It’s small investors who can benefit most from better transparency on bond trading

While market-led solutions have been effective in delivering the information most institutional investors need to trade confidently in Canada’s government bond markets, a gap exists when it comes to delivering useful information to retail investors. Canadian securities regulators have announced they will soon mandate that the prices at which government bonds trade, as well as other key information, be made public in a move aimed at improving transparency and further safeguarding investors in these securities.

A public transparency system could deliver meaningful benefits to retail investors, but only if it is properly designed and doesn’t impair overall market functioning. Specifically, the forthcoming transparency solution must be easily accessible, must contain information that is easily consumable by retail investors and must not introduce added costs to market participants. And, most importantly, retail investors must be made aware of its existence so that it can be utilized in their decision-making.

In determining the appropriate way forward, it is important to look at what has shaped the transparency agenda in Canada recently and over the better part of the last two decades.

Well-developed financial markets, such as Canada’s market for government bonds, tend to find what it takes to function efficiently. Market forces are quickest to identify any gaps and work swiftly to fill them. Such has been the case for bringing large investors in government bonds, such as pension plans and other institutional investors, the information they need to transact confidently. Whether through access to market data services (think Bloomberg) or the use of electronic trading platforms such as CanDeal, most institutional investors have the tools they require.

A shortcoming in Canada, however, has been the lack of similar market-led solutions for the small retail investor. For these investors, finding timely bond information has been a challenge. Perhaps this shouldn’t come as a surprise given that very few retail investors are willing to spend out-of-pocket to access information on bond markets, which tend to move at a glacial pace when compared to their equity-market counterpart.

The increased focus on fixed-income markets by market authorities has, however, recently resulted in several other regulatory initiatives, which are making retail bond investors more informed and ensuring the quality of their trade executions.

In 2015, the Investment Industry Regulatory Organization (IIROC) launched a debt-surveillance system that now captures all over-the-counter bond trades executed by investment dealers in Canada. IIROC uses the trade information to identify any market abuses and whether investors, large or small, obtain fair prices on their trades. In 2016, this surveillance system was leveraged to build a public transparency service for corporate debt securities, making useful trade information available on this generally more opaque corner of fixed-income markets. Further still, the recently implemented second phase of the Client Relationship Model (CRM2) brings retail investors in Canada a better understanding of the cost and performance of their bond holdings. Specifically, yield is now disclosed on bond purchases and investors also receive information regarding the total commissions, mark-ups or other service charges they paid on their bond trades. Consequently, Canada’s investor-protection framework for debt markets is perhaps among the most comprehensive in the world.

Are the regulators’ current aspirations for added government bond transparency, therefore, truly necessary? While measures have been implemented to ensure retail investors are obtaining fair market prices and additional details on their bond transactions, further sources of information could assist investors in verifying, or at least questioning, the prices they obtain. Greater market insight might also encourage increased retail participation in our debt markets, beyond fixed-income ETFs and mutual funds, which would contribute to healthy market functioning.

Investors, large or small, cannot make knowledgeable investment decisions without some information about the products they are trading or the markets in which they transact. Market-led solutions are meeting the needs of most institutional investors in this regard. A mandated public transparency framework for Canadian government debt markets would be of greatest value to retail investors and should be designed with their needs primarily in mind.

Jack Rando is managing director of the Investment Industry Association of Canada (IIAC) and authored the IIAC white paper “Filling the Gap: Perspectives on Transparency for Canada’s Government Debt Markets.”