“The new regulation is a solid step in the right direction,” said Steve Thom, Managing Director at RBC Capital Markets, referring to the September 17 announcement by Canadian Securities Administrators (CSA) on a new reporting system.
“The new regulation will increase price transparency, which is important for investors to be able to make more informed decisions. This is a good thing,” said Thom, “but the big thing is size.” He was the second of three panellists at a luncheon, sponsored by the CFA Society Toronto on September 18, 2015, to discuss changes in the fixed income markets.
However, “full size transparency would hurt liquidity, and disclosing full sizes [of trades] is of no benefit to the regulators. By limiting the size disclosed to 2 million, this maintains the liquidity and integrity of the market.”
Corporate bonds account for $500 billion of trading volume in Canada. Thom contrasted the liquidity available in the U.S. and Canadian markets. “In Canada, on a good hot issue, we have 75 buyers. Regularly, it is 40 to 45.” As an example, he said, “on a triple-B long deal, if six are sellers, that has a large effect on the marketplace.” In other words, because the number of clients is smaller the dealer group needs to step in and act as a buffer.
Uncertainty over markets has had a dampening effect. “In August 2015, no-one was willing to step into the market.”
“With everyone talking about liquidity, it becomes a self-fulfilling prophecy,” said Thom. In Canada the secondary trading in Canada is more concentrated than in the U.S., with the top three dealers accounting for almost 65 percent of trading, whereas in the U.S. there are 20 to 25 top dealers.
“As the regulatory environment gets stronger, we’ve had to hold back some capital,” he said, noting that bond dealers tend to work first on larger blocks, to get them to fit. “Liquidity has changed, and you have a different environment to work under.”
Regarding the new bond issues allocation process, Thom said he thought it works well. “We have a new issue allocation in place that takes into account all the information clients have provided us and I would assume all of our competitors have similar processes.” Retail investors have been “loud and clear” that they want greater participation in the new issues.
During the audience Q&A, Thom emphasized “liquidity of the market place is paramount.” He observed that nowadays market participants “are more selective about what they are putting on their books.”
As for the future, he said, “some of the market is moving towards an agency model but a larger part of the market is still done by taking liability. Given the current nature of the market, it’s important that clients and dealers maintain their relations and have conversations and don’t just rely on chat rooms and electronic information.” ª