SEC Approves Rule on Securitized-Debt Trading Data
Feb. 24 (Bloomberg) -- The U.S. Securities and Exchange Commission approved a plan that will initially withhold from the public trading data on securities backed by loans and leases even as regulators start collecting the information.
The SEC agreed to a Financial Industry Regulatory Authority proposal to expand its Trade Compliance and Reporting Engine, known as Trace, to cover the securities, according to a notice late yesterday on the agency’s Web site. The SEC said it “encourages” Finra, the U.S. brokerage industry’s main regulator, to follow through on its plan to study whether to publicly release trading prices and other data.
Trace started in 2002, providing the first real-time data on most corporate bond trading to anyone with Internet access. Finra’s proposal for asset-backed bonds only calls for it to consider disclosing such information, which it says it may confuse investors or reduce liquidity, even after the opacity of the market contributed to the worst financial crisis since the 1930s.
More disclosure “would go a long way toward helping ensure what occurred over the last couple of years didn’t occur again,” said Jeffery Elswick, the director of fixed income at San Antonio, Texas-based Frost Investment Advisors, which oversees $6.5 billion. “I personally have had a lot of conversations with broker-dealers where I say, ‘I can’t believe the SEC hasn’t required something like this.’”
In its request to the SEC, Finra said it decided against immediate public disclosure of prices because of the potential to mislead investors or make trades harder to execute.
‘Just Cautious’
“We’re just cautious,” Steven Joachim, Finra’s executive vice president for transparency services, said today in a telephone interview. “We want to be sure what we do is a positive and doesn’t create any problems, because once you move down the path of disseminating something, it’s very hard to take it back out of the marketplace.”
Collecting the information will allow the New York and Washington-based organization to assess the impact on specific markets and let regulators better detect fraud, market manipulation and other illegal activity, according to Finra.
Asset-backed debt was among the largest sources of more than $1.7 trillion of writedowns and credit losses at the world’s largest financial companies since the start of 2007, according to data compiled by Bloomberg.
Plan Release
Finra will release a formal plan within 60 days calling for collection of data no later than 270 days after that, Joachim said. At least an additional six months would be needed to start disclosure, providing the SEC the time to approve a new proposal, he said. Apart from whether to disclose information, Finra also needs to assess the best ways to do so, he said.
Investors now rely on quotes from brokers and pricing services run by companies including Interactive Data Corp. and Thomson Reuters. RBS Securities Inc. created a fee-based valuation service last year, saying traditional providers often fail to understand nuances of the markets. Bloomberg LP, the parent of Bloomberg News, also offers valuations of some securitized debt.
“Ultimately, if we want these markets to evolve and mature, the rational next step is to get more price discovery,” said Eugene Flood, chief executive officer at Chapel Hill, North Carolina-based Smith Breeden Associates Inc. The firm oversees about $15 billion and has analyzed mortgage bonds for more than 25 years.
Company Bonds
For company bonds, investors can obtain prices through Trace, which began July 1, 2002, and was fully phased in by 2005.
Finra’s predecessor, the National Association of Securities Dealers, originally ran Trace, which at first disseminated information on only 500 corporate debt securities. Additional groups of bonds were added over time as the NASD studied the potential impacts.
Bond dealers sought the gradual introduction in 2001 before Trace’s rollout. They warned that releasing most bond prices to the public could hurt “liquidity,” or ease of trading, in thinly traded sectors of the corporate bond market.
Trace offers direct access to data for most company debt, including trade-by-trade prices and statistics such as the most- active bonds, volume, advances, declines and new highs and lows.
Broadening Coverage
Trace will capture more trades next month, under a Finra plan approved last year. Securities firms will for the first time use the system to disclose prices for corporate bonds at the time of issuance and for so-called agency debt, a $2.5 trillion market of corporate borrowing by government-linked companies such as Fannie Mae and Freddie Mac.
Finra’s new initiative would extend coverage to about $5.3 trillion of mortgage securities with government-backed guarantees and $3.6 trillion of riskier securitized debt.
The Obama administration, in its June outline for steps that may be needed in an overhaul of the financial system, has called for Trace to expand to asset-backed securities. Disputes about the value of such debt during 2007 and 2008 prompted investors and lenders to question the health of banks and investment funds.
The subprime-mortgage crisis first roiled global markets in August 2007, with BNP Paribas halting withdrawals from three investment funds because it couldn’t properly value their holdings. That led to a run in the market for so-called asset- backed commercial paper and restrained interbank lending.
‘Random Prices’
In a June 2008 report, JPMorgan Chase & Co. mortgage-bond analyst Matthew Jozoff wrote that “seemingly random prices from third-party pricing services” were helping to dissuade investors from buying bonds backed by Alt-A mortgages, or those between prime and subprime.
Revealing trading data on asset-backed bonds may cut investors’ costs and brokers’ profits.
Trace disclosures for corporate bonds have caused bid-ask spreads -- the difference between the price at which investors buy and sell the securities -- to narrow and would likely do so for securitized debt, according to a comment letter on Finra’s proposal from the American Securitization Forum and the Securities Industry and Financial Markets Association, the industry’s largest trade groups.
Reducing profits for brokers “would create disincentives to market makers from providing liquidity and maintaining inventories of bonds” in certain markets, the groups said. That may affect “the depth of these markets, the ability for both dealer and investor participants to trade in significant-sized blocks of securities, and the ability to execute trades in a timely fashion,” they said.
Disclosing data may cause problems because specific asset- backed bonds can trade infrequently, with attributes of the underlying loans changing in the interim and values of similar securities not always comparable, said Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd., which advises community banks investing $20 billion of assets. There are more than 1 million unique securitized bonds, compared with tens of thousands of corporate securities.
source: bloomberg
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