When it comes to technology advances in the fixed income markets in Canada, “peer-to-peer still needs some work,” said Robert Pemberton, Head of Fixed Income at TD Asset Management. His company’s client base “runs the gamut from retail right through to large investors.” Approximately two and a half million are mutual fund clients.
He was the third of three panellists at a September 18, 2015, luncheon sponsored by the CFA Society Toronto, and held at the Toronto Board of Trade. Participants were commenting on regulatory changes in the fixed income markets announced the day before. Canadian Securities Administrators (CSA) will implement a new system to report pricing and volume of trading in corporate bond trades. The first part will launch in July 2016; the second, a year later. The system will be piggybacked on the Investment Industry Regulatory Organization of Canada (IIROC) systems.
Pemberton pointed out that even “TRACE is stepping back from the degree of transparency that they provide.” In 2002, the Financial Regulatory Authority (FINRA) introduced TRACE (Trade Reporting and Compliance Engine) to increase price transparency in the U.S. corporate debt market. Unlike the U.S. fixed income market regulatory changes, Canada will have a 2-day lag period.
Regarding electronic trading platforms, “From the peer-to-peer perspective, when you put up a bid or offer, if it sits there for more than 5 minutes, you are transmitting a lot of information,” said Pemberton. He noted the request-for-quote system can be turned on or off by dealers or clients.
As for secondary liquidity in the markets, “it’s not the dealers’ responsibility to put a floor under the market,” said Pemberton. “Price discovery might be more difficult than in 2006.”
Regulators have been studying the allocation of new bond issues, which are typically marketed to institutional investors before small investors. “When we give dealers guidance on a new issue, we are happy with the outcome,” said Pemberton. “We must treat all of our clients fairly from an allocation perspective. We’re comfortable giving the dealers our numbers.”
During the audience Q&A, Pemberton had some advice for participants. “The regulatory environment has changed, but it’s here to stay, so deal with it.” When the talk turned to the increasingly common agency trading in the fixed-income world, he emphasized that such a business model depends on trust that is “hard won, and easily lost. As a result, you should never put yourself in a position to lose it.”ª