The corporate new issue market does not have a requirement for underwriters to make generally available, immediately upon pricing of an issue, sufficient reference data for all market participants. For a market as large as the US corporate bond market, this is a major shortfall. As a result, a subcommittee of the Fixed Income Market Structure Advisory Committee recently issued a recommendation calling for the establishment of a central source of new issue reference data. TABB Group head of fixed income research George Bollenbacher examines the need for full instrument reference data, the specific FIMSAC recommendations, and what it might take to implement a solution.
On Oct. 29, 2018, the Technology and Electronic Trading Subcommittee (‘Subcommittee”) of the Fixed Income Market Structure Advisory Committee (“FIMSAC”) addressed a persistent problem in the corporate new issue marketplace: the availability of full instrument reference data immediately upon pricing.
Defining the Problem
The Subcommittee’s report said:
“In its deliberations, the Subcommittee focused on whether the timeliness and accessibility of bond reference data is impacting the efficiency and interoperability of the corporate and municipal bond markets. … [I]n the U.S. corporate bond market, neither underwriters nor issuers are currently required to submit a full set of new issue reference data to a central depository for onward public dissemination. …The Subcommittee understands that each corporate bond reference data provider collects and disseminates new issue reference data at different speeds that vary by a few hours to several days.”
How important is this? In the FIMSAC discussion of this subject, Spencer Gallagher, Director of product management at ICE Data Services, said, “For the market, at pricing, the clock starts ticking. And the need for information is immediate. Even an hour of delay is impactful and costly for many corners of the market, be it trading, buy side retail, and the venue community that feed all of these processes.”
In addition, he added, “We find that many of our clients required important data for pre-trade activities, such as compliance, as soon as the data is solidified for a particular new issue. This generally occurs at the pricing of the deal. … We cannot tell our clients that we can depend on having the data before trading begins. We can’t make that commitment. This often leads to the buy side scrambling to fulfill their pre-trade responsibilities.”
Doesn’t TRACE do this already? In the same discussion, Ola Persson, senior vice president of transparency services at FINRA, said, “One of the rules as part of the TRACE is something called obligation to provide notice, Rule 67-60, that in essence says that an underwriter has an obligation to give us basic details of that security prior to execution of the first transaction. It is really geared towards enabling TRACE reporting. So, it is a limited set of fields that we have.”
In other words, the corporate new issue market does not have a requirement for underwriters to make generally available, immediately upon pricing of an issue, sufficient reference data for all market participants to process trades, or even to perform necessary compliance functions. For a market as large as the US corporate bond market, this is a major shortfall.
Designing the Solution
As a result, at the Oct. 29 meeting, FIMSAC issued a recommendation which called for, “a single central source of new issue reference data like that available in the municipal bond market.” Additionally, “New issue reference data, and updates to reference data for seasoned issues, should be disseminated in real time to all reference data vendors and market participants, ensuring that everyone has access to the same data at the same time.”
Specifically: “The Subcommittee recommends that the SEC, in conjunction with FINRA, establish a new issue data service with the following elements:
- The managing underwriter1 of all TRACE-eligible corporate bond new issues, including registered offerings and unregistered Rule 144A offerings, would be required to send the specified new issue information specified below in Schedule A2, as well any follow-up adjustments, electronically to a central database managed by FINRA;
- The managing underwriter would be required to submit the new issue information to FINRA no later than distribution of the information to any reference data vendor or other third party not involved in the offering;
- Once the central database has all the required reporting information, FINRA will make the data available in a real-time electronic format to reference data vendors and other market participants as determined by FINRA; and
- FINRA shall provide subscribers with access to the service on an impartial basis at fees determined on a commercially reasonable basis, subject to applicable regulation.”
Schedule A2 defined the proposed data set, consisting of:
Source: FIMSAC Recommendation
If we understand that much of this data is generally supplied to potential buyers shortly after the issue is announced, in order for them to make valuation and purchasing decisions, and the rest comes in when the issue is priced, there is no reason all this data couldn’t be made available to a FINRA-authorized database immediately upon pricing. In fact, the muni market is already pretty close to that objective under the MSRB’s Rule G-34.
To move forward on this effort, we first have to define the scope. There are really two efforts involved: accumulation and distribution.
Accumulation involves obtaining and cataloging the required data elements for each corporate new issue. It might be somewhat simpler if the requirement only applied to issues registered under the 1933 Securities Act, since the underwriters, acting on behalf of the issuer, include most of the data elements in the SEC registration statement. But this effort also incorporates 144A securities, which, for those not familiar with them, are offered to a limited number of institutional investors with an offering memorandum instead of a registration statement. In the end, though, there needs to be one entity, specified in the report as FINRA, that will accumulate and maintain the data. That argues for a standardized formatting and delivery method. Whether that standardization can be done voluntarily, or will require a regulation, remains to be seen.
The FIMSAC recommendation also noted:
“The Subcommittee recognizes that the creation of this service will impose costs on FINRA and the underwriters. Based on available information, the Subcommittee believes that the costs would be small relative to the value of the service as the required information to be reported is similar to the information that underwriters already provide directly to reference data vendors.”
Distribution involves making the data immediately available to all market participants. At the FIMSAC meeting, Ola Persson of FINRA said on this subject:
“We would also need to create a separate distribution channel for this. And the reason being, today, since the only thing that really matters is that the security gets on TRACE, we actually do have contracts with vendors that allows us to take certain records or certain elements of records and incorporate those into the database and distribute that. That also explains where we can only today grant very limited usage rights to the data we distribute. So, this would have to be a service that would … be entirely sourced from underwriters’ … common link vendor data, and then we would have to build that, obviously.”
One possible solution is to build off currently available new issue services, such as IHS Markit’s IPREO service. These services act as a link between underwriters and potential buyers, 1) supplying sufficient instrument data for buy-side decision-making well before the pricing point, 2) allowing the buy side to post IOIs or orders with the underwriters, 3) communicating allocations to investors, and 4) communicating final pricing and final terms to investors. Arranging for these currently existing services to deliver the required fields to a FINRA database immediately upon pricing and making that database available on a subscription basis may be the most efficient way of solving this problem. We’ll see if FINRA takes that path or follows another one.