| <html> | |
| <title> - THE BOND PRICE COMPETITION IMPROVEMENT ACT OF 1999</title> | |
| <body><pre> | |
| [House Hearing, 106 Congress] | |
| [From the U.S. Government Publishing Office] | |
| THE BOND PRICE COMPETITION IMPROVEMENT ACT OF 1999 | |
| ======================================================================= | |
| HEARING | |
| before the | |
| SUBCOMMITTEE ON | |
| FINANCE AND HAZARDOUS MATERIALS | |
| of the | |
| COMMITTEE ON COMMERCE | |
| HOUSE OF REPRESENTATIVES | |
| ONE HUNDRED SIXTH CONGRESS | |
| FIRST SESSION | |
| __________ | |
| MARCH 18, 1999 | |
| __________ | |
| Serial No. 106-8 | |
| __________ | |
| Printed for the use of the Committee on Commerce | |
| <snowflake> | |
| U.S. GOVERNMENT PRINTING OFFICE | |
| 55-636CC WASHINGTON : 1999 | |
| ------------------------------------------------------------------------------ | |
| For sale by the U.S. Government Printing Office | |
| Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 | |
| COMMITTEE ON COMMERCE | |
| TOM BLILEY, Virginia, Chairman | |
| W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan | |
| MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California | |
| MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts | |
| JOE BARTON, Texas RALPH M. HALL, Texas | |
| FRED UPTON, Michigan RICK BOUCHER, Virginia | |
| CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York | |
| PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey | |
| Vice Chairman SHERROD BROWN, Ohio | |
| JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee | |
| CHRISTOPHER COX, California PETER DEUTSCH, Florida | |
| NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois | |
| STEVE LARGENT, Oklahoma ANNA G. ESHOO, California | |
| RICHARD BURR, North Carolina RON KLINK, Pennsylvania | |
| BRIAN P. BILBRAY, California BART STUPAK, Michigan | |
| ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York | |
| GREG GANSKE, Iowa THOMAS C. SAWYER, Ohio | |
| CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland | |
| TOM A. COBURN, Oklahoma GENE GREEN, Texas | |
| RICK LAZIO, New York KAREN McCARTHY, Missouri | |
| BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio | |
| JAMES E. ROGAN, California DIANA DeGETTE, Colorado | |
| JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin | |
| HEATHER WILSON, New Mexico BILL LUTHER, Minnesota | |
| JOHN B. SHADEGG, Arizona LOIS CAPPS, California | |
| CHARLES W. ``CHIP'' PICKERING, | |
| Mississippi | |
| VITO FOSSELLA, New York | |
| ROY BLUNT, Missouri | |
| ED BRYANT, Tennessee | |
| ROBERT L. EHRLICH, Jr., Maryland | |
| James E. Derderian, Chief of Staff | |
| James D. Barnette, General Counsel | |
| Reid P.F. Stuntz, Minority Staff Director and Chief Counsel | |
| ______ | |
| Subcommittee on Finance and Hazardous Materials | |
| MICHAEL G. OXLEY, Ohio, Chairman | |
| W.J. ``BILLY'' TAUZIN, Louisiana EDOLPHUS TOWNS, New York | |
| Vice Chairman PETER DEUTSCH, Florida | |
| PAUL E. GILLMOR, Ohio BART STUPAK, Michigan | |
| JAMES C. GREENWOOD, Pennsylvania ELIOT L. ENGEL, New York | |
| CHRISTOPHER COX, California DIANA DeGETTE, Colorado | |
| STEVE LARGENT, Oklahoma THOMAS M. BARRETT, Wisconsin | |
| BRIAN P. BILBRAY, California BILL LUTHER, Minnesota | |
| GREG GANSKE, Iowa LOIS CAPPS, California | |
| RICK LAZIO, New York EDWARD J. MARKEY, Massachusetts | |
| JOHN SHIMKUS, Illinois RALPH M. HALL, Texas | |
| HEATHER WILSON, New Mexico FRANK PALLONE, Jr., New Jersey | |
| JOHN B. SHADEGG, Arizona BOBBY L. RUSH, Illinois | |
| VITO FOSSELLA, New York JOHN D. DINGELL, Michigan, | |
| ROY BLUNT, Missouri (Ex Officio) | |
| ROBERT L. EHRLICH, Jr., Maryland | |
| TOM BLILEY, Virginia, | |
| (Ex Officio) | |
| (ii) | |
| C O N T E N T S | |
| __________ | |
| Page | |
| Testimony of: | |
| Campell, J. Patrick, Chief Operating Officer and Executive | |
| Vice President, National Association of Securities Dealers, | |
| Inc........................................................ 21 | |
| Green, Micah S., Executive Vice President, the Bond Market | |
| Association................................................ 27 | |
| Levitt, Hon. Arthur, Chairman; accompanied by Robert L.D. | |
| Colby, Deputy Director, Division of Market Regulation, | |
| Securities and Exchange Commission......................... 7 | |
| (iii) | |
| THE BOND PRICE COMPETITION IMPROVEMENT ACT OF 1999 | |
| ---------- | |
| THURSDAY, MARCH 18, 1999 | |
| House of Representatives, | |
| Committee on Commerce, | |
| Subcommittee on Finance and Hazardous Materials, | |
| Washington, DC. | |
| The subcommittee met, pursuant to notice, at 11:07 a.m., in | |
| room 2322, Rayburn House Office Building, Hon. Michael Oxley | |
| (chairman) presiding. | |
| Members present: Representatives Oxley, Ganske, Lazio, | |
| Shimkus, Fossella, Blunt, Bliley (ex officio), Towns, Stupak, | |
| Engel, DeGette, Barrett, Luther, Capps, and Markey. | |
| Staff present: David Cavicke, majority counsel; Linda | |
| Dallas Rich, majority counsel; Brian McCullough, professional | |
| staff member; Robert Simison, legislative clerk; Consulea | |
| Washington, minority counsel. | |
| Mr. Oxley. The subcommittee will come to order. The Chair | |
| would like to recognize the chairman of the full Commerce | |
| Committee, the gentleman from Richmond, Mr. Bliley for an | |
| opening statement. | |
| Chairman Bliley. I thank the chairman, the members of the | |
| committee, and the people who will testify. I'm very happy to | |
| see a good friend, Mr. Levitt, the Chairman of the SEC. I | |
| unfortunately have to be in two places at one time, which is a | |
| difficult thing to do at best. But, we have a hearing on | |
| electricity restructuring at 11 a.m. down in 2123, so I'll have | |
| to shuttle back and forth. | |
| In the 105th Congress, the committee conducted an inquiry | |
| into the U.S. bond markets and we learned three things. First, | |
| the bond market in the United States is huge. The ability of | |
| trading of Government securities exceeds $300 billion; daily | |
| trading of corporate debt, about $15 billion; the daily trading | |
| in municipal bonds about $9 billion. In comparison, the average | |
| daily value of stock traded on the New York Stock Exchange is | |
| about $25 billion. | |
| Second, the bond market offers a way for companies and | |
| cities to raise money with interest rates more favorable than | |
| those offered by banks. To the extent that companies and cities | |
| use the bond market, their cost of capital will be lower. They | |
| will be more competitive and they will save taxpayer's money. | |
| Indeed, today, in the Wall Street Journal, there's an article | |
| that AT&T may be about to raise somewhere between $6 and $8 | |
| billion in the bond market by themselves. | |
| Third, the level of transparency in parts of the bond | |
| market is poor. Transparency needs the ability of someone | |
| buying a bond to know the price at which the bond is trading. | |
| When people buy cars or furniture, they often comparison shop | |
| and make decisions based on price. For many investors in bonds, | |
| this comparison shopping is not possible. We heard testimony in | |
| September that two investors buying the same bond at the same | |
| time from the same dealer can be given very different prices, | |
| prices differing by as much 6 percent, a full year's worth of | |
| interest. | |
| I believe this situation is unacceptable. We have received | |
| a study from a professor at Purdue and an economist at the | |
| Federal Reserve that indicates that improved transparency will | |
| reduce spreads and improve prices to investors in the bond | |
| market. I ask unanimous consent that that study be made a part | |
| of today's hearing record. | |
| Mr. Oxley. Without objection. | |
| [The study appears at pg. 42.] | |
| Chairman Bliley. Today, we will consider a committee draft | |
| of legislation designed to improve transparency in the bond | |
| market. It is simple legislation. It directs the SEC to adopt | |
| rules facilitating transparency in these markets with certain | |
| minimum standards in that rulemaking. The SEC will take | |
| comments from the affected parties and will come up with the | |
| best way to improve price competition in these markets. | |
| This is an important goal for our markets and investors. | |
| Anyone using the bond market to save for retirement or | |
| education will benefit from it. Each of the witnesses has | |
| worked cooperatively with the committee to develop this | |
| bipartisan legislation. I commend Chairman Oxley for holding | |
| this hearing and for working with me on this legislation. I | |
| also commend John Dingell, Ed Towns, and Ed Markey for their | |
| cooperation in the project. | |
| I urge all members to consider this important legislation. | |
| After the hearing, it will be revised based on the testimony we | |
| hear today. It will then be introduced. I ask all members to | |
| consider co-sponsoring this legislation with me, and I yield | |
| back to balance my time. And, again, thank you, Mr. Chairman. | |
| Mr. Oxley. I thank the chairman and appreciate his remarks. | |
| The Subcommittee on Finance and Hazardous Materials has | |
| developed a track record of legislative accomplishments in the | |
| last two Congresses, improving our financial markets through | |
| competition. Competition forces change and change produces | |
| efficiency. Our commitment to apply these principles to the | |
| financial markets has translated into tangible results that | |
| benefit investors, as well as businesses. | |
| Of the many accomplishments of which the subcommittee can | |
| be proud, the most notable recent examples include the decimal | |
| pricing initiative, the National Securities Market Improvement | |
| Act, reduction of stock transaction fees, and securities | |
| litigation reform legislation. The decimal pricing effort, | |
| although not fully implemented, had an immediate impact for | |
| investors and business, alike. | |
| When the Exchanges voluntarily moved to reduce the minimum | |
| increment for trading stocks from \1/8\th to \1/16\th, | |
| individual investors and institutional investors began saving | |
| money immediately. And with the addition of twice as many | |
| prices at which to buy or sell a stock, the markets have | |
| experienced greater volume. We obviously don't take credit for | |
| the robust market volume that we've experienced over the last 2 | |
| years, but there is sufficient evidence that the move has in no | |
| way harmed market liquidity. | |
| Our current effort to improve the transparency in the | |
| corporate bond market originates with the same philosophy: | |
| improve information, eliminate anti-competitive and regulatory | |
| barriers and greater competition will result to benefit all | |
| aspects of the markets. | |
| When this subcommittee first examined this issue last | |
| September, the consensus was that the corporate bond market was | |
| not as transparent as other segments of the bond market. We | |
| determined that the market for these bonds could become more | |
| transparent. The more that relevant price and yield information | |
| is available, the more competition will improve. This in turn | |
| will improve prices for people buying bonds, their pension | |
| funds, and their mutual funds. | |
| Chairman Bliley challenged the bond market participants to | |
| improve transparency of the bond market. They have responded | |
| well. On their own initiative, the private sector has devoted | |
| its own resources to develop a system to begin to shed more | |
| light on the corporate bond market. I understand that one of | |
| these initiatives is scheduled to be operational within the | |
| next 2 months. I commend them for their efforts. | |
| Today, we are going to examine legislation to buildupon | |
| this work. The SEC has possessed the authority since 1975 to | |
| facilitate price transparency in the bond markets. The | |
| committee draft being considered today instructs the SEC to use | |
| that authority to guarantee transparency in these markets. | |
| Additionally, the committee draft sets certain minimum | |
| standards for transparency in the corporate bond market and | |
| calls for a study of transparency in the municipal market. | |
| I commend Chairman Bliley for his leadership in this | |
| initiative. I also thank the witnesses for their constructive | |
| comments in the drafting process. I recognize Ed Towns, our | |
| ranking member, John Dingell, the ranking member of the full | |
| committee, and my friend from Massachusetts for their help and | |
| support of this legislation. We anticipate that the legislation | |
| will be refined on the basis of today's hearing and then | |
| introduced. I hope we will have the support of all members for | |
| this worthwhile legislation. | |
| That ends the Chair's opening statement and I now turn to | |
| the ranking member, the gentleman from New York, Mr. Towns. | |
| Mr. Towns. Thank you, very much, Mr. Chairman, for holding | |
| this hearing. I appreciate having the opportunity here from our | |
| distinguished witness on bond market transparency and the | |
| committee draft bill, the Bond Price Competition Improvement | |
| Act of 1999. | |
| In 1972, Don Riggins stated in his book, A View From the | |
| Street, that at present, Wall Street is hiding behind a | |
| protective pricing system. While it preaches free competition | |
| and free market, as I mentioned in a public speech, that is | |
| like catching Carrie Nation tickling in the basement. | |
| We say that competition is good for everyone. We base our | |
| investment advice on the competitive stance of economy we are | |
| analyzing. The price of a stock is set by the forces operative | |
| in the marketplace. Yet, we live with this anomaly of a fixed | |
| rate structure. We know there's exceptions to our own rules. | |
| Prices are arrived at by a study of cost and markup for | |
| profits. Prices change as cost rise or fall. And as the demand | |
| for the product of service changes, they react to new | |
| efficiencies, to inflationary or deflationary pressures. That's | |
| the creed. Wall Street must learn to live by it. So, I suggest | |
| that in stock trading, we crown the customer king. | |
| In the 1975 Act Amendment, Congress abolished fixed | |
| commission rates and mandated that the SEC facilitate a | |
| national market system inequities that included implementation | |
| of a composite tape and quotation system. Twenty-five years | |
| later, we have the most transparent, efficient, liquid, fair, | |
| and competitive securities market in the entire world. The | |
| customer is king. But not so in the bond markets. Wall Street | |
| largely still lives as an exception to its own rules. | |
| Mr. Chairman, I'm pleased that we are going to try to shed | |
| a little sunlight on those markets, as well. It is long, long, | |
| long overdue. In June of last year, the hearing on on-line | |
| trading, this subcommittee heard testimony from Mr. Fondren, | |
| that at present, no centralized exchange for bonds, current | |
| price information remains in the hands of a small group of | |
| insiders perpetuating a system that is both inefficient and | |
| unnecessarily costly. | |
| In September, Mr. Chairman, Mr. Levitt gave a speech, | |
| calling for increased price transparency in the corporate debt | |
| market, to help investors make better decisions and increase | |
| confidence in the fairness of the markets. At this | |
| subcommittee's gala September 29, 1998, Chairman Bliley issued | |
| a challenge to the SEC and to the bond market to get going and | |
| clean up this--clean this market up. I look forward to hearing | |
| their reports this morning on what progress has been made. Both | |
| contend, in their written statements, that they are uniquely | |
| qualified to develop the system for public dissemination of | |
| bond transaction information. But, I hope we are not being | |
| asked to anoint any one system at this point. It would seem | |
| that there is room for both, if not others, as well. | |
| I understand that the draft bill was not finished in time | |
| for the witnesses to include detailed comments on the draft in | |
| their testimony, and I understand that. So, I hope that the | |
| chairman will direct them to submit written comments and hold | |
| the record open for that purpose. I look forward to working | |
| with the chairman of the full committee and the chairman of the | |
| subcommittee. I salute you both for leadership. And, at this | |
| time, I would yield back and say to you that I look forward to | |
| working very closely with you in the days and months ahead. | |
| Mr. Oxley. I thank the gentleman for his opening statement. | |
| The gentleman from Iowa, Mr. Ganske. | |
| Mr. Ganske. Thanks, Mr. Chairman. I look forward to the | |
| testimony from Chairman Levitt and I yield back. | |
| Mr. Oxley. The gentlelady from Colorado, Ms. Degette. | |
| Ms. Degette. Thank you, Mr. Chairman, and thank you for | |
| having this hearing today. I, too, look forward to the | |
| introduction of the Bond Price Competition Improvement Act of | |
| 1999. I think that there are three broad economic benefits that | |
| price transparency can bring to us. | |
| First of all, it can bolster investor protection by | |
| providing investors with better opportunities to monitor the | |
| behavior of the entities that make markets of secondary | |
| securities. Second, it can improve market liquidity by boosting | |
| investor market maker con- | |
| fidence in the market. Finally, it can enhance market | |
| efficiency by boosting a price discovery process of moving | |
| toward the optimal price for a particular security. | |
| With that, Mr. Chairman, I think there are great benefits. | |
| I would commend Mr. Levitt and others through their work in | |
| this area, as well as you. And I'm so eager to hear my | |
| colleague from Massachusetts comments, which I know are always | |
| wonderful. Usually, I have to follow him when I speak, so I'll | |
| yield back the balance of my time. | |
| Mr. Oxley. The gentlelady bravely yields back her time, and | |
| we now recognize the aforementioned gentleman from the Bay | |
| State. | |
| Mr. Markey. Thank you, Mr. Chairman, very much. And over | |
| the years, I've found that the single most difficult thing to | |
| actually have fun with is the bond market. | |
| By definition, it's dull. I mean, it's really dull. At | |
| least with class, you get a little bit attention. But, in the | |
| bond market, it's really--it's hard, you know. It's a hard | |
| thing to talk about. | |
| I'm so glad that we have our great Chairman of the | |
| Securities and Exchange Commission with us today; he's going to | |
| go down in the annals of the Securities and Exchange | |
| Commissions as one of the greats. If there's a Mount Rushmore, | |
| they'd be carving his picture out right now. He's at the top. | |
| So, we're very glad to have him here with us today, and you, as | |
| well, Mr. Colby. We thank you for coming. | |
| As you know, the Commerce Committee has had a long | |
| tradition of leadership in eliminating obstacles to the | |
| dissemination of market information to investors. It goes back | |
| a long, long way. The goal has always been to ensure that the | |
| public got market information. | |
| At the time that the 1975 Act passed, Congress added | |
| amendments to the Exchange Act, which directed the SEC to | |
| facilitate the creation of a national market system for | |
| qualified securities. When Congress enacted that legislation, | |
| it did not limit its application merely to stocks, but to all | |
| securities, including debt securities. In fact, the only type | |
| of securities that were not included were the so-called exempt | |
| securities, which had defined in the securities laws to include | |
| treasury bonds, government agency securities, and municipal | |
| securities. | |
| At the time this legislation passed, there were many in the | |
| broker-dealer community, who opposed it. But some 24 years | |
| later, the Dow Jones industrial average is pleased to top | |
| 10,000 mark and all observers agree that our stock market are | |
| much more efficient and more liquid, in large part due to their | |
| increased transparency. | |
| Over the years the SEC has not made much use of the powers | |
| Congress granted to it in this area to bring transparency to | |
| the corporate bond market. A decade after passage of the | |
| National Market System legislation, this committee also became | |
| concerned about the inadequacy of price transparency in the | |
| government securities market. Those concerns ultimately led the | |
| committee to include in the Government Securities Act of 1986 a | |
| provision mandating a General Accounting Office study of the | |
| matter. The GAO's final report in 1990 called for Federal | |
| regulation of price transparency in the government bond market. | |
| Based upon this recommendation, I crafted legislation, which | |
| would have extended the SEC price transparency authority to the | |
| government market. | |
| But this provision had to be dropped from the final version | |
| of the Government Securities Act Amendments of 1993, due to the | |
| intense opposition of the government bond dealers. Instead, the | |
| committee mandated that the SEC include, in its annual report | |
| to Congress, a requirement that the SEC analyze the report on | |
| the nature and adequacy of price transparency in the government | |
| securities market, and on any remedial legislation needed to | |
| address any future deterioration in investor access to market | |
| information. I look forward to hearing from Chairman Levitt | |
| this morning regarding the SEC's administration of this | |
| reporting provision. | |
| But the principle reason we are meeting here today is to | |
| review new draft legislation, which would direct the SEC to use | |
| the authorities Congress granted it back in 1975, to issue | |
| rules within 12 months to improve price transparency in the | |
| corporate bond market. I support this initiative, because I | |
| believe that bond investors deserve to get full access to the | |
| type of market information that will better enable them to | |
| determine whether they are getting the best price for their buy | |
| and sell orders. | |
| I know that Chairman Levitt has already taken some | |
| preliminary steps to move the industry forward in this area and | |
| that, as a result of his leadership, the NASD is currently | |
| considering rule changes that would create transparency in | |
| audit trail systems for the corporate bond market. In addition, | |
| I understand that the Bond Market Association has also stepped | |
| in with a plan to make certain market information available. I | |
| welcome each of these initiatives and would suggest that the | |
| legislation we are reviewing today should be seen as | |
| complimenting these efforts. | |
| I look forward to the testimony of the Chairman and our | |
| other distinguished witnesses. And Mr. Chairman, I congratulate | |
| you on the vigor with which you are continuing to pursue your | |
| chairmanship, looking into areas in which we can move on a | |
| bipartisan manner, to ensure that the market works in a more | |
| transparent fashion. And I thank you. | |
| Mr. Oxley. I thank the gentleman from Massachusetts. And | |
| try, as he might, to make the bond issue a little more sexy, | |
| you failed just a little bit. | |
| But, that was a good try. It was kind of like Boston | |
| College trying to get into the NCAA tournament, but that's | |
| another story. | |
| The gentleman from Missouri. | |
| Mr. Blunt. Of course, the Southwest Missouri State Bears | |
| play Duke tomorrow in the NCAA and after that 30 point win on | |
| Tennessee, which was harder to predict than anything in the | |
| bond market, I think Mr. Chairman, I'll just listen today. | |
| Mr. Oxley. I thank the gentleman. The gentleman from Long | |
| Island. | |
| Mr. Lazio. Once again, thank you for your interest and | |
| commitment and drive on this. And although we've had some | |
| disagreements in the past, I can say now, I think you were more | |
| right than I was. I look forward to the rest of the hearing. | |
| Welcome, my witnesses. | |
| Mr. Oxley. Did the reporter get that down? | |
| The gentlelady from California. | |
| Ms. Capps. Thank you. Thank you, Mr. Chairman. I'm a new | |
| member to this Subcommittee on Finance and Hazardous Materials | |
| and I can't think of a more fitting introduction to the | |
| committee than to hear the testimony today from the Honorable | |
| Arthur Levitt and from Mr. Robert Colby. So, I look forward to | |
| your presentation. Thank you, very much. | |
| Mr. Oxley. Thank you and welcome to the subcommittee. The | |
| gentleman from the upper peninsula. | |
| Mr. Stupak. Thank you, Mr. Chairman. I'll pass on the | |
| opening statement and look forward to our witnesses. And thanks | |
| for holding this hearing. | |
| Mr. Oxley. I thank the gentleman. We now turn to our | |
| distinguished Chairman of the Securities and Exchange | |
| Commission. We appreciate, as usual, Chairman Levitt, your | |
| participation in this debate; and Mr. Colby, welcome, as well. | |
| We were honored to visit the SEC at your request. I think | |
| speaking from all the members and staff who attended, it was | |
| the most worthwhile opportunity to learn more about what goes | |
| on over there and to understand fully the major | |
| responsibilities that you have and that you've done so well in | |
| carrying out. So, thank you and you're welcome to begin any | |
| time. | |
| STATEMENTS OF HON. ARTHUR LEVITT, CHAIRMAN; AND ROBERT L.D. | |
| COLBY, DEPUTY DIRECTOR, DIVISION OF MARKET REGULATION, | |
| SECURITIES AND EXCHANGE COMMISSION | |
| Mr. Levitt. Thank you, very much. I am accompanied by Bob | |
| Colby, who is the Deputy Director of the Division of Market | |
| Regulation and an absolutely essential component in dealing | |
| with the many complex issues that division deals with, in our | |
| effort to see to it that competition in our markets is both | |
| fierce and fair. | |
| Let me say at the outset that I support the draft bill, the | |
| Bond Price Competition Improvement Act of 1999, which directs | |
| the Commission to use its existing authority to bring | |
| transparency to the corporate debt market. By adding the weight | |
| of congressional action to that of the Commission, I think the | |
| bill sends a strong message throughout the marketplace as to | |
| the importance of this initiative. I know that your intent is | |
| not to constrain prompt Commission action in any way. There is | |
| a provision within the bill that we have some reservations | |
| about, but I know we're working closely with the committee | |
| staff to resolve that issue. | |
| Again, as I said in my speech last fall and previous | |
| testimony before this subcommittee, I think the time has come-- | |
| it's probably long overdue--to illuminate this needlessly dark | |
| corner of the Nation's capital markets. Clearly, the technology | |
| now exists to address this issue, to gather transaction prices, | |
| to distribute them, and probably most importantly to interpret | |
| them in a timely, accurate, and efficient fashion. | |
| Today, the bond market touches just about every aspect of | |
| our lives, from the cost of building schools and hospitals to | |
| corporate investments in plant and equipment. It impacts the | |
| assets of public and private pension funds, and it channels | |
| funds to mortgages, to car loans, and a whole universe of | |
| activities important in our day to day lives. | |
| The increase in the significance of the bond market is due, | |
| in part, to its absolutely phenomenal growth. Since 1990, | |
| corporate bond issuance has increased more than fourfold; and, | |
| for high yield bonds, more than tenfold. In effect, movements | |
| in the bond market represent a daily vote on the part of | |
| investors throughout the world, in terms of America's economy. | |
| As you see prices go up and down, it's nothing less than a | |
| reflection of that vote, which takes place minute by minute. | |
| With $2.4 trillion outstanding, the corporate debt market today | |
| is nearly twice the size of the municipal debt market and | |
| almost 70 percent as large as the outstanding treasury market. | |
| Yet, even in the light of this very impressive growth, the | |
| corporate debt market has failed to keep pace with the | |
| transparency improvements that have taken place in our other | |
| markets, including, as Mr. Markey noted, in the government and | |
| municipal bond markets. Some corporate bonds are traded by | |
| interdealer brokers. But transaction prices, even for | |
| interdealer transactions, are certainly not displayed, nor are | |
| they reported in an organized way. Other transactions are not | |
| even reported at all. And without a trading desk and a | |
| sophisticated research department, it's nearly impossible to | |
| gather and to interpret market data. | |
| Investors, who lack the resources at their disposal, are | |
| really left with incomplete information. And as far as I'm | |
| concerned, incomplete information leaves investors vulnerable. | |
| And that, I think, is unacceptable. Guesswork can never be a | |
| substitute for readily available pricing data. Because bond | |
| values are often closely related, the price of one bond can | |
| very often give us important information about other comparable | |
| bonds. And that's why I think comprehensive price transparency | |
| is so absolutely crucial. | |
| Last fall, the Commission asked the NASD to adopt | |
| transaction reporting rules for corporate debt and to develop | |
| systems to collect and redistribute transaction prices on an | |
| immediate basis. We, also, requested that the NASD create a | |
| data base of transactions and a surveillance program to better | |
| detect fraud in the corporate debt market. In response to that, | |
| the NASD has formed a committee of market participants. It's | |
| called the Bond Market Transparency Committee, and their | |
| mission is to develop an industry guided proposal that will | |
| increase price transparency and oversight for the corporate | |
| debt market. We expect to see this proposal before the end of | |
| the summer. It will, I hope, lead to transaction reporting for | |
| corporate debt, improving transparency as pricing data is | |
| distributed to the public. In addition, we expect that the | |
| NASD's efforts will lead to improved surveillance for the | |
| market. | |
| The Bond Market Association is also developing a proposal | |
| for collecting or disseminating transaction information from | |
| interdealer brokers, but only investment grade corporate debt | |
| securities up to now. A lot of the details of that proposal and | |
| its relationship with the NASD's initiative are still unclear. | |
| I absolutely welcome industry support for increased | |
| transparency. And I certainly commit to working closely with | |
| the Bond Market Association, as we look forward with our | |
| initiative. | |
| Today, market information moves at the speed of light. The | |
| availability of accurate information to ensure the long-term | |
| viability of our markets has never been more important. | |
| Transparency is more significant, more effective than almost | |
| any regulatory fix. The corporate debt market is certainly not | |
| immune from these realities. And without reform, I believe that | |
| its current strength cannot guarantee its future prominence in | |
| an increasingly, and fiercely, competitive global market. I'm | |
| encouraged by the progress that we have seen since last fall. | |
| I'm encouraged by a cooperative spirit in both the public and | |
| private sector that appears to characterize this initiative. | |
| A concensus is developing, and I believe that NASD and | |
| industry action will demonstrate that seeking timely and | |
| accurate pricing information is both feasible and practical. | |
| Transparency leads to fair, more efficient, and clearly more | |
| effective markets. That's in the interest of investors. It's in | |
| the interest of our markets, dealers, and our economy as a | |
| whole. | |
| I thank the committee. | |
| [The prepared statement of Hon. Arthur Levitt follows:] | |
| Prepared Statement of Hon. Arthur Levitt, Chairman, Securities and | |
| Exchange Commission | |
| Chairman Oxley, Representative Towns, and Members of the | |
| Subcommittee: Thank you for giving the Securities and Exchange | |
| Commission (``Commission'') the opportunity to present its views on an | |
| issue in which we are actively engaged--enhancing transparency in the | |
| United States debt market. Today, I'd like to focus on three topics: | |
| (1) how transparency promotes fairness and efficiency in the U.S. | |
| capital markets, and how regulatory surveillance bolsters investor | |
| confidence in those markets, (2) why we believe this is the right time | |
| for improved transparency in the corporate bond market, and (3) the | |
| progress that has been made in this area since the Fall of last year, | |
| when I testified before you about the need to improve corporate bond | |
| transparency. | |
| i. regulatory goals of enhanced transparency and market surveillance | |
| Transparency | |
| The Commission has long believed that transparency--the extent to | |
| which prices are visible and understandable to market participants-- | |
| plays a fundamental role in promoting the fairness and efficiency of | |
| U.S. capital markets. Despite differences between the debt and equity | |
| markets, the Commission believes that transparency is just as important | |
| for bonds as it is for stocks. Indeed, because the value of a bond is | |
| usually closely related to the value of other bonds, the price paid for | |
| one bond may be important information about the value of many other | |
| bonds. | |
| In order to make informed decisions, investors must know the prices | |
| recently paid for debt instruments generally, as well as for the | |
| specific bonds they hold or that are being offered in the market. | |
| Often, there are no recent market prices for the bonds an investor | |
| holds, and their value must be imputed from the prices of other bonds. | |
| Comprehensive price transparency is therefore critical to informed | |
| investment decisions. Informed investors, armed with accurate | |
| information, ensure that market prices represent fair values. And fair | |
| market prices, in turn, ensure that the markets perform their economic | |
| function of efficiently allocating capital resources. | |
| Because transparency increases the fairness and efficiency of | |
| markets and fosters investor confidence in those markets, it has the | |
| added benefit of encouraging greater participation by investors. This | |
| participation means more trading, more market liquidity, and perhaps | |
| even new business for bond dealers. Thus, we believe that a sound and | |
| sensible approach to bond market transparency will benefit almost | |
| everyone--investors, dealers, and the economy as a whole. | |
| The Commission has a long history of supporting price | |
| transparency. When Congress adopted the 1975 Securities Act Amendments, | |
| it gave the Commission substantially greater authority over quotation | |
| and transaction reporting. Since then, the Commission has pressed | |
| repeatedly for increased transparency in equity markets. Each time | |
| opponents have predicted doom, and each time the results have shown | |
| that more transparency leads only to more liquid and efficient markets. | |
| Recent experience in the debt markets has reinforced the Commission's | |
| belief in the benefits of price transparency. | |
| For example, in 1991, with encouragement from the Commission and | |
| Congress, the industry created GovPX, an electronic reporting system, | |
| to distribute real time quotes and transaction prices for U.S. Treasury | |
| securities. Treasury markets today exhibit an extraordinary combination | |
| of high liquidity and low transaction costs. Trading volume has | |
| increased from $111 billion per day in 1990 to $227 billion per day in | |
| 1998, and the spreads for benchmark bonds <SUP>1</SUP> are near zero. | |
| --------------------------------------------------------------------------- | |
| \1\ Benchmark Treasury bonds are generally considered to be the | |
| most recent issues of two, five and 10 year Treasury notes, and the | |
| most recently issued 30 year Treasury bond. | |
| --------------------------------------------------------------------------- | |
| In 1995, again with the Commission's encouragement, the Municipal | |
| Securities Rulemaking Board (``MSRB'') began collecting the details of | |
| dealer-to-dealer transactions in the municipal bond market and | |
| distributing daily summary reports. In August of last year, with | |
| Commission approval, the daily reports were expanded to include | |
| customer trades as well as interdealer trades. Most recently, just last | |
| November, the Bond Market Association began offering daily summaries on | |
| its Internet Web site, making municipal bond prices for the previous | |
| day available for the first time to the general public. This new Web | |
| page received 17,000 hits in its first three weeks of operation, | |
| suggesting a high level of interest by the public. | |
| Although we view the MSRB transparency program as a successful | |
| effort, the full impact of transparency in the municipal market will | |
| not be clear until trade reporting is done on a real-time basis, which | |
| the MSRB has committed to do and which we continue to support. | |
| In retrospect, we believe the government and municipal securities | |
| market transparency initiatives demonstrate both the benefits of price | |
| transparency in the debt markets, and the wisdom of being sensitive to | |
| the specific qualities of each market. The Commission's corporate bond | |
| transparency initiative will be carried out in the same spirit, seeking | |
| to further transparency goals in a manner uniquely tailored to that | |
| market. | |
| Regulatory Surveillance | |
| Market surveillance, like transparency, is a fundamental means of | |
| promoting fairness and confidence in markets. In fact, the two go hand- | |
| in-hand. Transparency promotes fairness and efficiency by making | |
| essential information available to all market participants, assuring | |
| that market decisions are based on appropriate information. | |
| Surveillance efforts, in turn, are designed to promote fairness and | |
| investor confidence by detecting and preventing fraudulent practices, | |
| such as market manipulation, and other potential abuses. Surveillance | |
| and transparency efforts, in essence, unite to provide a comprehensive | |
| program for protecting investors and promoting the effectiveness of | |
| capital markets. | |
| Effective market surveillance systems require that comprehensive | |
| trade information be reported to regulators. This reported trade | |
| information is subsequently used to produce audit trails and other | |
| sophisticated market surveillance tools. The key to meaningful | |
| surveillance is regulatory access to comprehensive trading information, | |
| essentially the same information that is required for price | |
| transparency. | |
| Today, no regulator has routine access to transaction information | |
| for the broad universe of corporate bonds and preferred stocks. | |
| Consequently, there is no organized system for routine surveillance of | |
| trading in that market. Regulators must depend on examinations of | |
| broker-dealers, or react to complaints brought by investors, which are | |
| cumbersome tools. A system of comprehensive trade reporting will permit | |
| the creation of a regulatory database and appropriate tools for | |
| proactive supervision of the corporate debt markets. | |
| ii. importance of u.s. debt markets | |
| Recent Growth | |
| We encourage this focus on the corporate bond market now, because | |
| in recent years it has grown in importance, but not in openness. In | |
| 1985 the corporate bond market, measured by outstanding debt, was | |
| smaller than the municipal bond market. Today, at $2.4 trillion | |
| outstanding, it is about $1 trillion larger than municipal debt. It is | |
| also about 70% as large as the outstanding Treasury debt. Corporate | |
| bond issuance has increased more than four fold since 1990, and for | |
| high yield bonds, more than ten fold. | |
| Corporate Bond Transparency | |
| Despite its unprecedented growth, however, the corporate debt | |
| market has failed to keep pace with transparency improvements in other | |
| markets, including the government and municipal bond markets. Timely | |
| and accurate pricing information on the broad spectrum of corporate | |
| bonds is not available to the public or even to mar- | |
| ket participants. Some corporate bonds are traded by interdealer | |
| brokers, but transaction prices, even for interdealer transactions, are | |
| not displayed or reported in an organized way. As a result, in order to | |
| obtain accurate valuations of corporate debt instruments, corporate | |
| bond market participants must have a trading desk and a research | |
| department with sophisticated analytical tools to gather and interpret | |
| market information. Generally these kinds of resources are available | |
| only to large broker-dealers and institutional investors. | |
| The time has come to illuminate this needlessly dark corner of the | |
| capital markets. The technology now exists to gather transaction | |
| prices, distribute them, and interpret them in a timely, accurate, and | |
| efficient manner. Developing such a mechanism seems the next logical | |
| step. | |
| iii. current initiative | |
| The initiative started last Fall to improve corporate debt | |
| transparency is moving forward. As we testified in September, we have | |
| asked the NASD to adopt transaction reporting rules for corporate debt, | |
| and to develop systems to collect and redistribute transaction prices | |
| on an immediate basis. We also requested that the NASD create a | |
| database of transactions and a surveillance program to better detect | |
| fraud in the corporate debt market. | |
| The NASD subsequently formed a committee of market participants-- | |
| the Bond Market Transparency Committee --to work toward an industry- | |
| guided solution that will increase price transparency and oversight for | |
| the corporate debt market. | |
| The NASD was asked to take on this initiative for two reasons. | |
| First, the NASD is the self-regulatory organization for the over-the- | |
| counter market, where almost all corporate debt transactions take | |
| place. While the NASD is already responsible for surveillance of this | |
| market, it generally lacks access to the market information needed to | |
| do so effectively. Second, the NASD already has in place much of the | |
| required infrastructure. For example, the NASD has a national network | |
| that collects transaction reports in Nasdaq and listed securities | |
| traded over-the-counter. It performs on-line comparison and | |
| reconciliation of those transactions, and redistributes the reported | |
| information to vendors and to the NASD's regulatory subsidiary, NASDR. | |
| We believe that much of this technology is adaptable to the corporate | |
| debt market and will obviate the need to ``reinvent the wheel.'' | |
| Finally, the NASD will be able to create systems that combine trade | |
| reporting and comparison that will further the industry's goal of T+1 | |
| settlement, which is also supported by the Commission. | |
| The NASD, and the industry committee it formed, are working toward | |
| a proposal for market transparency tailored to the unique features of | |
| the corporate bond market. We expect to see such a proposal before the | |
| end of the summer. We expect that the proposal will lead to transaction | |
| reporting for corporate debt that will improve transparency as pricing | |
| information is distributed to the public. Similarly, we expect that the | |
| NASD's efforts will also lead to improvements in its surveillance of | |
| the market. | |
| The Bond Market Association (``TBMA'') is also developing a | |
| proposal for collecting and disseminating transaction information from | |
| interdealer brokers, but only in investment grade corporate debt | |
| securities. While the details of that proposal and its relationship | |
| with the NASD's initiative are still unclear, we welcome industry | |
| support for increased transparency. We believe that TBMA's efforts | |
| will, at a minimum, demonstrate the feasibility of immediate price | |
| reporting in the corporate debt markets. | |
| iv. conclusion | |
| In conclusion, the Commission believes that we are making strides | |
| toward greater transparency for corporate bonds. Transparency is both | |
| feasible and practical, and it will lead to fairer, more efficient and | |
| more effective markets. Almost everyone will benefit--investors, | |
| dealers, and the economy as a whole. | |
| Thank you. I would be happy to respond to any questions you may | |
| have. | |
| Mr. Oxley. I thank the Chairman for his statement and I | |
| recognize myself for 5 minutes for questions. | |
| Let me begin by asking, Chairman Levitt, as you know, the | |
| SEC has had the authority to improve transparency in corporate | |
| debt since the 1975 Act. Why do you think over the years that | |
| that has not been pursued aggressively on the part of the SEC? | |
| Mr. Levitt. Well, it hasn't been for lack of interest. When | |
| I first came to the SEC, our top priority, at that point, was | |
| beginning to look at our debt markets, particularly our | |
| municipal markets, because we felt that, at that point in time, | |
| that market almost totally lacked transparency. But the vast | |
| number--the growing number of retail investors in that market | |
| were absolutely operating in the dark. It was almost like an | |
| oriental bazaar: individuals didn't know what they were buying, | |
| what they were paying, whether the bonds were rated or unrated. | |
| And there was a culture of pay to play, which characterized the | |
| way dealers got that business. So, we spent several years | |
| addressing that issue. | |
| But, it is clear from that time that our debt markets | |
| require additional attention. And I guess the shortest answer | |
| to your question would be in terms of priorities. We never felt | |
| that this was a low priority, but we felt that other issues | |
| really required our attention, at that point. And, frankly, the | |
| initiatives in the municipal market and the way the industry | |
| worked closely with us to attain our goals in that regard have | |
| set the stage for this initiative; I think it makes a concensus | |
| solution much more likely. And, although I share your desire to | |
| have attained this 5 or 6 years ago, I think we will attain it | |
| more comprehensively and more completely, at this time, as a | |
| result of a lot of the work that has been done in the past. | |
| Mr. Oxley. I appreciate that. Of course, 1975 was long | |
| before your tenure began anyway and, obviously, there was, even | |
| going back into the 1970's and into the 1980's, very little | |
| interest in this subject. I think probably other than Ed | |
| Markey, there was very little interest on the Hill, as well. We | |
| appreciate your efforts in working with us toward a better | |
| good. | |
| Mr. Chairman, should investors have to pay for market data | |
| on bonds? | |
| Mr. Levitt. This service is so important, such a | |
| significant benefit to investors, that we simply have to find a | |
| way to fund providing that service. And that means that various | |
| vendors, various dealers are going to have to account for some | |
| of the resources for providing that service. Now, as to whether | |
| investors pay directly, I mean, that's an open question, at | |
| this point. But, I think that it does have to be paid for and | |
| it does have to be provided. Now, I think there are resources | |
| in the community to provide that service. | |
| Mr. Oxley. Do you support giving investors bond prices at | |
| real time? There's some argument that doing so may affect | |
| liquidity. | |
| Mr. Levitt. I think that transparency is good for | |
| liquidity. I reject the notion that it is bad for liquidity. I | |
| think a market that is open, transparent, available to anyone | |
| who wants to access that market is a market that throughout the | |
| history of markets has attracted the greatest amount of | |
| interest. I believe that, while real time is a goal, it's | |
| certainly one that is realizable, and I am supportive of moving | |
| in that direction. | |
| Mr. Oxley. Do you support the increased transparency for | |
| bonds issued by government-sponsored entities, or should they | |
| be, because of very unique nature, be the only ones that | |
| shouldn't be required to provide more transparency? | |
| Mr. Levitt. I think we have to look very carefully at that. | |
| I think clearly what GovPX did for treasuries was something | |
| very important, in terms of public good. And certain aspects of | |
| the government market, I think, are attracting greater and | |
| greater public support and involvement. We have to consider | |
| that area, as we move forward. | |
| Mr. Oxley. Thank you. The gentleman from New York. | |
| Mr. Towns. Thank you, very much, Mr. Chairman. Chairman | |
| Levitt, on the next panel, the Bond Market Association will | |
| testify that an industry-sponsored solution is the best way to | |
| enhance transparency in the bond markets, but this market-based | |
| solution should be assessed before regulatory response is | |
| determined or mandated, and that the Association believes that | |
| legislation mandating regulatory action is unnecessary and | |
| unwanted, at this time. Do you agree or disagree with that? | |
| Mr. Levitt. You know, I think that industry solutions are | |
| always the ones that we try to be mindful of, and, wherever | |
| possible, the Commission works closely with the industry. It's | |
| an industry, after all, that I came out of and spent most of my | |
| life in. And, in general, I think the industry has a | |
| significant contribution to make, particularly in this area. | |
| But, the legislation doesn't obviate that fact. The legislation | |
| asks the Commission to more forward with its rulemaking process | |
| and covers areas that the industry solution does not presently | |
| address. | |
| The industry is dealing in the present iteration of that | |
| solution with highly rated, very liquid bonds. And I think, | |
| with retail investors moving into other aspects of the | |
| corporate debt market, we have to extend beyond that area. It's | |
| terribly important that we cover all areas. And I think it | |
| would be a mistake to hold up our approach in favor of waiting | |
| for the industry or, for that matter, holding up the industry | |
| to wait for us. We're going to move as quickly as we can. I | |
| hope that the industry will move with us. But, I think we both | |
| have the incentive, as a result of this legislation, to move | |
| expeditiously and get this behind us. | |
| Mr. Towns. Thank you. The committee draft includes language | |
| requiring the SEC to take into consideration the effectiveness | |
| of private sector initiatives. In your determination about | |
| whether rules or other actions are necessary, do you agree with | |
| the need for such an assessment? | |
| Mr. Levitt. I don't think that has to be placed in the | |
| legislation. I think if you trace the history of the | |
| Commission, in terms of its dealing with the industry that we | |
| regulate, our history shows that we work closely with them. | |
| We're not operating in a vacuum. I'm concerned that, the way | |
| that language is worded, it could indeed force us to wait for | |
| an industry solution. I think that should be left to our | |
| working with the industry and seeing to it that the two of us | |
| move as expeditiously as possible. | |
| I'm told that the language in its present form might be an | |
| impediment. And why place it there, unless you're fearful that | |
| we wouldn't do that? I would assure you that, as we always do, | |
| we will be consulting with all the parties and all our | |
| constituents that have an interest in this area. | |
| Mr. Towns. Well, I'm happy to know that you indicated you | |
| will be consulting and talking here, because I think that the | |
| chairman raised an issue, in terms of sort of who would pay for | |
| the service. And, of course, I think all these are issues that | |
| really have to be talked about a great deal before anybody can | |
| move forward. | |
| Mr. Levitt. Absolutely. | |
| Mr. Towns. At this time, I yield back, Mr. Chairman. | |
| Mr. Oxley. The gentleman yields back. The gentleman from | |
| Missouri. | |
| Mr. Blunt. Thank you, Mr. Chairman. Let me pursue that just | |
| a little bit more, Chairman Levitt. What about the idea of | |
| paying the market-based solution? Is there any reason that we | |
| should be concerned about the industry making a profit from | |
| market data? Is that going to dramatically impact, in your | |
| opinion, the wide access to that data? Do you think we ought to | |
| be thinking about that, as we craft this legislation? Or do you | |
| think that there likely is competition going to mean that the | |
| data is going to be available in an affordable and easy way? Or | |
| just talk to me a little bit more about that. | |
| Mr. Levitt. Well, this is part of an issue that goes far | |
| beyond this bill. This goes to the whole issue of how market | |
| data is gathered and disseminated, how it should be funded, who | |
| should fund it. | |
| I think we have to take a step back and analyze our whole | |
| regulatory system, which is predicated on the cooperative | |
| efforts of the self-regulatory organizations, the Commission, | |
| and private rights of action. Without all three of those | |
| bodies, I can say to you that we simply would not be able to | |
| protect investors, as effectively as the system has protected | |
| investors for the past 65 years. | |
| The self-regulatory organizations have established a | |
| substantial network of services that include testing, | |
| surveillance, and enforcement efforts. The NASD has built a | |
| very commendable and effective regulatory mechanism. And you | |
| have to ask yourselves what is the best method of paying for | |
| that. Clearly, their membership, through dues and fees and | |
| services, have to pay the bulk of it. And if we take away a | |
| substantial portion of the revenues from any of those entities, | |
| what would happen to them? | |
| When I was the Chairman of the American Stock Exchange, | |
| nearly 60 percent of our revenues came from providing data. | |
| Now, you may say to me, well, that's crazy. Who wants to run a | |
| business based upon that? That's not your mission. And I'd say | |
| I worried about it and worried about it a lot, because I felt | |
| that, if we ever came to the day when that source of revenue | |
| was not there, I didn't know what we could do. So, if you take | |
| away that money from one of the exchanges, clearly somebody, | |
| some institution, some entity is going to have to make up the | |
| difference. They'll have to develop other charges, and some | |
| subsequent SEC chairman will be sitting here answering the | |
| question of why do you allow those charges to be imposed upon | |
| this or that participant in the marketplace. | |
| I don't really know the answer to it. I understand that | |
| we're going to have hearings at some point on this subject. And | |
| I've written a letter to all of the institutions that provide | |
| this service, telling them that we are in the process of | |
| analyzing it and coming back with recommendations. And I'd like | |
| to complete this rather long winded response to your question | |
| by saying that we are addressing the issue, which is complex, | |
| and we look forward to work- | |
| ing closely with this committee, as we try to reach some | |
| reasonable conclusions. | |
| Mr. Blunt. Certainly, your experience at the American Stock | |
| Exchange would indicate that the industry providing data and | |
| providing it at a cost has worked effectively? | |
| Mr. Levitt. Yes. | |
| Mr. Blunt. The only other question I've got, just on the | |
| whole issue of implementation. I know that more than 20 years | |
| ago, the SEC was given authority to work to make corporate debt | |
| more transparent, has decided that wasn't necessary. This is, I | |
| think, a little more directed. But, more importantly, just for | |
| my view on this, you do think this is important and if we pass | |
| this legislation, would move toward the goal of transparency? | |
| Mr. Levitt. I absolutely commit to it. I commend the | |
| sponsors of this initiative. I think it's probably long | |
| overdue. And I commit to working closely with the committee and | |
| being sure that this is reality, as quickly as possible. | |
| Mr. Blunt. Thank you, Mr. Levitt. Thank you, Mr. Chairman. | |
| Mr. Oxley. I thank the gentleman. The gentlelady from | |
| Colorado. | |
| Ms. Degette. Thank you, Mr. Chairman. I'd like to follow | |
| up, Chairman Levitt, on an issue that Mr. Towns talked to you | |
| about, which was the industry's voluntary initiative to collect | |
| price data on certain bonds and they disseminate the data to | |
| the public and regulators. And you talked a little bit about | |
| that. I'd like to hone in a little bit more specifically and | |
| ask you to address two aspects of that. | |
| First of all, how effective do you think the industry can | |
| be, in monitoring itself, in collecting price data on | |
| investment corporate bonds from interdealers? | |
| And then a second and related question is that how do we | |
| know--and this might be a better question for the panel | |
| following it, except I have to leave, so I'll ask you to opine | |
| and then maybe when they testify, they can tell us--tell my | |
| staff or something. But my second question is how can you be | |
| confident that dealers will actually participate, in a | |
| meaningful way, in some kind of voluntary program? | |
| Mr. Levitt. Well, I think the industry is really capable of | |
| doing this. The Bond Market Association, which is coordinating | |
| the industry effort, is the same group that worked closely with | |
| the Commission, in our municipal initiative. And I think the | |
| genius of the creation of this bill, mandating the Commission | |
| to move forward on this, I think will really catalyze the | |
| industry to rapidly bring to closure their part of this and | |
| hopefully carry it beyond their present inclination. So, I | |
| think the combination will work very well. | |
| Ms. Degette. I thank you. I don't have any other questions. | |
| Mr. Oxley. Thank the gentlelady. The chairman of the full | |
| committee is recognized. | |
| Chairman Bliley. Just a couple of questions, Mr. Chairman. | |
| Information is a public good, so why should exchanges or | |
| dealers be able to cross subsidize other parts of their | |
| business to profits from market data? | |
| Mr. Levitt. Well, the providing of market data is something | |
| that has concerned the Commission, and, indeed, about 2 weeks | |
| ago, I sent a letter to all self-regulatory organizations that | |
| were providing that data. As I mentioned earlier in my | |
| testimony, that data represents a substantial part of the | |
| revenues of some of these institutions: 15 percent in the case | |
| of the New York Stock Exchange, a substantial part for the | |
| American Stock Exchange and the Pacific Stock Exchange. And we | |
| are studying this issue and going to come up with | |
| recommendations, as part of a much broader package. | |
| But, because the numbers involved are so considerable, we | |
| have to decide collectively with the self-regulatory | |
| organizations how they can fund themselves. If they don't get | |
| it from this source, where will they go to get those funds to | |
| provide the all important investor protections that they are | |
| providing? I mentioned before that we will work very closely | |
| with the committee, as we work through a study with the | |
| industry to determine what fair pricing would be and how that | |
| pricing is related to the actual cost of providing that | |
| information and what other sources of funding the industry can | |
| develop to see to it that they are viable institutions in doing | |
| their self-regulatory jobs. | |
| Chairman Bliley. Well, that's reassuring that you will have | |
| some guidelines, at least, to somewhat relate the cost of | |
| providing the information with the cost that they charge. | |
| Will improved transparency improve price competition among | |
| bond dealers? | |
| Mr. Levitt. I think it will. I think improved transparency | |
| creates the kinds of markets which will attract more and more | |
| public attention, and more transparency, I think, by virtue of | |
| competitive pressures, will improve pricing, as well. | |
| Chairman Bliley. Thank you, Mr. Chairman. And thank you, | |
| Mr. Chairman. I have no further questions. | |
| Mr. Oxley. I thank the gentleman. The gentleman from | |
| Michigan. | |
| Mr. Stupak. Thank you, Mr. Chairman. Just a question or | |
| two, Mr. Levitt. Maybe you could help us a little bit on the | |
| bill that's been introduced, and I know you said you support | |
| it. In plain English, could you help me out a little bit on | |
| page two? They go in there and they say, ``Action required, the | |
| Commission shall adopt rules and take such other actions.'' It | |
| goes on to say, ``To assure the prompt, accurate, reliable, and | |
| fair collection, processing, distribution, publication, | |
| transaction information, including the last sale data, with | |
| respect to covered debt securities, so that information is | |
| available to all exchange members, brokers, dealers, securities | |
| information processors, and other persons.'' | |
| And then they bracket it. And it's my understanding you | |
| have some concerns about the bracketed language in--from the | |
| brackets on line 19 to 24. Are you suggesting some alternative | |
| to the bracketed language? Can you break that down for me? | |
| Mr. Levitt. My concerns about that language are that it | |
| could be interpreted that the Commission would have to defer | |
| addressing this issue for a solution by the private sector. I | |
| mentioned before that, on any of our regulatory initiatives, we | |
| work very closely with the private sector. And I think all of | |
| us feel, judging by the statements that I've heard this | |
| morning, that this is something we should approach | |
| expeditiously. The private sector solutions that have been | |
| recommended thus far, I think, are commendable, move in the | |
| right direction, are not as comprehensive as we would like it, | |
| and are limited to only one part of the market. I believe that | |
| this initiative should carry to other parts of the market. | |
| Now, for instance, the high yield market, is part of the | |
| market that more and more retail investors are getting into. | |
| It's obviously a part of the market that holds greater risks | |
| than the other ends of the market. And, because of that, I | |
| think we've got to look very carefully at that. We can't leave | |
| the high yield market totally out in left field. | |
| So, I guess my feeling is that we will accomplish | |
| everything that is intended to be accomplished by this | |
| paragraph. But by casting it in stone, in a piece of | |
| legislation, I believe it defies our expediting the process. | |
| I'd like to ask Mr. Colby to comment on this, as well, if I | |
| might. | |
| Mr. Colby. Sure. We think the bill would be better without | |
| the paragraph included. If you decide to go forward---- | |
| Mr. Stupak. The bracketed part? | |
| Mr. Colby. That's right. | |
| Mr. Stupak. It would be better without the bracketed part? | |
| Mr. Colby. That's right, because it raises ambiguities and | |
| we think that it's something that we don't need in order to do | |
| the job we're planning to do, that we've said we would do. We | |
| have some language, if the committee decides to keep something | |
| similar to the bracheted language, that would reflect that. One | |
| of our goals is not just to create a data base, but it's also | |
| making sure that the market can be monitored. So, we need to | |
| take into account surveillance, and to be able to create a | |
| surveillance data base, as well. | |
| Mr. Stupak. And any suggested language you have, I'm sure, | |
| any member on this committee will be receptive, at least take a | |
| look at it. | |
| Can I ask you, Mr. Levitt, then, on page three, because you | |
| said you didn't want to leave anything out in left field, and | |
| page three, I think line five, starts, ``Covered debt | |
| securities.'' And they say, ``covered debt securities'' and | |
| then they say, ``exempted securities.'' So, what securities are | |
| carved out by the exempted securities and should they be and | |
| what securities might the SEC carve out by its grant of | |
| exempted authority? | |
| Mr. Colby. Exempted securities are treasury securities, | |
| agency securities issued by Fannie Mae, Freddi Mac, and others, | |
| and municipal securities. Municipal securities are covered by a | |
| separate scheme under the Act. Treasuries are typically covered | |
| by a separate scheme also. And agencies are covered, at this | |
| point, by page three of the bill. It's a technical issue--it | |
| may be covered by another provision. | |
| Mr. Stupak. Well, should they be carved out? Should they be | |
| accepted? | |
| Mr. Colby. For agency securities, the straight bonds that | |
| are issued by Fannie Mae and others are already covered very | |
| well by the existing GovPX system. What's left is mortgage pass | |
| through securities and collateralized mortgage obligations, | |
| which are quite complicated, in order to cover everything in | |
| this process. | |
| Mr. Stupak. Could I just ask him to follow up my second | |
| part of the question? Are there any securities that the SEC | |
| might want to see carved out? | |
| Mr. Colby. I believe the reason that this is written the | |
| way it is, is so that if, after consultation with the industry, | |
| there are securities that immediate disclosure creates problems | |
| for, this would give us the authority to carve those out. | |
| Mr. Stupak. Thank you. | |
| Mr. Oxley. The gentleman's time has expired. The gentleman | |
| from Statan Island. | |
| Mr. Fossella. No questions. | |
| Mr. Oxley. The gentleman from New York. | |
| Mr. Engel. Thank you, Mr. Chairman. How come you said | |
| Statan Island for him and you didn't say Bronx and Westchester | |
| for me? | |
| Mr. Oxley. I choked. I couldn't remember. | |
| Mr. Engel. Thank you. Chairman Levitt, first of all, let me | |
| say that--let me thank you for the job that you do and thank | |
| you for your accessibility. There has not been a time when I've | |
| called you that you haven't gotten back immediately, and I know | |
| every on the committee feels the same way. So, I wanted to just | |
| say that publicly, I really appreciate it. | |
| You spoke, in your testimony, you talked about corporate | |
| debt transparency. And I'm just wondering, is that where you | |
| see the most trouble or the most difficulty nowadays? Is it | |
| lack of transparency? Is it the corporate debt problem? | |
| Mr. Levitt. Well, if I began to assess priorities, in terms | |
| of what's going on in the markets, I'd have a pretty long list. | |
| But, almost every issue that would be on that list are issues | |
| that could be enhanced by virtue of increased transparency. And | |
| what this bill proposes to do is really an extension of what | |
| the Commission has embarked upon, in both the corporate and the | |
| municipal market, and is something that was directly and | |
| appropriately mandated in 1975. And the circumstance that more | |
| and more individuals are using our debt markets today than ever | |
| before in history makes this a particularly timely, appropriate | |
| step to take. | |
| Mr. Engel. Thank you. The Bond Market Association, it's | |
| concerned that the premature release of transaction information | |
| might inhibit the trading activity of vital market | |
| participants. Could you respond to those concerns and how this | |
| might affect the implementation of tools to improve market | |
| transparency? | |
| Mr. Levitt. Well, again, I remember from my own days in the | |
| industry, while the industry is enormously progressive, in | |
| terms of new products and new ways of funding our capital | |
| marketplace, the industry sometimes is reluctant to implement | |
| change, in terms of how they deal with the public. I believe | |
| that the industry is extremely progressive and the fact that | |
| they did such a superb job, in terms of our municipal markets, | |
| tells me that they are equally capable of doing the same job, | |
| with respect to our corporates. And I understand the | |
| reservations that they have, because this is bringing light to | |
| a market, which was clearly not as liquid as our equity | |
| markets, cannot be treated overnight in the same way that we | |
| treat our equity markets. | |
| But the goal is the same. The goal is greater | |
| understanding, greater transparency. Congress has appropriately | |
| recognized that goal and is mandating the Commission to come up | |
| with a solution, which I assure you will be sensitive to the | |
| industry, but most sen- | |
| sitive to the public interest. And I think that that sense of | |
| balance, between Congress, the private sector, and the public | |
| sector is exactly the way to go and the time to go there is | |
| now, not 6 months or a year from now. | |
| Mr. Engel. I think it was about 5 years ago, NASD | |
| introduced a fixed income pricing system to improve | |
| transparency in the high yield sector. How well has that | |
| worked? | |
| Mr. Levitt. I think it's worked extremely effectively for | |
| what it was meant to do. | |
| Mr. Engel. And the SEC's recommendations to NASD, how might | |
| that increase the timely dissemination of information? | |
| Mr. Levitt. I think what we've asked the NASD to do, | |
| essentially, is adopt rules, which require dealers to report | |
| all transactions in U.S. corporate bonds and preferred stocks | |
| to the NASD and to develop a system to redistribute that on a | |
| timely basis; and second, to create a data base of | |
| transactions, in both corporate bonds and preferred stock; and | |
| finally, and I think in some ways most importantly, to create a | |
| surveillance program to better detect fraud in this market, | |
| something that you simply can't do in the absence of taking the | |
| steps that you've asked us to take. And I think they are in the | |
| best position to do this. They are already geared up to move | |
| forward on this. I believe they have the resources and the | |
| experience, and I'm very comfortable having this done by a | |
| self-regulatory organization, rather than having government do | |
| it. | |
| Mr. Engel. Thank you, very much. | |
| Mr. Oxley. I thank the gentleman. The time has expired. The | |
| gentleman from Wisconsin, Mr. Barrett. | |
| Mr. Barrett. Thank you, Mr. Chairman. I just have a couple | |
| of quick questions. Is there anything specifically that you | |
| would like to see added to this measure? | |
| Mr. Levitt. Well, I think working together with the | |
| committee, the legislation appears to be thoughtful and | |
| sufficiently comprehensive to do the job I think it's intended | |
| to do. | |
| Mr. Barrett. In the ideal world, would there be any tools | |
| that you would want to have or do you feel that you have the | |
| tools necessary? | |
| Mr. Levitt. I think with respect to this particular | |
| initiative, it gives us the tools necessary to do the job. | |
| Mr. Barrett. I have no further questions. | |
| Mr. Oxley. I thank the gentleman. The gentleman from | |
| Massachusetts. | |
| Mr. Markey. Thank you, Mr. Chairman. Mr. Chairman, you said | |
| earlier that there were limitations to the Bond Market | |
| Association transparency initiative that necessitate SEC and | |
| NASD action. I'd like to explore those limitations further. | |
| First, isn't it true that the scope of the initiative is | |
| limited to investment grade debt? | |
| Mr. Levitt. With respect to the Bond Market Association, | |
| yes, that's correct. | |
| Mr. Markey. So, all the non-investment grade corporate | |
| bonds wouldn't even be covered? | |
| Mr. Levitt. That's correct. | |
| Mr. Markey. Isn't it also true that the industry initiative | |
| relies entirely upon voluntary participation? | |
| Mr. Levitt. That is correct. | |
| Mr. Markey. So, if an interdealer-broker doesn't volunteer | |
| to join the system, its trades wouldn't be displayed; is that | |
| right? | |
| Mr. Levitt. Yes. | |
| Mr. Markey. And a direct dealer to dealer or dealer to | |
| customer trade that doesn't use an interdealer-broker, who | |
| voluntarily joins the system also wouldn't be recorded; is that | |
| true? | |
| Mr. Levitt. That is correct. | |
| Mr. Markey. Now, I, also understand that the voluntary | |
| industry initiative would provide for hourly dissemination of | |
| summary price information. Wouldn't you agree that the value of | |
| price information decreases proportionately in time? | |
| Mr. Levitt. Yes. | |
| Mr. Markey. Wouldn't you, also, agree that in today's fast | |
| moving markets, hour old market data could prove pretty stale? | |
| Mr. Levitt. It would. | |
| Mr. Markey. The SEC has also called for full electronic | |
| audit trails for market surveillance purposes. Can you tell me | |
| why this is needed and how such information could assist the | |
| SEC and the NASD enforcement efforts? | |
| Mr. Levitt. Well, again, to the extent to which information | |
| is available, to the extent to which an audit trail is | |
| implemented, to the extent to which reporting is as broad as | |
| possible, that enables the NASD and the Commission to do their | |
| surveillance job much more comprehensively and accurately. And | |
| without that information--I think it's a question of how soon | |
| we get there. I think getting there overnight in a market, | |
| which is not analogous to our equity markets, for many reasons | |
| may not be possible. But I do believe that to say that we will | |
| take half measures indefinitely would be equally erroneous. | |
| And I'd like to ask Bob Colby to answer that question, as | |
| well. | |
| Mr. Colby. Right now, there is no comprehensive way to | |
| oversee activity in the corporate debt market. And if you | |
| wanted to know what's going on, you'd have to do an individual | |
| examination of each of the hundreds participating in that | |
| market. And this would allow them to look for problem trends | |
| and then focus examinations. | |
| Mr. Markey. Mr. Chairman, in your opening statement, you | |
| expressed some concern about bracketed language in the | |
| Chairman's draft, which would require the SEC to take into | |
| consideration private sector transparency efforts, as it | |
| considers adoption of new rules or other measures to bring more | |
| transparency to the corporate debt market. Should we delete | |
| this provision from the bill? | |
| Mr. Levitt. I would hope so. That would be my preferred | |
| recommendation. | |
| Mr. Markey. Now, I had read this language not as a | |
| limitation on the SEC's authority, but merely as a | |
| congressional suggestion that the SEC consider what was | |
| happening the industry, as it moved forward, but still leaves | |
| you entirely free to take whatever action you deem necessary in | |
| the public interest, all for the protection of investors. You | |
| don't interpret that language that way? | |
| Mr. Levitt. In the staff's analysis of that language, they | |
| felt that it did represent an impediment. And my feeling is, | |
| given the history of this, the fact that, as you pointed out so | |
| correctly, since 1975, the Commission has not taken this | |
| action, and since, as a matter of practice, we work very, very | |
| closely with the industry as we consider these issues, the very | |
| fact that you would give this directive, I think could serve as | |
| an impediment. | |
| On the other hand, by deleting the language, you certainly | |
| create a very strong incentive for all parties to move | |
| expeditiously to attain this goal. And if we're looking for an | |
| optimum solution, why not go for it, rather than taking a | |
| chance of putting anything in its way. | |
| Mr. Markey. Thank you, Mr. Chairman. Thank you, Mr. Colby, | |
| very much. | |
| Mr. Oxley. I thank the gentleman. If I could conclude, Mr. | |
| Chairman, by just asking one question. You had talked about | |
| fraud and obviously the necessity for targeting against fraud. | |
| Is there or do you have any evidence that fraud is any more | |
| prevalent in the bond market than in the equities market? | |
| Mr. Levitt. I think that, with respect to insider trading, | |
| the use of convertible bonds or certain other bond issues has | |
| become more of a factor, in terms of prevalence of fraud. I | |
| think to the extent to which bonds have become more and more | |
| attractive to retail investment, we have to consider that very, | |
| very carefully and seriously. And it's another reason why I | |
| welcome your initiative, at this time. | |
| Mr. Oxley. Has there been some enforcement actions in | |
| regard to those convertibles? | |
| Mr. Colby. I believe there have, but I'd have to check. | |
| Mr. Oxley. Thank you. Mr. Chairman, Mr. Colby, we thank | |
| you, again, for your participation and your leadership on this | |
| very important issue. | |
| Mr. Levitt. Thank you. | |
| Mr. Oxley. The Chair will call the second panel. The chair | |
| would recognize the second panel, Mr. Micah S. Green, the | |
| Executive Vice President for the Bond Market Association; and | |
| Mr. J. Patrick Campbell, Chief Operating Officer and Executive | |
| Vice President of the NASD Stock Market. Gentlemen, welcome to | |
| both of you. And we have no preferred order of appearance, so | |
| if you want to go alphabetically, that's fine with us. Mr. | |
| Campbell, welcome. | |
| STATEMENTS OF J. PATRICK CAMPELL, CHIEF OPERATING OFFICER AND | |
| EXECUTIVE VICE PRESIDENT, NATIONAL ASSOCIATION OF SECURITIES | |
| DEALERS, INC.; AND MICAH S. GREEN, EXECUTIVE VICE PRESIDENT, | |
| THE BOND MARKET ASSOCIATION | |
| Mr. Campbell. Thank you. The NASD supports the | |
| subcommittee's and the SEC's initiative to bring clearer price | |
| transparency, the extent to which timely data on prices is | |
| visible to all market participants to the bond markets, and | |
| wants to express our gratitude to you, Mr. Chairman, and to | |
| Chairman Bliley for your leadership in this area. While | |
| recognizing the contributions of other organizations, we | |
| continue to work with them for greater transparency. | |
| The NASD is uniquely situated to develop the systems and | |
| rules for the public dissemination of bond transaction | |
| information. These benefits stem from the NASD's self- | |
| regulatory status, its proven network, consistent capabilities, | |
| and its potential to provide comparison and settlement | |
| improvements to reduce systemic risk. The NASD is a self- | |
| regulatory organization under the 34 Securities Exchange Act. | |
| It is subject to direct SEC regulation and oversight, to ensure | |
| that it meets its obligations under that Act. Because no | |
| private organization is subject to the full ray of SEC | |
| oversight and review, the NASD is alone in its regulatory | |
| protections it provides among those seeking to improve bond | |
| market transparency. | |
| In addition to its SRO status, the NASD has developed the | |
| NASDAQ Stock Market into the world's premier electronic trading | |
| system, with the larger share volume of any market in the | |
| world. Its trade data are provided through one of the most | |
| extensive private networks in the world, which is being | |
| expanded. | |
| As part of that network, the NASD operates the automated | |
| confirmation transaction service, or ACT, which handles the | |
| post trade process for NASDAQ trade, and in a multi-dealer | |
| market similar to the current bond market structure. Among | |
| other things, ACT provides mandatory 90 second trade reporting, | |
| last sale dissemination, on-line trading comparison and | |
| reconciliation, risk management, real time regulatory | |
| oversight, and forwarding trades for clearing and settlement. | |
| ACT, as we have it today, thus could readily be adapted as a | |
| basis for bond reporting and trade comparison system that could | |
| provide both heightened oversight and reduced systemic risk. | |
| Since the SEC requested us to undertake this initiative in | |
| September of last year, the NASD has conducted extensive | |
| research on the depth and breadth of corporate market, reviewed | |
| reporting, surveillance elements, met with data vendors, | |
| clearing firms, and network display vendors. To pursue the | |
| initiative with all deliberate speed, the NASD has empaneled a | |
| bond market transparency committee, representing investors in | |
| all major segments of the bond market, to ensure that enhanced | |
| bond transparency is implemented appropriately and can be | |
| provided at the earliest possible time. We are proud of the | |
| wide representation that we have been able to obtain on this | |
| extremely important committee. Represented on it are individual | |
| investors, academia, institutional investors, major U.S. | |
| investment banking firms, large discount firms, regional | |
| investment banking firms, foreign-based investment banking | |
| firms, brokers, brokers, the Bond Market Association, the | |
| Securities Industry Association, and our own regulatory fixed | |
| income committee. | |
| Our committee has made substantial progress. The committee | |
| has agreed, in principle, as to the securities that should be | |
| included in the system, which now includes all registered debt | |
| securities in 144(a) securities. The committee will determine | |
| what will be disseminated and within what timeframe, to ensure | |
| maximum transparency, without disrupting markets and, | |
| consequently, harming liquidity. The committee has agreed that | |
| the NASD's automated confirmation transaction system will be an | |
| important tool for the confirmation of reported trades, | |
| especially as settlement cycles ultimately shorten the trade | |
| date plus one for settlement. The committee has also | |
| established that the information that it has collected should | |
| be widely disseminated to all vendors, to the maximum extent | |
| possible. | |
| The NASD is strongly supportive of the objectives and | |
| principles embodied in the Commerce draft of the Bond Price | |
| Competition Im- | |
| provement Act of 1999, and expresses its appreciation, too, Mr. | |
| Chairman, for your efforts in this important area. We | |
| particularly want to stress the importance of the provision in | |
| Section II of that bill, that expressly preserves all of the | |
| Commission's authority under Section 11(a). We believe that | |
| this provision is especially important in making it clear that | |
| the Commission has the authority to approve all the terms on | |
| which market information may be obtained and distribute, | |
| including the power to ensure that fees charged are fair, | |
| reasonable, and non-discriminatory. | |
| The NASD will work, as we have, with the SEC and the | |
| securities industry to make the necessary changes at the | |
| earliest possible time, with the maximum benefit to the | |
| investor and the minimum disruption to the industry. Thank you, | |
| Mr. Chairman. | |
| [The prepared statement of J. Patrick Campell follows:] | |
| Prepared Statement of J. Patrick Campbell, Chief Operating Officer, The | |
| Nasdaq Stock Market | |
| I am J. Patrick Campbell, Chief Operating Officer of the Nasdaq | |
| Stock Market, Inc. | |
| The NASD would like to thank the Subcommittee for this opportunity | |
| to testify again on bond market transparency and the changes needed to | |
| improve that transparency for investors and other market participants. | |
| It was my pleasure to testify before this Subcommittee last September | |
| 29 and share with you our thoughts on bond market transparency. Since | |
| that testimony we have made significant progress, which I would like to | |
| describe today. I will also accept the Subcommittee's invitation to | |
| comment on its draft bill, the Bond Price Competition Improvement Act | |
| of 1999. | |
| the nasd | |
| Let me briefly outline the role of the NASD in the regulation and | |
| operation of our securities markets. Established under authority | |
| granted by the 1938 Maloney Act Amendments to the Securities Exchange | |
| Act of 1934, the NASD is the largest self-regulatory organization for | |
| the securities industry in the world. Virtually every broker-dealer in | |
| the U.S. that conducts a securities business with the public is | |
| required by law to be a member of the NASD. The NASD's membership | |
| comprises 5,600 securities firms that operate in excess of 70,000 | |
| branch offices and employ more than 590,000 registered securities | |
| professionals. | |
| The NASD is the parent company of The Nasdaq Stock Market, Inc, the | |
| American Stock Exchange, and NASD Regulation, Inc. (NASDR). These | |
| wholly-owned subsidiaries operate under delegated authority from the | |
| parent, which retains overall responsibility for ensuring that the | |
| organization's statutory and self-regulatory functions and obligations | |
| are fulfilled. The NASD is governed by a 27-member Board of Governors, | |
| a majority of whom are non-securities industry affiliated. Board | |
| members are drawn from leaders of industry, academia, and the public. | |
| Among many other responsibilities, the Board, through a series of | |
| standing and select committees, monitor trends in the industry and | |
| promulgate rules, guidelines, and policies to protect investors and | |
| ensure market integrity. | |
| The Nasdaq Stock Market | |
| In keeping with the NASD's mission of facilitating capital | |
| formation for the ultimate benefit of investors, the Nasdaq Stock | |
| Market develops and operates a variety of market systems and services. | |
| The Nasdaq Stock Market is the largest electronic, screen-based | |
| market in the world, capable of handling trading levels of at least one | |
| and a half billion shares a day. Founded in 1971, Nasdaq today accounts | |
| for more than one-half of all equity shares traded in the nation and is | |
| the second largest stock market in the world in terms of the dollar | |
| value of trading. It lists the securities of 5,100 domestic and foreign | |
| companies, more than all other U.S. stock markets combined. | |
| The American Stock Exchange | |
| As the nation's second largest floor-based exchange, the American | |
| Stock Exchange has a significant presence in both listed equities and | |
| equity derivative securities. It lists 770 companies, and is widely | |
| known for its development of successful new investment products. | |
| NASD Regulation | |
| NASD Regulation is responsible for the registration, education, | |
| testing, and examination of member firms and their employees. In | |
| addition, it oversees and regulates our members' market-making | |
| activities and trading practices in securities, including those that | |
| are listed on The Nasdaq Stock Market and those that are not listed on | |
| any exchange. | |
| NASDR carries out its mandate from its Washington headquarters and | |
| 14 district offices located in major cities throughout the country. | |
| Through close cooperation with federal and state authorities and other | |
| self-regulators, overlap and duplication is minimized, freeing | |
| governmental resources to focus on other areas of securities | |
| regulation. | |
| NASDR has examination responsibilities for all of its 5,600 | |
| members. In addition to special cause investigations that address | |
| customer complaints and terminations of brokers for regulatory reasons, | |
| NASDR conducts a comprehensive routine cycle examination program. | |
| the bond and equity markets are different | |
| The NASD is well aware of the important differences between the | |
| debt and equity markets. These differences include: | |
| <bullet> Size--The bond markets are many times larger than the equity | |
| markets. For example, the combined equity trading on the Nasdaq | |
| Stock Market and New York Stock Exchange--the two most active | |
| markets in the world, based on dollar volume--totals $44 | |
| billion per day. The bond markets' total trading volume is | |
| approximately $350 billion per day, or eight times larger. | |
| <bullet> Number of bond issues--There are many more bond issues than | |
| stock issues. For example, about 15,000 stocks trade publicly | |
| on US stock markets, but there are more than one million bond | |
| issues outstanding. | |
| <bullet> Trading activity--Bonds trade most heavily in the first weeks | |
| after they come to market. After that time, they tend to be | |
| placed in portfolios by institutional and various retail | |
| accounts and held longer term. Equities tend to trade more | |
| frequently and are usually held for a shorter period of time. | |
| <bullet> Yield--In most areas of the debt market, bonds trade on yield | |
| rather than on dollar price and are valued in comparison to | |
| benchmark government securities. Bond trading relies on | |
| interest rates, inflation expectations, economic data, quality | |
| of debt, and the terms of the bond itself, more than on factors | |
| that are unique to the issuer. | |
| <bullet> Intermediaries--Certain sectors of the bond markets rely | |
| heavily on the role of the ``brokers' brokers.'' These | |
| intermediaries provide anonymity between bond dealers to avoid | |
| divulging their dealers' market positions. The brokers' brokers | |
| also provide dealers with information to give greater insight | |
| into current market situations. | |
| <bullet> Over the counter--About 90% of all bond trades take place in | |
| the over the counter market rather than on an exchange. | |
| <bullet> Transparency--As discussed below, corporate bond markets trade | |
| with less price transparency, that is, the extent to which | |
| timely data on prices is visible to all market participants. | |
| Although there are clear differences in the bond and equity | |
| markets, the NASD believes that there are principles that apply equally | |
| to both, such as the need for price transparency and effective | |
| regulation based on modern surveillance systems that examine actual | |
| trade data. | |
| the sec calls for transparency | |
| While public perception of the differences between the debt and | |
| equity markets has been growing slowly, SEC Chairman Levitt's September | |
| 9, 1998 statement brought the problem with the lack of transparency in | |
| the bond markets clearly into the public's awareness. | |
| Chairman Levitt identified a clear need for corporate debt market | |
| price transparency, saying: | |
| ``Investors have a right to know the prices at which bonds | |
| are being bought and sold. This will help them make better | |
| decisions, and it will increase confidence in the fairness of | |
| the markets. The sad truth is that investors in the corporate | |
| bond market do not enjoy the same access to information as a | |
| car buyer or a homebuyer or even a fruit buyer. And that's | |
| unacceptable. Guesswork can never be a substitute for readily | |
| available price data.'' | |
| Noting that the corporate debt market remains one of the last major | |
| US markets to not have some type of electronic price disclosure system, | |
| Chairman Levitt announced the NASD's agreement with the SEC to take | |
| several actions: | |
| <bullet> Propose rules requiring dealers to report all transactions in | |
| U.S. corporate bonds and preferred stocks to the NASD and | |
| develop systems to receive and redistribute transaction prices | |
| on an immediate basis; | |
| <bullet> Create a database of transactions in bonds and preferred | |
| stocks that will enable regulators to take a proactive role in | |
| supervising the corporate debt market, rather than only | |
| reacting to complaints brought by investors; and | |
| <bullet> Create, in conjunction with the development of a database, a | |
| surveillance program to better detect fraud to foster investor | |
| confidence in the fairness of these markets. | |
| We are committed to working with the SEC, the Subcommittee, and | |
| other parties to develop approaches to bring greater transparency to | |
| the bond markets. We believe that transparency is indispensable to | |
| market integrity, and we are confident that our efforts will provide | |
| greater transparency to the corporate bond market. | |
| nasd bond transparency benefits | |
| While recognizing the contributions of other organizations, and | |
| continuing to work with them for greater transparency, the NASD is | |
| uniquely situated to develop the systems and rules for the public | |
| dissemination of bond transaction information. These benefits stem from | |
| the NASD's SRO status, its proven network and systems capabilities, and | |
| its potential to provide comparison and settlement improvements to | |
| reduce systemic risk. | |
| SRO Status | |
| The NASD is a Self Regulatory Organization under the 1934 | |
| Securities Exchange Act. It is subject to direct SEC regulation and | |
| oversight to ensure that it meets its obligations under that Act. | |
| These obligations include: protection of investors and the public | |
| interest; promotion of just and equitable principles of trade; fair | |
| representation of members; equitable allocation of dues and fees; | |
| prevention of fraud and manipulation; fostering cooperation with the | |
| clearance and settlement system; facilitation of securities | |
| transactions; discipline of members for rule violations; governing the | |
| form and content of non-exchange quotations; compliance with SEC | |
| requirements on system standards for redundancy, capacity and security; | |
| provision of audit trail capability; and maintenance of market | |
| surveillance systems. | |
| Because these extensive obligations are neither required of or by | |
| any private organization, nor is a non-SRO private organization subject | |
| to the full array of SEC oversight and review, the NASD is alone in the | |
| regulatory protections it provides among those seeking to improve bond | |
| market transparency. | |
| NASD Network and Systems Experience | |
| The NASD has developed the Nasdaq Stock Market into the world's | |
| premier electronic trading system, with the largest share volume of any | |
| market in the world. Its quotes and trade data are provided through its | |
| extensive network to over 300,000 screens worldwide. | |
| The NASD has not rested on its success, however, and is constantly | |
| improving its systems. The NASD is now deploying a new, high capacity, | |
| high reliability, state-of-the-art enterprise wide communications | |
| network to service the more than 7,000 Nasdaq workstations throughout | |
| the country. The new network will initially provide us with four | |
| billion share day network capacity, expandable to more than double that | |
| amount. It uses leading edge communications technology and transparent | |
| back-up capability to provide far greater reliability. This new | |
| network, one of the world's largest, will ensure that NASD capabilities | |
| will be more than adequate to meet any additional capacity required by | |
| a bond transparency initiative. | |
| In addition to its market building success and its systems capacity | |
| improvements, the NASD operates systems that are relevant to providing | |
| additional transparency to the bond markets. | |
| For example, the Automated Confirmation Transaction service (ACT), | |
| handles the post-execution process for Nasdaq issues' trades that were | |
| negotiated over the telephone or executed in the various execution | |
| systems of The Nasdaq Stock Market. Among the critical post-execution | |
| steps that ACT handles are: mandatory 90 second trade reporting, last | |
| sale dissemination, on-line trade comparison and reconciliation, risk | |
| management, forwarding trade data to NASDR Market Regulation for real- | |
| time oversight, and forwarding trade data to the National Securities | |
| Clearing Corporation for clearing and settlement. | |
| ACT could serve as a basis for a bond reporting and trade | |
| comparison system that could provide both heightened oversight and | |
| reduced systemic risk. Risk would be reduced by improving the | |
| comparison rate for bonds, permitting earlier settlement, simplifying | |
| processing, and reducing uncompared trades. In addition, ACT could | |
| accommodate the changes needed when the time for settlement is reduced | |
| from T+3 to T+1. | |
| nasd progress to date | |
| Since the SEC requested us to undertake this initiative in | |
| September of last year, the NASD has conducted extensive research on | |
| the depth and breadth of corporate markets, reviewed reporting and | |
| surveillance elements, and met with data vendors, clearing firms, and | |
| network display vendors. | |
| The Bond Market Transparency Committee | |
| In order to ensure that enhanced bond transparency is implemented | |
| appropriately and can be provided at the earliest possible time, the | |
| NASD has empanelled a Bond Market Transparency Committee representing | |
| investors and all major segments the bond market. These segments and | |
| Committee members include: | |
| <bullet> Individual Investors--Dr. John Markese of the American | |
| Association for Individual Investors. | |
| <bullet> Academia--Dr. Ian Domowitz, Pennsylvania State University | |
| <bullet> Institutional Investors--Ian MacKinnon of the Vanguard Group | |
| and Edward Wiese of T.Rowe Price Investment Services. | |
| <bullet> Large Discount Firms--John Ladensack of Charles Schwab & | |
| Company. | |
| <bullet> Regional Investment Banking Firms--Stanley Becchetti of A.G. | |
| Edwards and Sons, and Michael Shea of J.C. Bradford & Company. | |
| <bullet> London-Based Investment Banking Firm--Mark E. Field of | |
| Schroder & Company. | |
| <bullet> Major Investment Banking Firms--Jane Carlin of Morgan Stanley | |
| Dean Witter & Company, Kelly Martin of Merrill Lynch & Company, | |
| and Michael Mortara of Goldman, Sachs & Company | |
| <bullet> Brokers' Brokers--James Jacoby of Asiel & Company, LLC and | |
| Joseph Shea of Cantor Fitzgerald Partners. | |
| <bullet> Bond Market Association--William H. James of Lazard Freres & | |
| Company. | |
| <bullet> Securities Industry Association--Jeffrey Theodorou of | |
| Prudential Securities. | |
| <bullet> NASDR Fixed Income Committee--Zachary Snow, Chairman of the | |
| Fixed Income Committee. | |
| The Committee's Progress | |
| Our Bond Market Transparency Committee has worked diligently from | |
| its first meeting on January 14 and is moving quickly to identify and | |
| solve the issues involved with increasing transparency. The Committee | |
| has made substantial progress. | |
| The Committee has agreed in principle as to the securities that | |
| should be included in the system, which now includes: investment grade | |
| corporate debt; medium term notes issued by U.S. companies; corporate | |
| ``Yankees,'' including development banks, and sovereigns; capital trust | |
| securities; convertibles; units; asset-backeds; floating rate notes, | |
| and 144A securities. | |
| The Committee will determine what will be disseminated and within | |
| what time frame in order to ensure maximum transparency without | |
| disrupting markets and consequently harming liquidity. | |
| The Committee has agreed that ACT will be important to the | |
| confirmation of reported trades, especially as the settlement cycle | |
| shortens to T+1. | |
| The Committee has established that the information that is | |
| collected should be widely disseminated to all vendors, to the maximum | |
| extent available. | |
| the bond price competition improvement act of 1999 | |
| The invitation letter to this hearing asked us to provide our | |
| comments on the Committee Draft of the Bond Price Competition | |
| Improvement Act of 1999. | |
| The NASD recognizes that the goal of the bill is to ensure that the | |
| momentum started by Chairman Levitt and Chairmen Bliley and Oxley last | |
| Fall continues toward bond market transparency. The bill would require | |
| the SEC to adopt rules on the collection and distribution of | |
| transaction information on covered debt securities. In addition, the | |
| bill would amend the definition of exempted securities in the 1934 | |
| Securities Exchange Act to cover government sponsored enterprises under | |
| the bill. Finally, the bill would require studies of inactively traded | |
| securities and municipal securities by the GAO, in consultation with | |
| the SEC and the Municipal Securities Rulemaking Board. | |
| The NASD is strongly supportive of the objectives and principles | |
| embodied in the bill of enhanced bond transparency and remains | |
| committed to work with you and your staff as this bill works its way | |
| through the legislative process. We particularly want to stress the | |
| importance of the provision in Section 2 of the bill that expressly | |
| preserves all of the Commission's authority under Section 11A. We | |
| believe that this provision is especially important in making it clear | |
| that the Commission has the authority to approve all of the terms on | |
| which market information may be obtained and distributed, including the | |
| power to assure that fees charged are fair, reasonable, and | |
| nondiscriminatory. | |
| conclusion | |
| The NASD thanks the Subcommittee for this opportunity to update it | |
| on our progress toward increased bond transparency and our views on the | |
| recently introduced bill. | |
| We strongly support the goals and objectives of the Committee Draft | |
| of the Bond Price Competition Improvement Act, a bill to enhance bond | |
| market transparency. We believe that our experience in developing | |
| systems for both the equity markets and the high yield bond markets | |
| will serve as a strong foundation as we prepare to fulfill our | |
| commitment to the SEC to improve transparency in the bond markets. | |
| Although we would all like to implement important changes like | |
| transparency quickly, we are proud of our efforts to date and pledge | |
| our continued efforts. We will work with the Congress, the SEC and the | |
| securities industry to make the necessary changes a reality at the | |
| earliest possible time, with the maximum benefit to the investor and | |
| minimum disruption to the industry. | |
| Mr. Oxley. Thank you, Mr. Campbell. Mr. Green. | |
| STATEMENT OF MICAH S. GREEN | |
| Mr. Green. Thank you, very much, Mr. Chairman. It's a | |
| pleasure to be before the subcommittee today. If I could ask | |
| that my entire written testimony be submitted for the record | |
| and I will talk more topically about the legislation and the | |
| Bond Market Association's initiative. | |
| Mr. Oxley. Without objection, both statements will be made | |
| part of the record. | |
| Mr. Green. Thank you. Before going into the legislation and | |
| our initiative, I want to first commend you and the members of | |
| the subcommittee and the leadership of the committee and the | |
| staff of the committee for everything they have done since the | |
| hearing last September, in urging the industry and the NASD and | |
| the SEC to get involved in this effort. Since September, we've | |
| taken your guidance and your urging very seriously and we | |
| commend you for your leadership in bringing this issue to the | |
| level of public attention that it surely needed. And I'd also | |
| like to commend the SEC Chairman Levitt, the entire SEC staff | |
| and members, as well as the NASD and our friend Pat Campbell | |
| for everything they have done in reaching out to the industry, | |
| so that we can work cooperatively in this effort. There's not a | |
| competition between a private sector initiative and what the | |
| NASD is working on. Frankly, they are very complementary | |
| efforts. But, we are working very, very closely with the NASD | |
| and look forward to that good working relationship going | |
| forward on this and other issues. So, I commend them for their | |
| leadership. | |
| We represent--the Bond Market Association represents | |
| underwriters and dealers of municipal bonds, corporate bonds, | |
| government securities, and virtually all bonds that are traded | |
| and sold by issuing authorities throughout the country and | |
| throughout the world. And we're very proud of the fact and | |
| several times over the last many, many years, when this | |
| committee has brought to the at- | |
| tention of the industry and the regulators problems that exist | |
| in the marketplace, that we have tried to step up to the plate | |
| and address those issues. And in so doing, we have tried to be | |
| not only responsive to the industry--to the concerns of Members | |
| of Congress and the regulators, but have also tried very | |
| seriously to look very deeply into ourselves and to make sure | |
| we're not missing something. And throughout the consideration | |
| of the Government's Securities Act, as well as the municipal | |
| securities market and now the corporate market, we've tried to | |
| step up and to say what's right and what's wrong about these | |
| markets and work vigorously and objectively to try to address | |
| those issues. | |
| Our written statement, unfortunately, was submitted prior | |
| to the issuance of the final draft of legislation. And I want | |
| to state here today that the latest draft that we saw is a | |
| draft that the Bond Market Association can be supportive of. We | |
| feel very strongly that the legislation reflects the interest | |
| of the free marketplace, by acknowledging that private sector | |
| initiatives should be considered by regulators prior to | |
| finalizing a direction for the regulator to take. And we don't | |
| view this as a delay at all, because as you'll hear in a | |
| moment, our private sector initiative is weeks away from | |
| becoming an absolute reality. But, we do believe that when an | |
| industry acknowledges the criticism that is raised by | |
| policymakers and is willing to take the actions necessary to | |
| address the concerns raised by those policymakers, there should | |
| be absolute consideration of the results of that work, because, | |
| otherwise, would make all this work meaningless and this work | |
| is very important. In a sense, we've become a laboratory for | |
| price transparency in the corporate bond market. | |
| So, we commend the subcommittee for including that | |
| bracketed language that was talked about earlier. Frankly, I | |
| view the brackets more as a highlight, that it's the most | |
| important of the bill. And I know that there will be debate on | |
| it. But, we do view that if this legislation is not intended to | |
| impart new regulatory authority to the SEC, but, in fact, to | |
| impart a congressional desire to employ regulatory authority | |
| that already exists, what you're doing with this bill is laying | |
| out your views, as to how that existing authority should be | |
| utilized. And by simply adding that they shall consider--and | |
| shall consider the private sector initiatives in carrying out | |
| the provisions of this Act, is not an impediment. In fact, it | |
| will make the whole process work that much better and the | |
| Commission and the regulators and the NASD will have the value | |
| of our initiative in moving forward. | |
| Second, the legislation is tremendously improved by | |
| including language in there that requires the consideration of | |
| the effect on liquidity in the marketplace. We don't sit here | |
| today to say that price transparency will hurt liquidity in the | |
| marketplace. Rather, we say that liquidity in the marketplace | |
| is extremely important; that if you lose liquidity, you hurt | |
| the ability of states and corporations and governments to come | |
| to market and get the very best prices on their bonds and get | |
| the very lowest cost of borrowing. So, it should be a | |
| consideration when looking at price transparency in the | |
| corporate bond market. And if it proves that it's not a | |
| problem, carry on. If it proves that it is a problem, it should | |
| influence how the final outcome appears. | |
| And then finally, we are also very appreciative of the fact | |
| that your legislation does not spell out a specific form of | |
| transparency and you leave that up to what the SROs are doing | |
| and what the marketplace is doing, to try to figure out what | |
| the best way to approach that issue is. So, we commend you for | |
| the current version of legislation and we do look forward to | |
| working with you on that. | |
| Now, if I may very briefly talk about where our initiative | |
| is and what the derivation of our initiative. The derivation of | |
| our initiative is this subcommittee. This subcommittee, and I | |
| can hear the words coming out of many of the subcommittee | |
| member's mouths, as if it were yesterday, and it was only a few | |
| months ago, that the industry had to do something. And we came | |
| out of our hearing immediately and met with Arthur Levitt, and | |
| after forming a transparency committee, informed him that we | |
| were prepared to do something very tangible in this area. And | |
| we presented a proposal to him and we sent it, of course, to | |
| the committee, as well. And immediately thereafter, we issued a | |
| request for proposal, an RFP, from various information | |
| providers and information services, to try to implement our | |
| price transparency system. We asked that those proposals be | |
| delivered by December 31. We really thrilled a lot of people | |
| for the Christmas holidays. But by December 31, we received | |
| nine proposals from a wide array of information providers. | |
| During the first 2 weeks of January, we reviewed those | |
| proposals. And at the end of January, we awarded a contract to | |
| GovPX. Why GovPX? Because GovPX is a facilitator of | |
| information. Just as it has provided tremendous market-based | |
| information in the government securities market, as well as, as | |
| Bob Colby said, the agency market, GovPX can be a facilitator | |
| here. And to address Congresswoman's Degette's point, they, | |
| also, have fabulous quality control measures at work right now | |
| in the government securities market, and we wanted them to be | |
| employed here, too. And now, we're about to test. Next week we | |
| have beta testing planned for this, in the hopes that this | |
| system, as designed to try to capture transaction information | |
| on a continuous basis through the day on actively traded | |
| securities, becomes alive at the end of April. | |
| Now, we're not saying it's the end all and be all. What | |
| we're saying is we are doing what we can, as an industry, to | |
| facilitate addressing your concerns as a committee as quickly | |
| as possible. We are working very closely with the NASD in this | |
| whole process, to try to move forward and beyond. But, at this | |
| stage, we are a few weeks away of having something up and | |
| running that would give everyone, the public, market | |
| participants, better information. And it would give regulators | |
| the information they need to survey the market, albeit as was | |
| said, not for all securities in the market, but for those that | |
| we can capture quickly that would give better surveillance and | |
| enforcement information and, more importantly, it would give | |
| regulators and this committee information as to what price | |
| transparency should look like going forward. | |
| So, we believe very strongly that it would be short sighted | |
| to move forward on a specific regulatory approach right now, | |
| until you've seen the results of this, which is, as you can, by | |
| the chart over there are just weeks away. And as soon as it | |
| goes on live, we will start seeing information. And also to | |
| answer several questions that came out about cost, we intend | |
| that this information, on cor- | |
| porate bond transaction information for those actively traded | |
| securities would be available through our onsite | |
| www.investingandbonds.com, free of charge to investors, just | |
| like we do it now for the municipal market. And as Chairman | |
| Levitt's written statement said, that municipal market Website | |
| is hit many, many times throughout the day. | |
| So, we're very proud of this effort, but we, also, realize | |
| that regulators and legislators want more. And we're willing to | |
| work toward the next steps beyond this, but we, also, feel very | |
| strongly that this laboratory that we've set up will have | |
| results from that experiment and they should be allowed to be | |
| analyzed and looked at, as we move forward. | |
| So, with that, I welcome your questions. And Mr. Chairman, | |
| I thank you and the committee. | |
| [The prepared statement of Micah S. Green follows:] | |
| Prepared Statement of Micah S. Green, Executive Vice President, The | |
| Bond Market Association | |
| The Bond Market Association appreciates the opportunity to comment | |
| on price transparency in the bond markets, and to present our views on | |
| associated legislative and regulatory issues. The Bond Market | |
| Association represents securities firms and banks that underwrite, | |
| trade, and sell debt securities both domestically and internationally. | |
| We commend Chairman Bliley, Chairman Oxley, and the subcommittee for | |
| taking the time to examine this important issue. | |
| Last September, this Subcommittee held a hearing that examined the | |
| state of price transparency in the bond markets. At that hearing, | |
| Chairman Bliley and others challenged the industry to improve price | |
| transparency in the bond markets. Securities and Exchange Commission | |
| Chairman Arthur Levitt made a similar call in a New York speech on | |
| September 9th, and again at the hearing. The industry has heeded those | |
| calls. | |
| In September, we pledged our support for the goal of providing | |
| investors with meaningful price information and reaffirmed our | |
| commitment to improve price transparency in the corporate bond markets. | |
| In keeping with that pledge, the Association is sponsoring a private- | |
| sector initiative that will provide price data on inter-dealer broker | |
| trades of investment grade corporate bonds to all market participants | |
| and investors. Beginning next month, the Association expects to | |
| inaugurate a service that makes transaction price data available | |
| directly to regulators and to the public through a wide range of data | |
| vendors and free of charge on our investor website. Under a contractual | |
| arrangement, the transparency product--Corporate Trades I--is being co- | |
| developed by the Association and GovPX Inc. GovPX is a leading provider | |
| of price and volume data in the government securities market and will | |
| operate the system for data collection and dissemination. | |
| This initiative represents our initial attempt to improve the | |
| availability of price data to the public for the corporate bond | |
| markets. In addition, the initiative creates a laboratory in which both | |
| market participants and regulators can obtain important insights into | |
| the interaction between transaction reporting and liquidity. We are | |
| pleased to report at this time that the timeframe for the inauguration | |
| of public reports by the end of April remains realistic and achievable. | |
| At the same time, we acknowledge that this initiative is merely one | |
| part of a longer process through which a variety of different systems | |
| and solutions will evolve. | |
| Historically, industry-based solutions to transparency challenges | |
| in the bond markets have addressed the needs of legislators, | |
| regulators, and market participants alike, and have resulted in | |
| significant improvements in the amount and quality of price data | |
| available to the public without disruption of market liquidity. The | |
| Bond Market Association played a major, proactive role in the design | |
| and implementation of systems to enhance price transparency in the | |
| government and municipal bond markets. We will do the same in the | |
| corporate markets. | |
| In the government securities market, the Association was | |
| instrumental in the creation of the GoxPX system for Treasury | |
| securities. Today, GoxPX is recognized as a leading provider of real- | |
| time price and volume information, and is widely credited with | |
| significantly improving price transparency in the government securities | |
| markets. In the municipal market, we worked closely with the Municipal | |
| Securities Rulemaking Board (MSRB) to develop a transaction reporting | |
| system that provides relevant data to investors. Last November, the | |
| Association, in coordination with Standard & Poor's J.J. Kenny, began | |
| posting the MSRB's price and volume data--enhanced by yield, credit | |
| rating, call dates, and other useful information--on its investor | |
| website, investinginbonds.com. This user-friendly service enables | |
| investors to obtain enhanced end-of-day pricing information--from the | |
| previous trading day--on actual municipal bond transactions free of | |
| charge. | |
| Clearly, this industry has established a tradition of responding | |
| promptly and efficiently to calls for increased price transparency in | |
| the bond markets. The corporate markets are no exception. In less than | |
| six months, the industry has made substantial progress toward | |
| implementing a system that will enhance corporate bond price | |
| transparency. [See the attached timeline that illustrates the progress | |
| of our transparency initiative.] Our commitment to improving | |
| transparency is serious, and we are making it happen. Therefore, we | |
| believe it would be premature at this time, to enact legislation | |
| designed to immediately mandate transparency through regulatory decree. | |
| In this statement, we focus on three themes. First, we will present | |
| our views on the critical relationship between price transparency and | |
| market liquidity in the corporate bond markets. Second, we will discuss | |
| the progress the industry has made toward improving price transparency | |
| since September. Finally, we will discuss why legislation to improve | |
| transparency through regulatory decree is not necessary at this time. | |
| Transparency Policy Issues | |
| The Association fully supports the goal of enhancing price | |
| transparency in the corporate bond markets. However, price transparency | |
| should not be confused with regulatory reporting. Regulatory reporting | |
| involves providing trade information to regulators for audit trail or | |
| other market surveillance purposes. The Association fully supports the | |
| timely transmission of corporate bond transaction information to | |
| regulators and/or Self-regulatory Organizations if such reporting is | |
| necessary to properly surveil the market to prevent and detect market | |
| abuses. However, the appropriate definition of ``timely'' depends on | |
| the regulatory objectives. | |
| The Association encourages regulators to consider the costs and | |
| benefits of implementing a system that would require immediate | |
| reporting of every trade in the corporate bond markets. The differences | |
| between the equity market and the bond markets have long been | |
| recognized by regulators. Chairman Levitt himself is on record stating | |
| he is ``not suggesting that we transpose the national market system | |
| built for equities to the debt markets.'' The Association urges | |
| Congress and regulators to keep this in mind as they move forward with | |
| plans for enhancing regulatory reporting systems to supplement dealer | |
| books and records which have long been available for inspection. | |
| In contrast to regulatory reporting, price transparency is the | |
| timely dissemination of trade information to the public. Here, the | |
| objective is to provide the public--including both large institutional | |
| investors that dominate the corporate bond markets and individuals-- | |
| with useful information about the current price levels of bonds they | |
| hold or wish to buy or sell--without jeopardizing their ability to | |
| trade these bonds. Here, we raise the issue of real-time price | |
| dissemination because some have indicated their belief that the public | |
| has a right to know the prices and volumes of all trades | |
| instantaneously. | |
| The nature of the corporate bond markets creates some unique | |
| challenges for the design of systems that would efficiently distribute | |
| meaningful price data to all investors. First, there are many different | |
| bond issues outstanding, and over 95 percent of corporate bonds are | |
| held by institutional investors. In the corporate bond markets alone | |
| there are an estimated 400,000 individual bonds | |
| outstanding.<SUP>1</SUP> Second, the vast majority of outstanding bonds | |
| trade very infrequently, i.e., the bond markets are not continuous | |
| trading markets. Unlike the stock market where most issues trade daily, | |
| it is not unusual for months to pass between trades in a particular | |
| bond issue. For example, in 1996, of the approximately 400,000 | |
| corporate bonds outstanding, only 4 percent traded at some point during | |
| the year.<SUP>2</SUP> | |
| --------------------------------------------------------------------------- | |
| \1\ Source: CUSIP Service Bureau. Estimate includes corporate | |
| bonds, medium-term notes, asset-backed bonds, and non-agency mortgage | |
| securities outstanding as of September 1998. | |
| \2\ Bond Market Association estimate. | |
| --------------------------------------------------------------------------- | |
| The Association is also quite concerned about the negative effect | |
| that real-time dissemination could have on liquidity in the corporate | |
| bond markets. Since dealers and institutions trade large blocks of | |
| bonds, revealing prices and trading volumes instantaneously could hurt | |
| market liquidity. If market participants (i.e., potential | |
| counterparties) had access to information about other market | |
| participant's trading strategies, it would be more difficult to conduct | |
| further trades. Given the non-con- | |
| tinuous trading environment of the bond markets, a market participant | |
| attempting to ``unwind'' a large position would definitely not want the | |
| prices of sales posted before the position was fully liquidated. Often, | |
| a small number of institutions or dealers hold very large blocks of a | |
| particular issue, and thus, a liquidation of their position would be | |
| obvious to the market. Additionally, once the bonds are taken into | |
| inventory by a dealer, it could take days, or even weeks to find a | |
| buyer for these less-liquid bonds. | |
| The bond markets depend on the willingness of dealers to take | |
| positions in bonds and carry inventory, thereby shifting market risk to | |
| the financial intermediary and creating liquidity for investors. The | |
| premature release of transaction information could inhibit the trading | |
| activity of these vital market participants. Clearly, a prolonged | |
| reduction in market liquidity would have serious consequences not only | |
| for the bond markets, but for the economy as a whole. Liquidity | |
| disturbances, such as those that occurred in the bond markets last | |
| fall, can lead to a higher cost of capital for bond issuers, and | |
| inhibit capital formation. Higher capital costs for America's | |
| corporations translate into less funding for capital expansion--a | |
| significant factor affecting economic growth. This is why the | |
| Association's initiative is designed to strike an important balance | |
| between transparency and market liquidity. | |
| Regulators have long recognized the differences between highly | |
| liquid markets--such as those for most listed equities, and less liquid | |
| markets--when crafting rules for various markets with respect to the | |
| timeliness and content of public dissemination. In most of the equities | |
| markets, price transparency has been equated with real time last sale | |
| reporting. While real-time transaction price and size dissemination | |
| characterizes the nature of price transparency for liquid equity | |
| securities, transparency for illiquid equities is quite different. | |
| Trade data for liquid equities must be reported to the NASD within 90 | |
| seconds of the transaction via the Automated Confirmation System (ACT), | |
| which automatically disseminates trade information to the public. | |
| However, trades in illiquid equity securities are reported to the NASD | |
| for regulatory purposes--but not via ACT--and these trades are not ever | |
| reported to the public. Additionally, odd-lot transactions in National | |
| Market securities and private placements (in reliance on Section 4(2) | |
| of the Securities Act) are not required to be reported through the ACT | |
| system. | |
| Likewise, transparency initiatives for the OTC bond markets need to | |
| take into account the individualistic nature of bonds, differences in | |
| liquidity, and differences across instruments in the various bond | |
| markets. Historically, these differences have been recognized by | |
| Congress and regulatory authorities as evidenced by the differences | |
| between existing bond market transparency systems that have been | |
| developed and have been found to be providing adequate information to | |
| date. The attached table illustrates the characteristics of several | |
| transaction reporting systems currently operating in U.S. financial | |
| markets. | |
| In the government securities market, GovPX is a leading provider of | |
| real-time benchmark pricing for all active and off-the-run Treasuries. | |
| The liquid nature of Treasury securities led to a solution that | |
| provides prompt price dissemination for Treasury securities. In the | |
| municipal market, price transparency has been greatly enhanced by the | |
| Municipal Securities Rulemaking Board's (MSRB) end-of-day trade | |
| reporting, a system that currently includes both dealer and customer | |
| trades. Beginning in November 1998, the Association began posting this | |
| data on its investinginbonds.com website free of charge. Investors can | |
| access CUSIP numbers, security descriptions, number of trades, volume, | |
| and high and low prices for municipal bonds that trade four or more | |
| times on the prior day. Additionally, investors can sort the data | |
| according to State or other criteria. This enhanced user-friendly | |
| format has been well-received by the investing public. The less-liquid | |
| nature of the municipal securities market led to the development of | |
| this time-delayed and synthesized trade reporting system. It is | |
| important to note that individual investor response to this data has | |
| been extremely favorable and liquidity in this market was apparently | |
| unharmed by the implementation of this system. | |
| In the corporate market, a price transparency system for high-yield | |
| bonds has been in place since 1994. The NASD introduced the Fixed | |
| Income Pricing System (FIPS) to enhance transparency in the high-yield | |
| sector. FIPS provides for the collection, processing, and real-time | |
| display of firm quotations and summary transaction data for 50 | |
| designated (mandatory) high-yield bonds. Interestingly, actual | |
| transactions are never disseminated to FIPS participants or to the | |
| public. Again, it should be noted that regulators fully recognized the | |
| possible harm that could be brought about by real-time transaction | |
| dissemination and by imposing a system on the entire market. In a 1991 | |
| report to Congress, then SEC Chairman Richard Breeden acknowledged that | |
| mandating increased price transparency to the entire high-yield market | |
| could be harmful: | |
| . . . mandating increased transparency for the large segment of | |
| the market that is illiquid could further reduce dealer | |
| participation in that segment of the market, and is therefore | |
| only practical where a ``critical mass'' of market participants | |
| exists. | |
| The foregoing review of transparency systems in the market for | |
| illiquid equities and in the bond markets highlights a critical fact. | |
| Currently, there are no real-time transaction reporting systems in | |
| existence that require or provide immediate public dissemination of | |
| every trade in a given class of illiquid securities. Furthermore, | |
| regulators have recognized the difference between liquid and illiquid | |
| securities when developing regulations for equities and for high-yield | |
| bonds. Therefore, the Association would object to any system that | |
| mandates dissemination of the price and size of every bond trade to the | |
| public on a real-time basis. Given that there is no precedent for | |
| requiring such an extensive system, the negative impact on the markets | |
| would be difficult to quantify since it has not been observed in any | |
| market for relatively illiquid securities. However, academic research | |
| has shown that too much transparency can actually increase market | |
| volatility and lower market liquidity in markets where trading volume | |
| is thin--precisely the type of characterization that applies to a large | |
| number of securities in the corporate bond markets.<SUP>3</SUP> | |
| Therefore, the Association is concerned that market liquidity could be | |
| negatively affected by the mandatory real-time disclosure of all | |
| trades. | |
| --------------------------------------------------------------------------- | |
| \3\ See Ananth Madhavan, ``Security Prices and Market | |
| Transparency,'' Journal of Financial Intermediation, no. 5, 1996, pp. | |
| 255-283. | |
| --------------------------------------------------------------------------- | |
| The Association believes the best way to expeditiously achieve | |
| meaningful price transparency in the corporate bond markets is to | |
| embrace a market-oriented approach that is designed to preserve market | |
| liquidity. This approach will also allow for the reassessment of | |
| existing systems and adjustments to the systems over time. This is | |
| consistent with the historical approach to price transparency that has | |
| proven to be successful in the government and municipal bond markets. | |
| The Association's Transparency Initiative | |
| The Association has taken the lead in developing a system that will | |
| enhance price transparency in the investment grade corporate bond | |
| market. In September, the Association organized a Price Transparency | |
| Steering Committee, under the auspices of our Corporate Bond Division, | |
| to examine the issues that must be considered when designing | |
| appropriate systems to improve price transparency without damaging | |
| market liquidity. The Committee is comprised of senior bond officials | |
| from dealer and inter-dealer broker firms. After the Subcommittee | |
| hearing last September, the Committee resolved to implement a system | |
| that would respond directly to the challenge put forth by Congress and | |
| the SEC. | |
| Members of the Steering Committee met with SEC Chairman Levitt in | |
| October to express the industry's desire to design and implement a | |
| first-phase transparency solution within a six-month period. | |
| Recognizing that the industry initiative would likely have to meld with | |
| the longer-term goals envisioned by the SEC, the Steering Committee | |
| proceeded with the plan to design an initial price transparency system | |
| for investment grade corporate bonds. | |
| In November, the Association issued a ``request for proposals'' | |
| (RFP) that asked pricing and information vendors, as well as others who | |
| could facilitate this initiative, to submit proposals presenting how | |
| they would implement the Association's initiative by enabling inter- | |
| dealer brokers to submit investment grade corporate bond transaction | |
| data and redistribute such data to the public through electronic means. | |
| The Association also held a bidders conference to answer questions and | |
| discuss other aspects of the plan with prospective bidders. | |
| By the end of December, the Association had received nine proposals | |
| from an impressive group of bidders. Following interviews and | |
| deliberation in January, the Steering Committee selected GovPX as the | |
| vendor that would design and operate the system for the industry's | |
| transparency initiative. GovPX proposed a collection mechanism that is | |
| extremely flexible and can be adapted over time to include a wider | |
| range of reporting entities and/or securities. The ability of the | |
| initial system to expand and adapt to future modifications is a strong- | |
| point of the GovPX system. In addition, from the perspective of the | |
| Association, GovPX is essentially a ``facilitator'' with a strong track | |
| record and financial incentives to redistribute price data through the | |
| broadest range of existing and prospective data vendors. Finally, GovPX | |
| has extensive experience collecting price data from inter-dealer | |
| brokers and disseminating that data for the entire range of government | |
| securities. | |
| Last month, the Steering Committee adopted a set of initial display | |
| parameters for the transparency system, and intends to consider | |
| adjustments to these preliminary parameters after the system has become | |
| operational. The initial parameters were developed in consultation with | |
| a broad range of the Association's membership not only from Wall | |
| Street, but from across the country. Of paramount importance to the | |
| Committee was the intention to protect the confidentiality of | |
| investors' positions, particularly with regard to less-liquid debt | |
| securities. Over the past several months, the Committee collected | |
| valuable input from inter-dealer brokers, dealers, and their customers | |
| before determining the initial parameters for the transparency | |
| initiative. | |
| The Association's Voluntary Price Transparency Initiative product, | |
| called Corporate Trades I, will collect price data on investment grade | |
| corporate bonds from inter-dealer brokers to meet this Subcommittee's | |
| priority to disseminate data to the public, and to meet the SEC's and | |
| the NASD's priority to obtain information for surveillance purposes. | |
| The Association expects that inter-dealer brokers active in the | |
| investment grade corporate bond market will report data on all | |
| transactions to GovPX. To date, seven leading inter-dealer brokers-- | |
| which account for approximately 90 percent of investment grade trades | |
| of all inter-dealer brokers--have informed the Association of their | |
| intent to participate in this voluntary initiative. GovPX will then | |
| make the data available to the public consistent with the preliminary | |
| display parameters agreed to by the Steering Committee and the | |
| Corporate Bond Division of the Association. | |
| With respect to dissemination of transaction data to the public, | |
| the initial display parameters will provide for continuous reporting | |
| throughout the day of the prices of all investment grade corporate | |
| bonds that have been traded at least four times and involve individual | |
| transactions of $10 million or less. This information will be | |
| disseminated to GovPX subscribers within one hour of the occurrence of | |
| the fourth trade and within one hour for all trades in the same | |
| security thereafter. At the end of each trading day, the price and size | |
| range of every trade meeting these parameters will be disseminated to | |
| the public and enhanced with descriptive information including credit | |
| ratings and yield-to-Treasury data. | |
| Actual sizes of individual trades will not be revealed publicly in | |
| order to preserve investor anonymity, which is important due to the | |
| concentrated ownership of corporate bonds. The Association's | |
| preliminary view is that these public display parameters strike a fair | |
| balance between our objective of enhancing transparency without | |
| jeopardizing market liquidity. However, for surveillance purposes, | |
| regulators will be provided with a file of all price and volume data | |
| for all trades reported to GovPX. | |
| We expect this new information product to be available to the | |
| public through data vendors before the end of April. In addition, the | |
| Association plans to make the data available in a user-friendly format | |
| on its investinginbonds.com website free of charge at the same time or | |
| shortly thereafter. | |
| Legislation Mandating Regulatory Action is Not Needed | |
| The Association believes that legislation mandating immediate | |
| regulatory action for price transparency is unnecessary and unwarranted | |
| at this time. This industry has responded promptly to calls for | |
| increased transparency. Widespread market abuses have not been | |
| identified in the corporate bond markets, nor have investors clamored | |
| for more protection due to opaque conditions in the corporate markets. | |
| While it is appropriate and commendable for Congress to examine the | |
| issues related to price transparency in the bond markets, the | |
| industry--given our response and action since last September's | |
| hearing--should be given the opportunity to complete development of | |
| appropriate, market-specific solutions. | |
| It is our strong belief that, as in the other bond markets, this | |
| market-based solution should be assessed before a regulatory response | |
| is determined or mandated. In this regard, the Association would be | |
| willing to provide Congress with a report that details our progress on | |
| implementing the system after it has become operational for a | |
| reasonable amount of time. It is our sincere hope that the SEC and | |
| NASD, who have already begun a regulatory review of this matter, will | |
| take into account the results of this important initiative before | |
| decisions are made about a regulatory response. However, if legislation | |
| is deemed to be necessary, legislation embodying a logical and orderly | |
| market-oriented process would be preferable to legislation that | |
| prematurely mandates regulatory action, as the latter would signal | |
| regulators to proceed regardless of the results of the industry's | |
| initiative. | |
| Some have proposed expanding the National Market System for | |
| equities to include the bond markets. In addition, some have advocated | |
| expanding the definition of non-exempt securities under Section 11A of | |
| the Securities Exchange Act to include federally-sponsored agency | |
| securities and securities issued by international financial | |
| organizations, such as the World Bank. The Association opposes such | |
| proposals for several reasons. | |
| First, the legislative history surrounding the 1975 Amendments that | |
| enacted Section 11A reflects the fact that Congress' intended focus in | |
| creating a National Mar- | |
| ket System (NMS) was on the regulation of the equity markets. The NMS | |
| framework and goals were born out of the unique circumstances that | |
| characterized the market structure for corporate equity securities in | |
| the early 1970s. Bond markets were then, and continue be, significantly | |
| different structurally from the equities market. | |
| The SEC and Chairman Levitt have been vocal in their belief that | |
| the National Market System should not be transposed on the debt | |
| markets. In his speech last September, Chairman Levitt said: | |
| I am not suggesting that we transpose the National Market | |
| System built for equities to the debt markets. For many | |
| reasons, that would not work. | |
| Finally, the proposed expansion of the definition of non-exempt | |
| securities to include agencies and issues of international financial | |
| organizations, is not warranted based on the findings of recent | |
| regulatory reports. Last March, the Treasury Department, the SEC, and | |
| the Federal Reserve Board released their ``Joint Study of the | |
| Regulatory System for Government Securities,'' which considered the | |
| state of transparency in the Treasury and agency securities markets. | |
| The report recognized the ``variety of pricing and related | |
| information'' that is available from financial publications and online | |
| vendors. The report concluded that the government securities market-- | |
| which by definition includes federally sponsored agencies--is | |
| functioning smoothly: | |
| The market continues to function smoothly, and the three | |
| agencies do not believe it is flawed in any fundamental sense. | |
| As a result, we believe no additional rulemaking authority | |
| under the [Government Securities Act], as amended, is required | |
| at this time. | |
| Additionally, the SEC's Debt Market Review came to a similar | |
| conclusion regarding Treasury and federal agency securities: | |
| The combination of real time data for benchmark Treasuries | |
| and supplementary quotes and other information for the other | |
| securities appears to provide a very good level of pricing | |
| information for all government bonds. | |
| The Review also examined non-agency mortgage and other structured | |
| products and concluded that the ``quality of pricing information and | |
| interpretive tools available to the market is good.'' The SEC has | |
| repeatedly decided not to pursue regulatory changes to the markets for | |
| agency and non-agency mortgage-and asset-backed securities. The Bond | |
| Market Association supports the conclusions of the SEC regarding this | |
| matter. | |
| Conclusions | |
| For over a decade, The Bond Market Association has been at the | |
| forefront of efforts to improve price transparency in the bond markets. | |
| Our most recent initiative will deliver price data on investment grade | |
| corporate bonds to the general public on our investor website--free of | |
| charge--in the coming weeks. While we agree that enhancing price | |
| transparency for liquid securities is a laudable goal, we maintain that | |
| widespread dissemination of trade data for illiquid securities will | |
| likely have a negative impact on market liquidity and on bond market | |
| investors. We will continue to work with the Members of this | |
| Subcommittee, the SEC, the NASD, and others, to ensure that investors | |
| have access to meaningful price information on bonds. However, we do | |
| not believe that legislation mandating immediate regulatory action is | |
| warranted at this time. We believe that policy-makers should consider | |
| the industry's efforts before determining what regulatory actions may | |
| be necessary. | |
| Voluntary Price Transparency Initiative Timeline of Progress | |
| -------------------------------------------------------------------------------------------------------------------------------------------------------- | |
| September 1998 October 1998 November 1998 December 1998 January 1999 February 1999 March 1999 April 1999 | |
| -------------------------------------------------------------------------------------------------------------------------------------------------------- | |
| At transparency hearing, Association Association Association Association Association's Association and Association and | |
| Association pledges to work members meet issues a receives reviews nine Transparency GovPX plan to GovPX plan to | |
| to enhance price with SEC request for proposals from vendor Steering begin testing launch | |
| transparency. Chairman Levitt proposals to bidding vendors. proposals and Committee system to Corporate | |
| and begin to develop selects GovPX adopts transmit and Trades I. | |
| develop transparency as vendor for parameters for disseminate Association | |
| industry product and the industry the prices. plans to post | |
| initiative. hosts bidders. initiative. transparency data on its | |
| Association system--Corpor investingbonds | |
| hosts open ate Trades I. .com website | |
| forum on price | |
| transparency. | |
| -------------------------------------------------------------------------------------------------------------------------------------------------------- | |
| Characteristics of Selected Transaction Reporting Systems: Ranked from High to Low Liquidity | |
| -------------------------------------------------------------------------------------------------------------------------------------------------------- | |
| Security's General Dissemination Dissemination Release Actual | |
| Security System Liquidity Type Reporting Timeframe Audience Trades to Public | |
| -------------------------------------------------------------------------------------------------------------------------------------------------------- | |
| Exchange-listed Equities....... ACT (Nasdaq) DOT Very high......... Within 90 seconds Instantly-price Market participants Yes | |
| and OARS (NYSE). of trade (ACT) and volume. and consolidated | |
| and automatically tape. | |
| in DOT and OARS. | |
| Treasury Securities............ GovPX............. High.............. Instant-built into Instant-price and GovPX participants Yes | |
| system. volume. and subscribing | |
| vendors. | |
| Agency Bonds................... GovPX............. High.............. Instant-built into Instantly-price GovPX participants Yes | |
| system. and volume. and subscribing | |
| vendors. | |
| High Yield Bonds-Mandatory NFIPS (Nasdaq).... Relatively high... Within 5 minutes Every Hour-Price FIPS participants No | |
| Issues \1\. of trade. and Volume and data vendors. | |
| Summary. | |
| Municipal Bonds................ MSRB (NSCC)....... Varies but End of day........ Next Day price and Data vendors and The No | |
| typically low. summary volume Bond Market | |
| data for bonds Association's | |
| that traded 4 or website- | |
| more times. investinginbonds.co | |
| m. | |
| Investment Grade Corporate Corporate Trades I Varies but Within 15 minutes Within 1 hour GovPX subscribers No | |
| Bonds. (The Bond Market typically low. of trade. after 4th trade and investors | |
| Association/ and within 1 hour through | |
| GovPX). for subsequent Association's | |
| trades--prices website- | |
| released for investinginbonds.co | |
| trades of $10 m. | |
| mil. or less. | |
| New York Stock Exchange-Listed ABS (NYSE)........ Varies but Instant-built into Instantly-price market participants Yes \2\ | |
| Bonds. typically low. system. and volume. and high speed | |
| quote line; summary | |
| data in newspapers. | |
| High Yield Bonds-Nonmandatory FIPS (Nasdaq)..... Low............... By 5 p.m. on day None.............. None................ No | |
| \3\. of trade. | |
| Non-Nasdaq Equities \4\........ Non-Nasdaq Low............... Price and volume None.............. No.................. No | |
| Reporting System data reported | |
| (NASD). between 4 p.m. | |
| and 6:30 p.m. on | |
| trade date or | |
| between 7:30 a.m. | |
| and 9 a.m. on | |
| next business day. | |
| -------------------------------------------------------------------------------------------------------------------------------------------------------- | |
| \1\ Mandatory FIPS bonds are the 50 most active high-yield bonds as designated by an advisory committee; this committee meets every six months to | |
| reassess the mandatory list. | |
| \2\ The vast majority of NYSE bond trades are retail, odd-lot transactions. | |
| \3\ Non-mandatory FIPS issues are all bonds rated BB+ or lower by Standard & Poor's, excluding those designated as mandatory FIPS issues. | |
| \4\ Non-Nasdaq equities are defined as securities that are neither included in The Nasdaq Stock Market nor traded on any national securities exchange. | |
| Mr. Oxley. I thank both the gentlemen, and we appreciate | |
| your good work in this area. Let me begin by asking Mr. Green: | |
| what should we be looking for in April, when this program is | |
| going to become available? What are you going to be looking for | |
| and what do we need to look for, in terms of the applicability | |
| of this program and its effectiveness? | |
| Mr. Green. Well, in April, and assuming all the beta | |
| testing and everything goes well, but so far, so good, | |
| transaction information on the investment grade corporate bonds | |
| that are traded through interdealer brokers will begin getting | |
| reported on a continued--on a continuous basis throughout the | |
| trading day to GovPX. GovPX will then pipeline that information | |
| out to information vendors, to the Bond Market Association for | |
| use on our Website, and also to regulators. And regulators will | |
| frankly get complete information, so that they can do their | |
| surveillance enforcement activity on those sets of bonds | |
| throughout the trading day. Also at the end of the day, there | |
| will be more complete reports about the total volumes and | |
| buckets of volumes to see what transacted through the trading | |
| day. But, immediately when it's turned on, that reporting | |
| process will begin. | |
| Now, with regard to our Website, we hope it's--we hope the | |
| Website, itself, is ready to take that feed at the end of April | |
| and that's--it may be a few weeks after that, once we see the | |
| information flowing. | |
| Mr. Oxley. Let me ask Mr. Campbell, what role then does | |
| NASDAQ play in this whole process? Take us through the | |
| mechanics of this, if you will. Also, what will you be looking | |
| for in terms of the effectiveness of the GovPX program? | |
| Mr. Campbell. Mr. Chairman, we have, since last September, | |
| had many meetings with our committee on bond transparency. We | |
| have done a fine job in defining and getting in the process of | |
| writing rules. We expect to be delivering those rules to the | |
| Securities and Exchange Commission very early summer, hopefully | |
| in the month of June. | |
| During the period of time that the Bond Market | |
| Association's experiment with collecting and disseminating the | |
| bond transaction information, we should be very sensitive to | |
| what we can learn from them through this initiative and | |
| incorporate that into the rules that we write to follow the | |
| Securities and Exchange Commission, that all broker-dealers | |
| will ultimately have to abide by. And I think the fact that we | |
| have included on our committee a representative of the Bond | |
| Market Association to assist us in the process, we believe that | |
| we should gain some insights that will help us do a better job | |
| in the formulation of those rules. | |
| Mr. Oxley. Let me ask Mr. Campbell, what about junk bonds? | |
| First of all, how would junk bonds be in this mix and how would | |
| they be treated? | |
| Mr. Campbell. At the current time, we have an existing | |
| system that collects information on high yield or junk bonds. | |
| We would expect to include that, as has already been determined | |
| by the committee, that we would collect and disseminate that | |
| information. That is--that decision has already been made. And, | |
| in fact, we can continue to use the FIPS system, as Chairman | |
| Levitt discussed, to continue to collect that information and | |
| dovetail that into the ultimate process. | |
| But at the current time, we have made available in our | |
| architecture of the collection system, every vendor out there, | |
| who has a terminal out there, including the development and | |
| building of a Web-based browser system to those firms, who do | |
| not have the technical expertise or the funding to go on a | |
| computer interface or subscribe to any of those services, we | |
| will allow them to have the input over a Web-based browser | |
| system for timely reporting, too. So, we fully expect and have | |
| already decided that we will include those securities in the | |
| timely reporting, as with the rest of the fixed income | |
| securities. | |
| Mr. Oxley. Thank you. Mr. Green, your plan is basically | |
| dealer to dealer? Do you see, at some point, the expansion of | |
| dealer to customer arrangement? | |
| Mr. Green. Well, within--the voluntary initiative, quite | |
| frankly, there's no question, we are not a regulator. We are | |
| not a self-regulator. The key element that we're trying to do | |
| is to get people, get firms, get market participants to | |
| volunteer to do something. And why we picked, you know, | |
| interdealer brokers and why we picked corporate--investment | |
| great corporate debt, in part, is because the FIPS program | |
| already exists. A lot of odd lot retail transactions are | |
| already covered by the New York Stock Exchange's ABS system. | |
| And we wanted to try to find something that currently wasn't | |
| hit by anything with the universe that we could get to | |
| volunteer, and to go beyond that voluntarily would probably be | |
| more difficult, as an overall industry. | |
| But, I think we need to see what the results of this effort | |
| are, and not a long timeframe for results. But, to see how this | |
| works, to see how useful the information is, to see the | |
| mechanism with which the information is distributed, to see if | |
| it's being used by investors, if it's being interpreted | |
| correctly, if it's being structured properly, and that will | |
| serve as a model for the steps beyond. | |
| Mr. Oxley. Thank you. My time has expired. The gentleman | |
| from New York. | |
| Mr. Towns. Thank you, very much, Mr. Chairman. Mr. | |
| Campbell, do you support the committee draft? | |
| Mr. Campbell. Yes, sir, we support it. | |
| Mr. Towns. Do you think there's anything that's not in | |
| there that should be in there? | |
| Mr. Campbell. No, sir. We believe that the committee draft | |
| encompasses the intent of the committee and the work that | |
| everybody is doing in this area. I think that we would support | |
| the draft document and we have--I had the pleasure of | |
| participating with this committee and the staff in the | |
| assistance and drafting. | |
| Mr. Towns. Mr. Green, same question. | |
| Mr. Green. The way the legislation is currently drafted, | |
| the Bond Market Association can support the current draft. | |
| Mr. Towns. What about any additional information that | |
| should be put in or anything that's left out that should be in? | |
| Mr. Green. Well, we might cross Ts differently or dot Is | |
| differently. But with the provisions that I talked about in my | |
| testimony, it provides a very balanced approach to ensuring | |
| that private sector initiatives and market liquidity are very | |
| much a part of the consideration of anything going forward. And | |
| for that, we would support it. | |
| Mr. Towns. The NASD says that they're uniquely situated to | |
| develop a system that moves for the public dissemination of | |
| bond transaction information. The Bond Market Association | |
| believes that an industry-sponsored solution is the best way to | |
| enhance transparency in the bond market. Who is right? | |
| Mr. Green. Well, we both are. Because if one---- | |
| Mr. Shimkus. We're the politicians. | |
| Mr. Green. Because if one could address all the needs of | |
| policymakers through voluntary industry efforts, one would | |
| surely choose to do it that way. But, I think it's incumbent | |
| upon industries to self-analyze and recognize that things that | |
| can be done, should be done. And then if things need to go | |
| further, that's when you may need the next step beyond | |
| voluntary, to a level of self-regulation. And if self- | |
| regulation doesn't work, you have regulation. And if regulation | |
| doesn't work, the Hill will produce legislation that will | |
| provide regulators with the means to do it. So, we're at the | |
| voluntary stage right now. | |
| Mr. Campbell. In last September's testimony, we weren't | |
| given a choice as to whether we wanted to do this or not. We | |
| were challenged by this committee and responded very directly | |
| to the SEC in their call for increased bond market | |
| transparency. We do believe that what we are doing also is a | |
| very industry-led solution. We have the largest to the smallest | |
| underwriters on the committee; we have firms that represent | |
| customers only; we have individuals, who represent specifically | |
| the individual investors; as well as the largest purchasers of | |
| corporate debt securities in the United States. | |
| So, we do believe that, although my friend and I and our | |
| associations differ on very minute, but important issues, that | |
| we have continued to make every effort to work together in a | |
| collegial fashion, to move this forward for the very best | |
| interest of the investor. We continue to gain insights on the | |
| committee from the representation of all the associations that | |
| really have an interest in this, from the Securities Industry | |
| Association, to the Bond Market Association, to the Association | |
| of American Investors. We believe that this effort that we're | |
| undertaking and have been in the process of is not going to be | |
| injurious to the industry. The industry is hard at work in the | |
| process to make this the finest resolution, to provide the | |
| transparency that they know how to provide. So, they are deeply | |
| involved and will continue to work with the Bond Market | |
| Association. And between all of us, we will have a product that | |
| we can be proud of and the investor will benefit from. | |
| Mr. Towns. I think you're saying you can work together? Is | |
| that what you're saying? | |
| Mr. Campbell. We plan to go to lunch very shortly here. | |
| We have been to dinner. We have served on the same panels. | |
| We're proud of our competitive instincts, but recognize that we | |
| have one final goal, and that's to get this to the investor, so | |
| the people benefit from increased information. | |
| Mr. Towns. Thank you, very much. And maybe you two guys | |
| should try breakfast. | |
| Mr. Campbell. We'll try it, thank you. | |
| Mr. Towns. I yield back, Mr. Chairman. | |
| Mr. Oxley. The gentleman's time has expired. The gentleman | |
| from Illinois, Mr. Shimkus. | |
| Mr. Shimkus. Thank you, Mr. Chairman. I apologize for not | |
| being here earlier. I had another subcommittee. You know, I'm | |
| very punctual. | |
| But energy power also is a big issue for Illinois and | |
| that's my other subcommittee. | |
| This question was asked to a previous panel, but I'd like | |
| to address it also to you both. Do you agree that price | |
| information is a public good? | |
| Mr. Campbell. Absolutely. We, in the NASDAQ market today, | |
| trade over a billion shares a day; have an infrastructure that | |
| not only collects and disseminates this information as widely | |
| as any other capital market in the world. We have a Website | |
| that dispenses this information free to the public that has, in | |
| excess, of 20 million hits a day. We spend close to $40 million | |
| a year in Web initiatives that are freely accessible to the | |
| public. There is nobody that is a strong believer, stronger | |
| than NASDAQ, that information and transparency is a positive. | |
| Mr. Shimkus. Mr. Green? | |
| Mr. Green. I would complement the Website, by the way. I | |
| have it book marked and it's really wonderful information. I | |
| guess the--I think prices information should be available to | |
| the public. There's no question about it. But the price | |
| information that the public can get free of charge is either | |
| delayed or paid for by someone else. Because, in a sense, | |
| market information overall is almost a form of intellectual | |
| property. So, where you draw the line between what's | |
| intellectual property and when does it become public domain, I | |
| think is an argument that lawyers can argue over many lunches, | |
| breakfasts, and dinners, and I don't have the answer for that. | |
| But, I think the public policy desire is to get price | |
| information to the public. And where it goes from being | |
| intellectual property that has a value that cost money, to | |
| something that becomes free of charge, is--I don't know where | |
| to draw that line. | |
| Mr. Shimkus. Is it safe to assume that dealers get a better | |
| deal than the public--the consumer? | |
| Mr. Campbell. I think that's probably not true. Today, if I | |
| am a public individual and I'm desirous of receiving real, on | |
| time, instantaneous quotes, I can presently do that for a | |
| maximum amount of only $4 a month, and we have and will have in | |
| front of our Board later on this month a proposal to | |
| essentially reduce that by half. Most of what happens in those | |
| charges are very accessible by any public individual. They can | |
| receive it on their PC at home; they can receive it on their | |
| pager; and there are many different avenues for them to get | |
| that. | |
| Mr. Shimkus. Mr. Green? | |
| Mr. Green. Well, if Pat's talking about cutting the fees | |
| that are paid by members, I have nothing to add. | |
| Mr. Shimkus. But, do you agree? I mean, the question really | |
| was---- | |
| Mr. Green. Dealers pay for the data. You know, when instead | |
| of going to nasdaq.com, you get the price through a dealer's | |
| Website, the dealers pay for that data. So---- | |
| Mr. Shimkus. There's a pass along charge for just | |
| information. | |
| Mr. Green. Right. Either direct or---- | |
| Mr. Shimkus. So, you made the argument, then, that if an | |
| individual consumer is buying direct, with the dealer, it's | |
| going to be an increased cost? | |
| Mr. Green. If the marketplace allows it to be passed along. | |
| It's a very competitive marketplace now driving down the cost | |
| of transactions and it's not always recoupable. | |
| Mr. Shimkus. Let me go to one last question. A lot of | |
| information is provided to regulators. Why can't investors get | |
| what is given to government bureaucrats? | |
| Mr. Campbell. That's an excellent question. We are in the | |
| process of implementing, over the next 12, 18 months, a system | |
| called an order audit trail. That is primarily an SEC driven | |
| initiative for equity securities. There is no reason why that | |
| can't ultimately be transferred to debt securities, whereby | |
| very possibly in the next 18 months, 24 months, you can | |
| actually go on the Website and find your specific order and be | |
| able to track it. And what the public wants more than anything | |
| is they want the price that they paid validated. And the way | |
| they validate it is to see other transactions along with | |
| theirs. | |
| Mr. Shimkus. Mr. Green, do you have anything to add? | |
| Mr. Green. Yeah, I would just say that we don't want to | |
| prejudge whether or not that's doable. But, that's where the | |
| issue of considering the effect of liquidity on the marketplace | |
| is crucial, because the difference between sending information | |
| to a regulator for surveillance and enforcement purposes and | |
| disseminating that same very information to the public, in this | |
| particular market where you're dealing with large wholesale | |
| institutional sized transactions, that can take actually some | |
| time to occur and unwind. The premature dissemination of | |
| information could affect the pricing of that transaction all | |
| along the way. | |
| But, we're not going to prejudge that. We feel that in | |
| designing a system that is going to provide for that price | |
| transparency, the effect on liquidity should be a | |
| consideration, because if it adversely affects liquidity, it | |
| will increase risks in that marketplace, and the dealer | |
| community puts up the capital to create the markets. But more | |
| importantly, the issuing community needs to get the lowest | |
| possible cost of capital. When AT&T comes to market later this | |
| week for $6 to $8 billion worth of bonds, our quarter-point | |
| here or a basis point there makes a lot of difference, and that | |
| happens when liquidity is good or liquidity is bad. So, all | |
| we're saying, in designing and fashioning a final system, | |
| liquidity should be a consideration, as it relates to the | |
| public dissemination, to ensure that the mere dissemination | |
| doesn't hurt the marketplace that you're trying to help. | |
| Mr. Shimkus. Mr. Chairman, my time has expired and I'll | |
| yield back. | |
| Mr. Oxley. I thank the gentleman for participation and we | |
| thank you both for a most enlightening testimony. I think we're | |
| on the right track and we appreciate all the hard work you've | |
| done on your side to make this a reality. Too many times from | |
| our perspective we nod in the right direction and say go to it, | |
| and don't give you a whole lot of encouragement. In this case, | |
| I think, it's a good example of the private sector initiative | |
| working very well at our directive, not necessarily in a | |
| dictatorial way, but in terms of a cooperative way. I think at | |
| the end of the day, that's exactly what's going to happen. It | |
| will benefit ultimately the marketplace and the consumer. | |
| So, thank you all for your testimony. And the subcommittee | |
| stands adjourn. | |
| [Whereupon, at 12:49 p.m., the subcommittee was adjourned.] | |
| [Additional material submitted for the record follows:] | |
| [GRAPHIC] [TIFF OMITTED] T5636.001 | |
| [GRAPHIC] [TIFF OMITTED] T5636.002 | |
| [GRAPHIC] [TIFF OMITTED] T5636.003 | |
| [GRAPHIC] [TIFF OMITTED] T5636.004 | |
| [GRAPHIC] [TIFF OMITTED] T5636.005 | |
| [GRAPHIC] [TIFF OMITTED] T5636.006 | |
| [GRAPHIC] [TIFF OMITTED] T5636.007 | |
| [GRAPHIC] [TIFF OMITTED] T5636.008 | |
| [GRAPHIC] [TIFF OMITTED] T5636.009 | |
| [GRAPHIC] [TIFF OMITTED] T5636.010 | |
| [GRAPHIC] [TIFF OMITTED] T5636.011 | |
| [GRAPHIC] [TIFF OMITTED] T5636.012 | |
| [GRAPHIC] [TIFF OMITTED] T5636.013 | |
| [GRAPHIC] [TIFF OMITTED] T5636.014 | |
| [GRAPHIC] [TIFF OMITTED] T5636.015 | |
| [GRAPHIC] [TIFF OMITTED] T5636.016 | |
| [GRAPHIC] [TIFF OMITTED] T5636.017 | |
| [GRAPHIC] [TIFF OMITTED] T5636.018 | |
| [GRAPHIC] [TIFF OMITTED] T5636.019 | |
| [GRAPHIC] [TIFF OMITTED] T5636.020 | |
| [GRAPHIC] [TIFF OMITTED] T5636.021 | |
| [GRAPHIC] [TIFF OMITTED] T5636.022 | |
| [GRAPHIC] [TIFF OMITTED] T5636.023 | |
| [GRAPHIC] [TIFF OMITTED] T5636.024 | |
| [GRAPHIC] [TIFF OMITTED] T5636.025 | |
| [GRAPHIC] [TIFF OMITTED] T5636.026 | |
| [GRAPHIC] [TIFF OMITTED] T5636.027 | |
| [GRAPHIC] [TIFF OMITTED] T5636.028 | |
| [GRAPHIC] [TIFF OMITTED] T5636.029 | |
| [GRAPHIC] [TIFF OMITTED] T5636.030 | |
| [GRAPHIC] [TIFF OMITTED] T5636.031 | |
| [GRAPHIC] [TIFF OMITTED] T5636.032 | |
| [GRAPHIC] [TIFF OMITTED] T5636.033 | |
| [GRAPHIC] [TIFF OMITTED] T5636.034 | |
| [GRAPHIC] [TIFF OMITTED] T5636.035 | |
| [GRAPHIC] [TIFF OMITTED] T5636.036 | |
| [GRAPHIC] [TIFF OMITTED] T5636.037 | |
| [GRAPHIC] [TIFF OMITTED] T5636.038 | |
| [GRAPHIC] [TIFF OMITTED] T5636.039 | |
| [GRAPHIC] [TIFF OMITTED] T5636.040 | |
| [GRAPHIC] [TIFF OMITTED] T5636.041 | |
| [GRAPHIC] [TIFF OMITTED] T5636.042 | |
| [GRAPHIC] [TIFF OMITTED] T5636.043 | |
| </pre></body></html> | |