Retail investors have had easy access to almost real-time stock market data for a long time, yet the bond market in Canada has remained stubbornly opaque. So, securities regulators have been pushing steadily for greater transparency in the fixed-income arena.
In May, the Canadian Securities Administrators (CSA) unveiled its latest proposals regarding this market, which would introduce post-trade transparency requirements for trading in government bonds and would expand the existing reporting requirements for corporate bonds.
The CSA is proposing to expand reporting for corporate bonds beyond their current obligations to cover all trades; to designate the Investment Industry Regulatory Organization of Canada as the “information processor” that collects and disseminates trading data for government bonds; and to reduce the delay in reporting that data publicly to one day after the trade from two days. The CSA plans to start phasing in these measures in April 2019 and aims to have them fully adopted by the end of next year.
The underlying purpose of these reforms is to help make the huge fixed-income market more fair and more efficient. According to the CSA, more than $12 trillion worth of debt securities was traded in Canada’s secondary bond market in 2017, but most of this activity took place between a handful of large institutions.
By increasing market transparency, the CSA hopes that smaller investors (retail and small- and mid-sized institutional investors) will be better able to participate in the bond market. That should raise investor confidence and, ultimately, boost investor participation and market liquidity.
Yet, regulators also are trying to balance the benefits of increased transparency with the purported risks. The CSA’s proposal acknowledge that some market observers believe that too much transparency will harm liquidity. The fear is that major bond dealers would be exposed to much more trading risk if the market is made highly transparent, given that the securities involved are relatively illiquid. As a result, investment dealers may be less willing to hold bonds in their own inventory and less apt to make markets.
The Ontario Teachers’ Pension Plan Board‘s comment on the CSA proposals warns that too much transparency could enable other traders to reverse-engineer publicly disclosed trading data and use them to try to front-run large institutional trades.
To date, the regulators have attempted to address these concerns with measures such as volume caps (which hide the true volume traded) and delays in disseminating data to the public.
Yet, the CSA’s latest effort to expand the scope of trade reporting is getting pushback from the large financial services institutions that dominate the Canadian fixed-income market.
For example, the Canadian Bankers Association‘s submission states that extending reporting requirements to banks will generate only minimal additional market data; that doing so will create costly operational challenges for both the industry and regulators; and that allowing securities regulators to impose trade reporting requirements on banks may violate a long-standing jurisdictional boundary that leaves the banks under the authority of the Office of the Superintendent of Financial Institutions.
Yet, critics from the investor side charge that the CSA isn’t being ambitious enough. In particular, investor advocates would like to see much shorter delays in the public reporting of bond trading data than the CSA envisions.
Toronto-based Invesco Canada Ltd.‘s submission argues that the CSA’s proposals don’t do enough to boost transparency for investors. The asset-management firm’s submission states that current conditions in Canada’s debt market are neither fair nor efficient. Invesco’s submission further argues that the lack of market transparency “has been harmful to us and our investors, as well as [to] virtually every other buy-side investor, whether or not they are aware of that fact.”
Invesco’s submission suggests that the low level of retail investor participation in the Canadian fixed-income market stems from both the lack of market data that’s available to the average retail investor and the significantly higher trading costs that retail investors face compared with institutions.
Even institutional investors don’t have access to sufficient trading data to determine whether they are getting good prices, Invesco’s submission states. As a result, larger dealers are able to capture huge spreads based on their advantages in this opaque market.
Invesco’s submission adds that the CSA’s latest proposal fails to address the dearth of timely trade data, specifically for retail investors and buy-side investors in general. The company’s submission calls on the CSA to “take more meaningful steps” to deal with these issues, pointing to the U.S. and European markets, where trading data is publicly reported within 15 minutes.
This view is echoed in the submission from the Canadian Advocacy Council for Canadian CFA Institute Societies, which states that CSA should harmonize its approach to trade reporting with the requirements in the U.S. as much as possible, with the ultimate objective of gradually moving toward “full real-time post-trade transparency over the long term.”
Invesco’s submission concludes: “Unfortunately, in our view, the CSA has erred too much on the side of the large financial institutions that make up the core of this market.”