Comments on: Forget Volcker — bring back Glass-Steagall Bridges, budgets, bonds Mon, 24 Nov 2014 00:29:08 +0000 hourly 1 By: DogFase Fri, 02 Mar 2012 16:56:36 +0000 It’s true that there aren’t quote reporting requirements in the bond markets like there are in the stock markets. But that’s because there are literally millions of distinct bonds outstanding versus around 8,000 equities. It is impossible to quote all bonds actively as is done with equities. Dealers only provide bond quotes when their customers ask. And, there are detailed FINRA and MSRB markup and fair pricing rules that apply to the prices dealers dealers can charge for bonds. Moreover, the rules related to price transparency are completely unrelated to Gramm Leach Bliley and wouldn’t change if Glass Stegall came back. The GLBA had practically nothing to do with regulating the bond markets.

Even more important, there are extensive regulations that apply to almost all aspects of the bond markets. The SEC, FINRA and the MSRB all have thick rule books that relate to the bond business, and those rule books are getting thicker as Dodd-Frank is implemented. It simply isn’t the case that regulators conduct “little to no oversight of bond markets.”

Finally, under Glass-Stegall before the GLBA, banks were heavily involved in the fixed income markets. Government, agency, mortgage-backed and most municipal securities were all “bank eligible,” meaning that commercial banks could underwrite and trade them. Bringing back Glass-Stegall as it was before the GLBA wouldn’t keep banks out of the fixed income business.

By: Cate Long Thu, 01 Mar 2012 23:09:37 +0000 Thanks for the comment DogFase.

Regulators do collect post trade data on bond trading and occasionally you hear of fines against brokers for excessive markups on a retail investor. The MSRB is currently undertaking rulemaking for broker’s broker Rule G-43 as described below. This is one of the few times that a regulator is imposing a rule pre-trade and I don’t believe that you can find a comparable rule for other bond types ie corporates, agencies, Treasuries or sovereign. If I have missed that rulemaking I’d appreciate you pointing it out.

MSRB Proposed Rule for G-43 tions/Regulatory-Notices/2011/ px?n=1

Under Revised Draft Rule G-43(d)(iii), the term “broker’s broker” would mean a dealer, or a separately operated and supervised division or unit of a dealer, that principally effects transactions for other dealers or that holds itself out as a broker’s broker, whether a separate company or part of a larger company.

The role of the broker’s broker is that of intermediary between selling dealers and bidding dealers. Revised Draft Rule G-43(a) would set forth the basic duties of a broker’s broker to such dealers.[2] Revised Draft Rule G-43(a)(i) would incorporate the same basic duty currently found in Rule G-18. That is, a broker’s broker would be required to make a reasonable effort to obtain a price for the dealer that was fair and reasonable in relation to prevailing market conditions. The broker’s broker would be required to employ the same care and diligence in doing so as if the transaction were being done for its own account.

Revised Draft Rule G-43(a)(ii) would provide that a broker’s broker that undertook to act for or on behalf of another dealer in connection with a transaction or potential transaction in municipal securities could not take any action that would work against that dealer’s interest to receive advantageous pricing. Under Revised Draft Rule G-43(a)(iii), a broker’s broker would be presumed to act for or on behalf of the seller[3] in a bid-wanted or offering, unless both the seller and bidders agreed otherwise in writing in advance of the bid-wanted or offering.

Revised Draft Rule G-43(b) would create a safe harbor. The safe harbor would provide that a broker’s broker that conducted bid-wanteds and offerings in the manner described in Revised Draft Rule G-43(b) would have satisfied its pricing duty under Revised Draft Rule G-43(a)(i).[4]

These provisions of the safe harbor are designed to increase the likelihood that the highest bid in the bid-wanted or offering is fair and reasonable. Many of the requirements of Revised Draft Rule G-43(b) would address behavior that would also be a violation of Rule G-17 (e.g., the prohibitions on providing bidders with “last looks” and encouraging off-market bids), although the requirements of Revised Draft Rule G-43 would not supplant those of Rule G-17.

Revised Draft Rule G-43(c)(i)(H) would require broker’s brokers that availed themselves of the safe harbor to use predetermined parameters designed to identify possible off-market bids in the conduct of bid-wanteds.[5] For example, the predetermined parameters could be based on yield curves, pricing services, recent trades reported to the MSRB’s RTRS System, or bids submitted to a broker’s broker in previous bid-wanteds or offerings.

By: DogFase Thu, 01 Mar 2012 22:40:26 +0000 “The SEC heavily regulates stock trading but conducts little to no oversight of bond markets.”

That’s simply not true. The bond businesses of banks and broker-dealers are heavily regulated. There are regulations related to suitability, capital, trade reporting, record keeping, testing and qualifications, pricing and markups, etc. And when FINRA or SEC examiners look at dealers, they look at their bond activities as closely as anything else. With regard to muni bonds, municipal bond dealers are the only segment of the capital markets that have their own, dedicated regulatory agency, the MSRB. FINRA and the SEC frequently announce enforcement actions against rule violators in the bond market. How can you say the market isn’t regulated?

“So Glass-Steagall was killed, and no one regulated the two largest areas of the financial markets, fixed income and derivatives.”

This is partly true for derivatives. It isn’t true at all for bonds. It’s true that before Dodd-Frank, over-the-counter derivatives weren’t regulated. But that had nothing to do with the GLBA. It was the Commodity Futures Modernization Act, not the GLBA, that specified that no federal regulator had authority over derivatives. And all that’s changed now, any way. A big part of Dodd-Frank is the new authority the CFTC and SEC have over swaps, swap dealers and major swap users.