Law in Quebec

The Canadian Securities Administrators, the umbrella group for Canada’s provincial securities regulators, announced plans to make the Investment Industry Regulatory Organization of Canada (IIROC), a national self-regulatory organization that oversees all investment dealers and their trading activity in Canada’s debt and equity markets, the information processor for the corporate bond market. IIROC is now disseminating in the web and free of charge post-trade information for certain corporate debt securities, subject to volume caps. In 2017 IIROC will expand the dissemination of information to trades in all corporate debt securities. Dissemination however will not be in real time. Rather it will be reported two days after a trade has been executed, according to CSA staff notice 21-317.

“Transparency is always a good thing, and it’s long overdue for the corporate issuers, not as a class per se, but simply because you have that now in all of the other products,” said Geoffrey Cher, a Toronto securities lawyer with Wildeboer Dellelce LLP. “This is simply consistent from a harmonization perspective. Over the last three-to-five years a big part of what our securities regulators have been doing is harmonizing instruments and products and the data you could get.”

The fixed income market in Canada is huge, worth approximately $2 trillion in long-term securities and $322 billion in the money-market as of December 2014, revealed a comprehensive report on the Canadian bond markets penned by the Ontario Securities Commission. Bonds issued by various levels of governments make up 51 per cent of the bonds outstanding in the domestic market. The other half is nearly evenly split between term securitizations (23 per cent or $486 billion) and corporate bonds (22 per cent or $486 billion), noted the OSC report.

The CSA staff notice comes as regulators around the world are calling for greater transparency in the secondary market for bonds.  Unlike equity markets, bonds are not traded on public exchanges. Instead they are private transactions where some larger institutions may trade bilaterally. Most however work with securities dealers acting as intermediaries to find a trading counterparty or take on the position as principal. Since bonds trade in a decentralized, over-the-counter market, investors — particularly retail investors — have limited access to pricing and trade volume information, said the OSC study. Investors also have little ability to determine the components of the retail price, and have limited access to many bonds. “Asymmetric information in the fixed income market places retail investors at a disadvantage relative to other participants,” said the OSC report, adding that many bond trades are still completed over the phone. Even regulators are somewhat in the dark, especially around trade reporting, as there are fewer regulatory requirements in the fixed income market compared to the equity market, noted the OSC study.

That’s beginning to change. While the shift towards greater transparency began in the United States with the introduction of the Trade Reporting and Compliance Engine (TRACE) system in 2002, which disseminates in real-time post-trade information on corporate bonds, it is only relatively recently that it has begun gaining momentum elsewhere. European regulators are considering following the U.S. lead, and the CSA is finally now taking steps. “International developments are what is driving action here,” observed Marian Passmore, director of policy and chief operating officer at the Canadian Foundation for Advancement of Investor Rights (FAIR Canada). “To some extent Canada is catching up with initiatives that have already been under way elsewhere. But they have taken a step in the right direction.”

The investment industry, while commending the CSA for devoting increased attention to the fixed income market, warns that too much transparency on some segments of the market could be detrimental. “Efficient functioning of fixed income markets, particularly small markets such as Canada’s, require a balance between price transparency and trade anonymity,” said Jack Rando,  director of capital arkets at the Investment Industry Association of Canada (IIAC). “If investor or dealer anonymity is compromised, it will have a direct impact on market behaviour.” Rando added that the CSA needs to be “sensitive” to the delicate balance between transparency of information and market liquidity and efficient functioning. Any policy framework that lowers incentives for dealers “to make markets,” maintain inventories and trade securities will be “detrimental” to the market.

But even industry players and large investors are grumbling about the lack of transparency in the fixed income market. Invesco Canada Ltd., a leading global investment firm, asserts that there is currently an uneven playing field between market makers and buy-side participants. “Excess profits today are made at the expense of buy-side participants exclusively,” said Invesco in a brief  when the CSA invited comments over what was then a proposal. Others griped about the dissemination delays, maintaining that a two-day delay between the time of a transaction and the time it will be publicly reported by IIROC is too long. The Portfolio Management Association of Canada said that a two-day delay will not be “helpful” to the market and will end up providing “stale” information. That’s why it recommended a one-day delay. Alternatively it suggested a tiered approach, with less liquid fixed income be subjected to a longer delay than their more liquid counterparts.

The CSA so far has stood its ground but seems to suggest that it is open to review the situation. In CSA staff notice 21-317, the regulatory organization said that it will be analyzing the impact of the new transparency framework and may possibly decrease the dissemination delay for “appropriate” bonds. It also said that it is currently reviewing dealer’s practices regarding new issue allocations, and will determine what – if any – regulatory action is needed.

“Unless you are a distressed debt player in terms of strategy that you are running, the need for immediate pricing in the fixed income market is probably mitigated,” said Cher.

Investor advocates like FAIR Canada would have liked to have seen CSA move quicker on the issue of transparency in the fixed income market but is now hoping that the regulatory body seizes the opportunity. “The collection of data by the regulators is very critical and needs to be as comprehensive as possible so that they have a really good understanding of what’s going on in the markets they regulate,” said Passmore.