The CanPX system should not be killed off amid efforts by the Canadian Securities Administrators (CSA) to enhance bond market transparency, the Investment Industry Association of Canada (IIAC) argues.
The latest industry letter from IIAC President and CEO Ian Russell examines the CSA’s plan for enhancing transparency in fixed-income markets, which would utilize the new debt reporting system developed by the Investment Industry Regulatory Organization of Canada (IIROC). The CSA plan is to boost public reporting of bond market activity, subject to delays and volume caps designed to preserve market liquidity.
See: Bringing sunshine to the bond market
However, the IIAC has argued that the CSA plan needs more thought, and that regulators should consider possibly excluding certain illiquid issues from the new reporting regime altogether, or at least allowing longer delays in reporting, so that dealers aren’t driven to pull back from trading amid liquidity concerns.
The key element for any transparency system is its flexibility to adjust the degree of mandated transparency to safeguard the underlying liquidity of the bond, Russell argues in his letter. Flexibility in the transparency mechanism is essential to ensure that the extent of transactional information provided and timing of release of that information does not undermine the underlying liquidity of the bond.
The letter suggests that the IIROC system is unlikely to provide sufficient flexibility needed for an effective transparency system. Instead, the IIAC argues the optimal approach would seem to be an amalgam of the proposed transparency approach based on the new IIROC surveillance system, and the existing CanPX transparency system.
The Russell letter proposes that the IIROC reporting system be used to provide information on certain corporate bonds (subject to volume caps and reporting delays), with more-illiquid issues subject to longer delays, or excluded altogether, and that the CanPX system would continue to publish real-time prices and volume for Canadian government securities, and an agreed list of corporate securities. The CanPX system would also retain its status as an approved transparency system, subject to regulatory oversight, Russell’s letter says.
“The IIROC surveillance system provides a useful vehicle for transparency as long as precautions are taken in the dissemination of the bond information. However, this surveillance system does not provide the required flexibility to ensure effective bond transparency to meet the needs of investors trading in liquid and illiquid corporate bonds, the letter argues. The existing CanPX transparency scheme, that has delivered understated value to fixed income markets for years, should retain approval and oversight of the regulators, in conjunction with the proposed transparency approach, to ensure the needs of the marketplace are met,” Russell’s letter concludes