The Investment Dealers Association says that Canadian securities firms and regulators must determine how involved retail investors are in domestic debt markets, and whether their involvement necessitates regulatory intervention.

In a paper authored by Paul Bourque, senior vice president member regulation at the IDA, the IDA notes that both, “international and domestic developments are focusing more attention on the regulation of fixed income markets.”

In part, this newfound focus is due to demographic change, it notes, as, “the ageing of industrialized societies should rapidly increase appetites for fixed income products as the need grows for more stable returns to fund cash needs and to protect against inflation.”

The paper reports that a survey of market participants conducted by the Canadian Securities Administrators and the IDA in 2001 found, “a strong consensus that reforms were needed in the retail market.”

“The primary issues for the retail investor were poor transparency and low investment knowledge,” it says, adding that the IDA is developing polices for the regulation of Canada’s fixed income markets. For example, in 2005, the IDA board approved new trading rules for the debt market. “More detailed rules relating to the manner in which best execution and reasonable mark-ups for retail customers are to be assessed are under development,” it adds.

“To complete this work, some important policy questions have to be addressed,” it says, including: What is the level of retail participation in the debt markets? What are the bid-ask spreads for retail vs. institutional trades and can the differential be justified? How can retail investors determine whether they are being given a fair price? What is the current level of transparency for retail investors in the fixed income market and what is an appropriate level of transparency? What are the information gaps that have to be filled in order to answer these questions for the Canadian capital markets? Finally, is additional regulation justified to improve transparency for retail investors, or indeed, to obtain the information concerning retail participation in order to make this assessment?

“There are two important questions for Canadian regulators and the industry: the extent of retail participation in debt markets, and whether market based solutions can deliver the appropriate level of retail transparency,” it concludes. “If regulatory intervention is justified as the only means by which to obtain the information concerning retail participation, then additional transparency rules seems inevitable. If, on the other hand, retail data can be provided, and the degree to which the market has provided transparency for retail customers assessed, the discussion can focus on what additional rules if any are required to provide an appropriate level of fixed income transparency for retail customers.”