House subcommittee examines efficiency of fixed income markets

At a hearing held by the House Subcommittee on Capital Markets, Securities, and Investment, experts reviewed the fixed income market and discussed the need for enhanced transparency and liquidity to ensure it operates effectively.

“The United States has the deepest, strongest, most liquid capital markets in the world and the fixed income market is one of the largest sources of capital for issuers and investment opportunities for a broad array of savers and investors,” Rep. Bill Huizenga (R-MI), the subcommittee chair, said. “While lesser-known to some investors, the fixed income market is nearly twice as large as the equity market and differs significantly.”

He explained that the fixed income serves as a source of funding for companies as well as governments in that they are used to fund local infrastructure projects such as roads and bridges.

Given these important functions, the fixed income markets must operate efficiently, transparently and effectively, Huizenga said. They should also have a regulatory structure that appropriately reflects the market’s unique characteristics.

“Fixed income markets provide a critical source of funding to companies and governments. The capital raised in our markets provides growth capital for corporate America to create jobs, fund key infrastructure projects for municipalities to upgrade roads and bridges, and provides a vital funding mechanism for the federal government,” Alex Sedgewick, head of Fixed Income Market Structure & Electronic Trading at T. Rowe Price, said.

Several witnesses testified that more fixed income transactions, municipal security transactions, in particular, should be done via electronic trading as opposed to over the phone.

“The ATSs [electronic trading] have brought positive changes to the municipal bond markets through these auctions by increasing price transparency and liquidity and by helping buyers and sellers find each other.” Matthew Andresen, founder and CEO at Headlands Global Markets, said.

Randy Snook, executive vice president, Securities Industry and Financial Markets Association said policymakers need to calibrate existing and future rules to ensure they do not unduly impede the ability of the market to provide the capital needed to finance growth in the economy.

John Shay, global head of fixed income and commodities at Nasdaq, said the U.S Treasury market would benefit from greater transparency.

“The market for U.S. Treasury Securities is widely recognized to be the most liquid and consequential market in the U.S. and perhaps the world,” Shay said. “Trillions of dollars or USWTs circumnavigate the globe, trading across, and resting in, the accounts of individual investors, institutions, corporations, and governments on every continent.  Trillions of dollars more in derivatives on USTs trade separately and just as actively. That said, the market for USTs could benefit from greater transparency, organization and efficiency.”