The Bond Market Association has formed a high-yield committee that will work with regulators to ensure that a new National Association of Securities Dealers corporate bond trade reporting system, called TRACE (Trade Reporting and Comparison Entry), preserves dealer anonymity and doesn't dry up liquidity in smaller investment grade and high-yield issues. Michel de Konkoly Thege, BMA associate general counsel and staff adviser to the committee, says in less liquid markets, "a firm's willingness to commit capital to holdings in a particular security could diminish if other market participants anticipate what their strategy is."
"If the market knows some firm out there has a substantial position that they need to liquidate, buyers tend to go away," agrees Mark Freeman, portfolio manager and vice president at Westwood Management Corp. in Dallas. A trader at a small shop also voices the concern that increased transparency could cause larger competitors to steal his clients.
A separate bond transaction reporting committee, comprised of representatives chosen by the BMA and NASD, will examine whether and for how long to delay public dissemination of TRACE data after trades are made. The high yield committee will make recommendations to one of its senior members who will serve as the high-yield community's liaison to the bond transaction reporting committee. "In the high yield market, deals not as big as the jumbo global investment grade deals have a higher level of credit sensitivity," says de Konkoly Thege.
TRACE will provide 13 different types of data once it is ready, probably by the fourth quarter of this year. De Konkoly Thege says sale price/yield information will be the most closely watched by market participants, and for investment grade corporate issues of $1 billion or more and a group of relatively liquid high yield issues known as the FIPS 50, such data will be disseminated immediately after a trade is made. For less liquid issues, however, the bond transaction reporting committee may choose to delay data dissemination in order to preserve dealer anonymity.
The high-yield committee will look at other topics as they arise, including concerns that the Security and Exchange Commission's Regulation FD has increased bond market volatility, and the possibility of European securities regulators' initiating shelf registration and a 144A private placement rule. The roughly 15 member committee held its first meeting last week. "We are have a senior and well-respected group put together that will look at a number of issues, particularly regulatory issues, that affect the high yield market," said committee chairman Joseph McGrath, managing director in high yield capital markets at Goldman Sachs. Asked to elaborate on the committee's agenda, McGrath did not provide a response by press time.
