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Creating transparency in the fixed income markets

Creating transparency in the fixed income markets



Presentation made to Women in Housing and Finance on October 14, 2008 by Cate Long in Washington, DC.

Presentation made to Women in Housing and Finance on October 14, 2008 by Cate Long in Washington, DC.

The topic is improving fairness and transparency in the fixed income markets,



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    Creating transparency in the fixed income markets Creating transparency in the fixed income markets Presentation Transcript

    • 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 - 1 st 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
    • << The underwriter distributes the deal >>
      • Most offerings are oversubscribed
      • Generally 90% of bonds are held to maturity
      • Almost entirely an institutional client process
    • << Investors >>
      • Investors are usually institutions
      • Pension funds, mutual funds, banks, foreign governments and overseas investors
    • << Credit ratings agencies >>
    • << How is the bond priced when issued? >> Yield on Treasuries < B1 > < B > < BB- > IB 9.04%. 3.80 %
    • << What happens when bonds are issued? >>
    • << When bonds trade over the counter >>
    • << When the bonds trade- ECN or ATS >>
    • << When bonds e xchange trade >>
    • << What is FIX >>
      • 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
    • << Message flow >>
      • IOI and quote response
    • << Why use FIX >>
      • 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
    • << FIX trade many products >>
      • Corporates
      • Convertibles
      • High yield
      • MBS
      • CMB
      • ABS
      • CMO
      • CP
      • CD
      • Repo
      • Treasuries
      • Agencies
      • Municipals
      • Swaps
      • Non-US securities
    • << Buyside FIX usage >> Fixed income Equity Derivatives FX Source: fixprotocol.org/survey  
    • << Sellside fixed income usage >> Governments Agencies Corporates Source: fixprotocol.org/survey   Converts MBS Pre-Trade Trade Post-Trade Support w/in 24 months
    • << What kind of financial assets do households own? >> Source: Survey of Consumer Finance – Federal Reserve
    • Bringing light to a dark market Policy recommendations for fixed income
    • << Price reporting >>
      • Expand the TRACE trade reporting system to incorporate all cash fixed income securities
      • Treasuries
      • MBS
      • Repo
      • Agencies
      • Structured finance products
      • Money market instruments
    • << Naming >>
      • 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
    • << Expand “equivalent disclosure” to all rated asset classes >>
      • 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.
    • << Require public companies to disclose outstanding securities >>
      • 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.
    • << Create a facility for retail investors to purchase Treasury securities >>
      • 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
    • << More oversight and transparency for all trading venues >>
      • 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.
    • << Trade and clear cash and derivative products through multilateral platforms >>
      • 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.
      • T hese central utilities will greatly reduce information asymmetries and protect the broader financial markets against systemic risk .
    • << Repeal the Tower Amendment >>
      • 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.