel of market participants that the SEC formed in 2017. The group, called the Fixed Income Market Structure Advisory Committee, is supposed to come up with recommendations for improving trading.

Finra informed the Securities Industry and Financial Markets Association, whose members include Wall Street’s biggest bond dealers, that the study had been put on the back burner pending further discussions with the SEC and the bond advisory panel, said the people who asked not to be named because the decision wasn’t publicly announced. Sifma backed the proposal.

Boosting Liquidity

Corporate bond trades are revealed through Finra’s Trade Reporting and Compliance Engine, better known as Trace. The regulator introduced the system in 2002 with the goal of increasing transparency, as most transactions have historically taken place over the phone between buyers and sellers.

“Sifma believes Finra should move forward expeditiously to implement changes to the Trace system that will boost block trade liquidity,” Chris Killian, a managing director for the trade group, said in a statement.

An SEC spokeswoman declined to comment.

A common refrain among Wall Street banks is that rules passed in the wake of the 2008 financial crisis made it harder and more expensive for them to hold large inventories of corporate bonds. That has prompted banks to function mostly as intermediaries that link up buyers and sellers, rather than purchasing big blocks of bonds from investors and then unloading the debt over time for a profit.

‘Too High’

Pimco argues that real-time reporting has exacerbated the issue by leading to higher transaction costs. That’s in part because market participants quickly know what was bought and at what price, so banks have a hard time flipping a bond for more than they paid for it. In a June letter to Finra, Pimco said there have been instances when brokers pulled back from making a market because the transaction price was “simply too high.”

Vanguard disputes those claims. In its letter, the asset-management giant said there’s no proof that prompt disclosure of trades is hurting liquidity. But it is clear, according to Vanguard, that increased transparency lowers transaction costs. It called the proposed study “a harmful solution to an unsubstantiated problem.”

Regardless of who’s right, Pimco said now is the time to evaluate whether regulators need to revamp rules because markets are calm and investor demand for corporate debt is high. No one would want to find out that there are severe problems during a meltdown, Chief Investment Officer Mihir Worah said in the firm’s letter to Finra.

“If Finra delays examining these changes -- or chooses not to proceed with the study at all -- it may take another financial market crisis to expose some of the concerns that numerous market participants have raised,” Worah said.

©2020 Bloomberg L.P.

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