In a letter to the Federal Reserve Bank and the Financial Industry Regulatory Authority, the Regional Bond Dealers Association today called on FINRA to suspend TRACE reporting of agency debt trades until bank dealers are required to comply with similar rules. Currently, banks do not have to submit such trade data, while broker-dealers that are not affiliated with banks are required to do so. This creates an unlevel playing field and, worse, severely limits the amount of price transparency available to investors and other market participants.
“We applaud FINRA’s commitment to transparency,” commented Mike Nicholas, Chief Executive Officer of the RBDA, “however, the exclusion of a large class of agency debt market participants compromises the reliability of the information that is ultimately reported and fails to protect the very market participants FINRA intended to help.”
FINRA expanded TRACE reporting effective March 1 of this year to include government agency debt to give market participants, especially retail investors, access to price information which was not readily available to non-professionals. Clearly, however, excluding bank dealers from reporting requirements distorts the available information, and it should be noted that bank-affiliated dealers accounted for all 15 of the top U.S. debt and equity underwriters as recently as 2008.
Further, requiring unaffiliated broker-dealers to submit data while excusing bank dealers creates a material competitive advantage for one group of dealers at the expense of the other. RBDA members across the country are already seeing a clear market reaction to this regulatory imbalance. On the very day TRACE was expanded, a number of financial institutions began taking steps to ensure that agency trades were handled by entities which, because of their status as banks, were beyond the reach of FINRA’s rules.
“There is absolutely no reason to believe that such counterproductive activity will not continue to spread as long as the imbalance is allowed to persist,” commented Mr. Nicholas. “In fact, those market participants who handle the largest number of trades in federal agency debt securities will have the greatest incentives to follow suit.”
In order to become compliant with the new reporting requirements, brokers-dealers must also develop new technology and administrative reporting systems, as well as pay reporting fees. These costs can be significant and create another imbalance compared to bank-affiliated dealers who do not incur these expenses.
