Finra investigates US bond market
The US brokerage industry regulator is to begin investigating the bond market, including whether deals between brokers and exchanges are fleecing investors. The Financial Industry Regulatory Authority (Finra) will also look at the operations of electronic debt trading platforms, which have become increasingly popular as investors seek to trade fixed-income products.
It comes amid a changing environment in the bond market as trading in fixed-income securities migrates away from being carried out over the phone between dealers at banks and investors, to electronic platforms. The retreat from bond trading by many financial institutions has led to a drop in liquidity that is worrying regulators.
Richard G Ketchum, Finra chairman and chief executive officer, believes there has been “tremendous change” over the last ten years in broker-dealer operations, the markets and the regulatory landscape.
“While we have seen some firms make great progress in keeping up with these changes, more attention needs to be paid to addressing specific challenges we've pinpointed,” he said. “Doing so will provide the building blocks for a stronger culture of compliance, while indifference to or inaction on these issues will only serve as stumbling blocks toward robust compliance and supervision programs.”
In a letter outlining its priorities for the year ahead, Finra identified specific areas of concern, including the sale and supervision of interest-rate-sensitive and complex products, such as alternative mutual funds. It also wants to focus on high-risk brokers and removing “bad actors” who prey on investors.
It will launch a test program to determine whether brokers who use electronic bond trading platforms are getting the best prices for investors.
Five key areas for regulatory reform were listed: abusive trading algorithms; high-frequency trading; cross-market and cross-product manipulation; order routing practices, best execution and disclosure; and market access controls. Finra also said it is worried about potential cybersecurity attacks that destroy data.
It comes after the Securities and Exchange Commission approved a Finra proposal requiring brokerages to toughen up background reviews they conduct on new hires, in a move that will likely create additional compliance costs for financial institutions.