January 22, 2004
The Honorable William H.
Donaldson Mr. Robert R. Glauber Dear Messrs. Donaldson and Glauber: I am writing to acknowledge receipt of the Securities and Exchange Commission (SEC) and NASD annual progress reports, dated December 30, 2003, and December 31, 2003, respectively, on the status of corporate bond market transparency. These are the last in your series of such annual reports, and I am sharing them with the Committee on Financial Services, which now has jurisdiction over these matters, for whatever further action they deem appropriate. I commend you for the significant progress that has been made to date, but I am struck by how much still remains to be done, five years after the House passed the Bond Price Competition Improvement Act and former SEC chairman Arthur Levitt called for better disclosure of corporate bond trading data. I believe that this area deserves continued attention. In a December 29 memorandum to SEC Chairman Donaldson, Annette Nazareth, director of the SEC's market regulation division, summarized developments during the past year and expected future improvements regarding NASD's Trade Reporting and Compliance Engine, referred to as TRACE, and concluded that "dissemination of last sale data on corporate bonds through TRACE has significantly improved the transparency of the corporate bond market." "In addition, because transactions data in all eligible bonds is reported to TRACE and available to the NASD for surveillance purposes, TRACE has enhanced the NASD's ability to conduct surveillance of this important market," Nazareth wrote. In addition, Nazareth reported a marked decrease in the number of alternative trading systems currently available to trade debt securities which she attributed to "a significant consolidation in the industry." She said that, out of an estimated 49 alternative trading systems operating pursuant to Regulation ATS, SEC staff estimates that 15 systems trade debt securities, a decrease of 22 percent from the 24 debt systems estimated to be in operation a year ago. The most successful electronic system for trading corporate bonds is a multi-dealer system that does not report on Form ATS because it does not meet the definition of "alternative trading system," she added. Mr. Glauber's letter notes, among other things, that "TRACE has provided a level of information that has brought unprecedented transparency to the corporate bond market. NASD will continue to work with the SEC and the industry to sustain this trend." Among other key developments in 2003, the Glauber letter points to compression of the reporting time from 75 minutes to 45 minutes, effective October 1, 2003, and advises that NASD staff intends to recommend a further reduction of the TRACE reporting period "until we reach the accepted standard for real time reporting of 15 minutes." A great deal of mischief can occur within such lag times; I would encourage you to do better and soon. Recent press reports, "NASD to Get Tougher on Bond Reporting," Securities Industry News, Monday, December 1, 2003, p.1 (copy enclosed), indicate that corporate and municipal bond transaction reporting failures are now one of the top 10 regulatory violations cited nationwide by examiners, and that regulators intend to start imposing hefty fines for trade reporting failures. The article cites an example by NASD regulatory staff of one firm that does 1,400 inter-dealer transactions a month and has failed to report the correct time-of-trade for the last four months. I observe that NASD issued Notice to Members 03-13 in March 2003, reminding firms about transaction reporting requirements and announcing enforcement actions against firms for violation of Municipal Securities Rulemaking Board (MSRB) transaction reporting rules. I find little comfort in pronouncements that TRACE has been "significantly enhanced and expanded" if the level or quality of transaction-reporting compliance falls short of the optimum, thus calling into question the degree of transparency actually being obtained. Notice 03-13 stated: "Accurate and timely automated comparison and reporting of municipal securities transaction information is critical to a member firm's trade processing function, the accurate dissemination of transaction information, price transparency, and efficient and effective regulatory oversight of municipal securities trading and sales practices." I strongly agree, and believe the same applies to the corporate bond market. Thank you for your consideration of my views and for your organizations' sustained hard work on this important market integrity and investor protection issue. If I can be of any assistance to your continuing efforts, please do not hesitate to ask. Sincerely,
Enclosure cc: The Honorable W.J.
"Billy" Tauzin, Chairman
The Honorable Michael G. Oxley, Chairman
The Honorable Barney Frank, Ranking Member
| |
|
 |
 |
 |
 |
 |
 |
 |
 |
