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SEC Fixed Income Market Structure Advisory Committee Meeting

Securities and Exchange Commission

Fixed Income Market Structure Advisory Committee Meeting

Tuesday, June 11, 2019

Key Topics & Takeaways

Opening Statements

Fixed Income Market Structure Advisory Committee (FIMSAC) Chairman Michael Heaney briefly outlined the agenda for continuing the discussion from the April 15 FIMSAC meeting, where members discussed providing recommendations on pennying in the corporate and municipal bond markets, as well as considering a draft comment letter on FINRA’s New Issue Reference Database Proposal. Division of Trading and Markets Director Brett Redfearn encouraged interested parties to submit comments to FIMSAC through the SEC’s website.

Committee Discussion

Subcommittee’s Draft Recommendation on Pennying in the Corporate Bond and Municipal Securities Markets

Heaney began the discussion by thanking the Technology and Electronic Trading Subcommittee’s continued work on the pennying recommendation to clarify its intended scope based on the feedback from the panel of experts at FIMSAC’s April 15 meeting. Richard McVey, Chairman of the Technology and Electronic Trading Subcommittee, further discussed the changes to the preliminary recommendation. McVey highlighted that the updated recommendation clarifies the definition of pennying, its negative impact, and distinguishes pennying from the legitimate use of last look, which is a valid practice as part of a dealer’s best execution process.

Tom Gira, FINRA, expressed his support for this recommendation, including that FINRA should publish a request for comment on the use of pennying in the corporate bond market. Gira also stated that FINRA plans to conduct a study on pennying in corporate bonds that could help with comments that are likely to come. In response to Redfearn’s questions, Gira stated that FINRA has yet to begin the study but will gather the information from trading venues to see if there is similar conduct found in the study on pennying in the municipal securities market.

FIMSAC approved the Subcommittee’s pennying recommendation.
Subcommittee’s Draft Comment Letter on FINRA’s New Issue Reference Database Proposal Heaney and McVey emphasized the importance of FINRA’s proposal and for FIMSAC to comment on the proposal, considering FIMSAC unanimously recommended establishing a database for new corporate bond issues. McVey said the comment letter focuses on FINRA’s recommended data fields and makes additional suggestions, and reiterates the importance of this new issue database for valuing fixed income securities and describes the inclusive process that led to FIMSAC’s initial proposal. In particular, having a full database with the multitude of corporate bonds to keep track of corporate actions, mergers, credit ratings and more information will help market participants value and trade new bonds and will be a major improvement over the current practice of relying on the underwriters to distribute this information to all trading venues. McVey mentioned that this recommendation does not attempt to displace reference providers; to the contrary, almost all reference providers support the proposal. The letter points to the valuable information provided by the DTCC for municipal bonds as a positive comparison, which similarly did not harm municipal bond reference data providers. Further, the letter states that FINRA can provide this service in a cost effective and expedient way as this service would be a logical extension of the Trade Reporting and Compliance Engine (TRACE).

FIMSAC members provided their comments on the draft comment letter. Lynn Martin stated that the Intercontinental Exchange (ICE) provides reference data and supports a centralized new issue database, which promotes transparency liquidity in new issue corporate bonds. Larry Harris mentioned that the data was already public in registration statements collected and distributed by EDGAR. Harris additionally suggested that the SEC make corporate bond registration statements machine readable to promote competition. Sonali Thieson, Bank of America Merrill Lynch, expressed support for a new issue database and recommended that FINRA also: (1) standardize the fields to minimize potential errors from requiring the underwriter to manually report the majority of fields, and (2) require the issuer or rating agencies to report the bond’s rating. Larry Tabb, TABB Group, expressed his initial hesitation about creating the database, and stated that he now supports the proposal to provide good data but hopes this does not create a monopoly.

FIMSAC approved the Subcommittee’s draft comment letter.

For more information on this meeting, please click here.