Wall Street's self-regulator invited representatives from big
banks, money managers and trading venues to its offices Thursday to
discuss snags in the corporate bond market and whether steps could
be taken to help withstand future shocks, a spokesman said.
The Financial Industry Regulatory Authority hosted a closed-door
meeting at its offices in lower Manhattan to discuss growing issues
with secondary trading in the $7.8 trillion U.S. market for
corporate debt, he said.
Among the topics under discussion: how well the corporate debt
market is currently serving the needs of its participants, and how
well the market could respond to a credit or liquidity event, he
said.
Liquidity is a term traders use to describe how easily they can
transact at reasonable prices in large sizes.
While the cost of trading isn't elevated, some traders have
complained it is becoming more difficult to buy and sell big blocks
of bonds than it used to be. Many of them are blaming new rules
that targeted banks, which long acted as middlemen on bond
trades.
"Finra believes it is critical to bring together regulators and
market participants to candidly discuss current and emerging issues
in the corporate bond market," the Finra spokesman said in a
statement Thursday.
He said the regulator would host another meeting early in July
to explore the existing corporate bond market structure, and how it
may evolve to meet the new trading challenges.
One of the ideas the industry has proposed is delaying reporting
of large trade sizes by one day. Currently, all trades must be
reported within 15 minutes, under Finra rules. News of the industry
proposal was reported earlier by the Financial Times.
In corporate debt, trade sizes have been shrinking, lower
trading activity has had a greater tendency to move prices, and
fewer bonds are changing hands as a percentage of the market's
overall size, traders said.
Trading has also concentrated around the newest debt, leaving
older bonds to grow stale and less popular.
When Peter Tchir was a bond trader for UBS AG on its giant
trading floor in Stamford, Conn., in 2007, calls came in nonstop
from clients seeking bonds from home builders like Toll Brothers
and D.R. Horton. Junk bonds flew, often in chunks of $10 million to
$20 million, with salespeople yelling across the floor to get
trades done in minutes, Mr. Tchir said.
Today, larger orders are rarely completed in a single day and
finding a motivated buyer or seller can take a week or more, said
Sean Burton, another former UBS bond trader who now heads client
relations for technology provider Algomi.
While new issuance of corporate debt is robust, only 66% of
outstanding U.S. corporate bonds rated investment grade changed
hands last year, the lowest rate since 2005, according to Barclays
PLC.
About 81% of investor respondents to a recent poll by researcher
Greenwich Associates said that their ability to trade over $15
million of corporate bonds had become "difficult" or "extremely
difficult."
Bond-pricing agent Interactive Data Corp. is launching a new
"liquidity indicator" gauge next month, after more than 50
investment firms contacted it to discuss trading challenges and to
estimate how many days it would take to liquidate their holdings
under various market stresses.
In preparation for choppy trading conditions when the Federal
Reserve moves to raise rates, bond funds have been loading up on
cash. In November, The Wall Street Journal reported that large bond
funds were holding the most cash since the financial crisis.
The Securities and Exchange Commission has also been making
inquiries about mutual fund managers' readiness for more turbulence
in bond prices and a drop in liquidity, said a person familiar with
the matter.
The asset-management arm of the Securities Industry and
Financial Markets Association said in a May letter to the SEC it
had formed a liquidity "working group" and suggested the agency
form its own committee on liquidity, in part to help understand the
problem.
A spokeswoman for the SEC declined to comment.
"Everyone's talking about this problem because they're trying to
figure out what happens when rates rise and if we have outflows,"
said Michael Nappi, a senior fixed-income trader at Eaton Vance
Management.
Write to Katy Burne at katy.burne@wsj.com
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