The Washington Post

SEC head advocates bond market reforms


Mary Jo White, chair of the U.S. Securities and Exchange Commission, speaks to guests as she attends the 438th meeting of The Economic Club of New York, in Middle Manhattan, June 20, 2014. (Eduardo Munoz/Reuters)

Securities and Exchange Commission Chair Mary Jo White on Friday called for reforms to the fixed-income market, advocating several proposed regulations that she said would make it cheaper and more efficient for investors to buy and sell bonds.

Speaking at the Economic Club of New York, White said that the multitrillion dollar market for municipal and corporate bonds is plagued by decentralization, insufficient competition and underuse of technology — problems, she said, that new regulations could help solve.

One proposal would establish a “best execution rule” for the municipal securities market, similar to those governing stock markets. The proposed rule, being developed by the Municipal Securities Rulemaking Board, could potentially require municipal securities brokers to work as quickly as possible to get their clients the best prices.

Another reform would require dealers to disclose any extra fees they charge in “riskless principal” transactions. In these trades, dealers buy corporate and municipal bonds from their clients and then quickly sell them to other dealers, often charging their customers a fee for the deal that they are not currently required to disclose. White said that the Financial Industry Regulatory Authority and the MSRB, which are both self-regulatory agencies, are working to develop rules for these transactions by the end of this year.

White said her office is also working on a proposal to make pre-trade pricing information for corporate and municipal bonds traded electronically or by other alternative networks more widely available to the public. Currently dominated by traditional dealers, the fixed-income market has only recently begun to make forays into new technologically driven channels that have become common in the stock market.

White’s proposed reforms were greeted with praise from several industry experts, who said the new rules would generally change the fixed-income market for the better.

“Anything that can improve transparency will increase the comfort and the confidence that investors have in the market,” said Vikram Rai, a fixed-income strategist at Citigroup, who noted that he thinks the fixed-income market already has a high degree of transparency.

James Angel, a finance professor at Georgetown University, called the reforms “long overdue.” He predicted, however, that the proposals could prompt some pushback from municipal bond dealers who could recoil at changes they may think could make it harder for them to make money.

“The SEC has a very careful trade-off to make here: between actions that will promote transparency and consumer protection, but at the same time we also need to worry about the impact on the availability of dealer capital,” Angel said.

White’s call for new rules governing bond transactions comes amid a separate federal push to examine an equity market that has been transformed in recent years by technological changes.

The Senate held hearings this week on high-frequency trading, which allows traders to use sophisticated technology to execute transactions at blink-of-an-eye speeds.

The practice has recently come under heightened scrutiny, including a Justice Department investigation into whether traders are violating insider-trading laws. Earlier this month, White gave a speech outlining initiatives to help regulators monitor the rise of high-frequency and off-exchange stock trading.

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