Bond Market Developments : Elsewhere, New Rules Coming For OTC
Following the article I wrote some weeks back regarding the state of the local OTC bond market (https://tradehaven.net/market/singapore-bond-market-look-no-further/), I am following up with this short piece on positive developments on OTC markets elsewhere in the world.
Does this sound a little familiar ?
“The U.S. Securities and Exchange Commission is separately examining to what extent smaller buyers are disadvantaged and whether the behavior constitutes market manipulation, Bloomberg News reported March 20. Brokers can choose which rivals and clients may see their bond prices on electronic trading systems by turning quotes on and off.
Bonds aren’t traded as frequently as stocks, which are listed on exchanges. Some will rarely change hands, making it difficult for buyers and sellers to assess a market rate.” http://www.bloomberg.com/news/2014-05-16/bond-markups-as-low-as-3-said-unacceptable-to-finra-in-trading.html
OTC Bond Markets
The US consumer may be scarcely aware of the truckloads of additional rights they have been bestowed since the enactment of the Dodd–Frank Wall Street Reform and Consumer Protection Act which was signed unto law in 2010.
Market reforms have been pretty jarring to the banks with the 2,000 pages of the Act implemented in bits and pieces by 2 authorities spearheading a fragmented roll out.
So far, we have the derivatives portion rolled out by the CFTC last year but the rules at the SEC for securities (including bonds) still being debated. http://www.sec.gov/spotlight/regreformcomments.shtml
That is not to say that the US market remains non transparent. Since 2002, they had TRACE, a bond price reporting system that is supervised by FINRA, Financial Industry Regulatory Authority. Traded prices of bonds (corporates, agencies, convertibles, mortgages included) will be reported subject to a 4 hour delay for non subscribers.
The good news is now Europe will be implementing the same ! To even more stringent standards, as reported last week. http://www.bloomberg.com/news/2014-05-29/europe-s-bond-traders-confront-overhaul-seen-stricter-than-u-s-.html
There is no need for me to list the pros in this, even if it has not hit the shores of Singapore yet and we should give Europe more than a couple of years to move for all the financial market vs regulators wrangling that has cost the US a 4 year delay to no affirmative action on the bond front yet.
Singaporean banks have been rebuffing these moves with DBS refusing to register with US regulators back in Oct 2012, which has resulted in a stalemate.
Another set back for the Singapore market would be that depth does not mean anything here with only a handful of banks active in very local domestic bond names.
I can foresee already, in my greedy former banker’s eyes, a circumvention by re-introducing the hard sales commissions so transacted prices will already take into account the mark ups.
Finally, it could also mean the death of the local bond market because there is simply no incentive to sell the bonds and bankers will move to other more lucrative products.
The Monetary Authority of Singapore has adopted the derivatives reporting rules and effected the changes in the Securities and Futures Regulations last October.
It is still a long way to completion, with more than its fair share of exemptions, although it looks good as a headline. http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Consultation%20Papers/Reporting%20consult%20response.pdf
I am expecting the OTC bond market reforms to drag along for a few years more.
Yet the public can only expect better things to come and I note with satisfaction that FINRA is homing in their investigations on bond trade commissions these days. http://www.bloomberg.com/news/2014-05-16/bond-markups-as-low-as-3-said-unacceptable-to-finra-in-trading.html
3% or less is the new acceptable which hardly ever happens in Singapore, because my joke is that 3% on the bond price and you may end up with a negative yield.
Our local bond market is by far much smaller and disjointed than the US’s. The retail bond market is underdeveloped and parched for bonds (has anyone read my Idea For Transport and Infrastructure Bonds yet ?)
The OTC market is spiraling off tangent and slightly out of control with little depth and a few players dominating.
I do wonder if it is worth taking a plunge to make an open system out of the market yet ?
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