The SEC’s Fixed Income Market Structure Advisory Committee (FIMSAC) unanimously approved a preliminary recommendation to establish a new issue reference center for corporate bonds. The recommendation, which was developed by FIMSAC’s Technology and Electronic Trading Subcommittee, advises that the corporate bond market could benefit from a central source of new issue reference data similar to the New Issue Information Dissemination Service (NIIDS), which operates in the municipal bond market.
Municipal versus corporate bond data. In its recommendation, the subcommittee outlines the different approaches to the dissemination of new issue data in the municipal and corporate bond markets. Most new issues of municipal securities are required to submit to NIIDs all information required for a dealer to report and produce a customer trade confirmation within two hours of the "formal award" of the new issue. This new issue data is made immediately available to reference data providers that provide or sell the information to market participants.
In contrast, there is no universal automated means for underwriters or issuers to distribute new issue data to corporate bond market participants, the recommendation explains. While FINRA does require underwriters of an initial offering of a bond eligible under its TRACE Trade Reporting and Compliance Engine (TRACE) to provide certain information to FINRA prior to the execution of the first transaction of the offering, it does not include detailed data required to price and settle a bond trade, such as information needed to calculate accrued interest and net money.
Difficulties of obtaining data. According to Spencer Gallagher of ICE Data Services, in his experience, reference data for new issues of corporate bonds was only available about half the time when the security is priced. The methods of obtaining this data are inefficient, he said, explaining that underwriters are the primary source of the information and that it is usually communicated by email. In addition, neither the timing nor the attributes that are supplied are standardized. It is difficult to complete pre-trade activities without the data, which can leave the buy side scrambling, he said.
Fred Demesy of Refinitiv, which provides data on financial markets, explained that his company sources data from three avenues: contributions from customers, self-sourcing (internal teams who obtain data from sources like websites, dealmakers, market participants on the sell side), and third-party vendors. Under the current system, some market participants have market data much earlier than others. This can create a competitive advantage for certain platforms, which is not good for a transparent market, Demesy said. In addition, surveying multiple vendors can result in multiple fees and duplicate costs, he remarked.
Recommendation. The subcommittee proposed a list of 24 new issue reference data fields. These data fields include information needed to perform the calculations necessary to price and settle a corporate bond trade. The managing underwriter of all TRACE-eligible corporate bond new issues would be required to send this information and any follow-up adjustments electronically to a central database managed by FINRA no later than the distribution of information to any reference data vendor or other third party not involved in the offering.
When the central database has all the required information, FINRA would make the data available in a real-time electronic format to reference data vendors and other market participants. Subscribers would have access to the service at fees determined on a "commercially reasonable basis" and subject to applicable regulation.
According to the subcommittee, the creation of this data center would make the valuation, trading, settlement, and trade reporting of new issue corporate bonds more efficient because it would reduce trading errors and enhance competition. While the subcommittee acknowledged that the service would impose costs on FINRA and underwriters, it believes the costs would be small relative to the value the service would provide.
Future actions. The subcommittee’s preliminary recommendation only applies to new issues, but it noted that following implementation of this service, the SEC should consider whether to extend it to seasoned issues. Another possible expansion that should be considered in the future is the inclusion in the service of information about corporate actions, such as bond default, partial redemption, tender offer, exchange offer, and consent solicitation. The subcommittee notes, however, that this reporting obligation would more logically fall on the issuer, since underwriters may not be involved in corporate actions months or years after the initial offering.
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