US fixed income markets

* * The opacity crisis * *

Woman in Housing and Finance

Washington, DC

October 14th, 2008

Cate Long, Multiple-Markets

The New York Times...

....The mind of the President is apparently occupied by some notions regarding panics which would probably be less perturbing if they were clearer.

His allusions to the subject on Tuesday evening were palpably sincere, but we find them a little confused.

We cannot, for example, quite make out what he means...

December 19, 1912

Run on East Side Bank, NY
2/16/12

What's the market?

Fixed income ~ bond ~ debt ~ credit

A large, deep, quiet market

Used by governments, corporations, financial institutions and sponsoring entities to raise funds

These products fill the balance sheets of banks, pension and mutual funds, governments, individuals

A bond =

A debt instrument, also considered a loan, that an investor makes to a corporation, government, federal agency, or other organization ( issuer)

In which the issuer typically agrees to pay the investor the amount of the face value of the bond on a future date

And to pay interest at a specified rate at regular intervals.

US issuers

Treasury >>$ 423 billion

Federal agencies >> $ 817 billion

Municipals >> $ 229 billion

Corporates >> $ 567 billion

Asset backed >> $ 123 billion

Mortgage backed >> $ 816 billion

Equity issuance >> $ 147 billion

SIFMA - 1st half of 2008

Bonds are underwritten...

Terms of the issue are defined (size in dollars, the maturity, the approximate yield)

Credit rating agencies are contacted and ratings developed

Debt syndication desks at investment banks connect the seller and buyers

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Most offerings are oversubscribed

Generally 90% of bonds are held to maturity

Almost entirely an institutional client process

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Investors are usually institutions

Pension funds, mutual funds, banks, foreign governments and overseas investors

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Yield on Treasuries< B1 >< B >< BB- >IB

9.04%.3.80 %

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A technical specification for the electronic communication of trade-related messages

Collaboratively developed by many market participants

Made up of fields and messages

Tag = value

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IOI and quote response

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Standardizes communications with all your counterparties

Supports straight through processing

Reduces entry errors

Makes establishing new trading relationships quick and easy

Increasingly supports cross asset trading

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Corporates

Convertibles

High yield

MBS

CMB

ABS

CMO

CP

CD

Repo

Treasuries

Agencies

Municipals

Swaps

Non-US securities

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Fixed income

EquityDerivativesFXSource: fixprotocol.org/survey

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Governments

AgenciesCorporatesSource: fixprotocol.org/surveyConverts

MBSPre-TradeTradePost-TradeSupport w/in 24 months

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Source: Survey of Consumer Finance Federal Reserve

Bringing light to a dark market







Policy recommendations for
fixed income

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Expand the TRACE trade reporting system to incorporate all cash fixed income securities

Treasuries

MBS

Repo

Agencies

Structured finance products

Money market instruments

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Open source the CUSIP nomenclature system

This will be the foundation for the development of a vast body of information and disclosure for fixed income securities.

This should be like equity tickers

Bank, Broker, Asset Manager, etc. All Municipals only $56,750 per year

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All raters should have non-public information not just those compensated to rate the issue.

For example, Lehman Brothers and AIG, should have provided non-public information to all NRSROs rather than the few they compensated.

The SEC should examine whether Lehman and AIG were ratings shopping leading up to their failures.

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All entities issuing public securities should file detailed disclosure with the SEC outlining all securities outstanding and the exchanges, ATS, ECN or OTC markets on which the filing company has securities.

This would give market participants the information to assess the full capital structure and risk profile of the issuing entity.

With this level of disclosure it would be possible to assess the liquidity of an issuers securities.

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The Treasury Department, through the Federal Reserve, should make Treasury securities available for sale and purchase on an ongoing and regular basis to retail investors similar to their sales to primary dealers.

It is very good that retail can participate in auctions (TreasuryDirect) but should have available daily trading capability

The New York Stock Exchange Bonds platform could be utilized

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The SEC should require more disclosure of the various alternative trading systems, over-the-counter liquidity platforms and crossing networks.

Access to these platforms should be made more universal.

Trading venues should publish liquidity statistics for securities traded.

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An integrated multilateral trading and clearing model will offer the best route to improved risk management and enhanced efficiency for all participants in the credit derivatives market and also for the underlying companies on which credit derivatives are based.

This will offer regulators the immediate information and transparency they need to prevent fraud, manipulation and market abuse.

These central utilities will greatly reduce information asymmetries and protect the broader financial markets against systemic risk.

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A recent study says about 25% of municipal issuers are chronically delinquent in filing their disclosure documents.

The Congress should consider means of enhancing disclosure.

Information flow is vital for healthy markets and the protection of investors.