US bond lobbies warn SEC of severe disruption under rule change

Lobby groups are warning that activity in the world’s biggest bond market could grind to a halt at the end of this month without last-minute exemptions to an obscure 50-year-old rule in the US that has previously taken aim only at stocks.

Bond trade associations have written to regulators to say amended rules will have a “significant, deleterious effect” on government and corporate bond markets, and pleaded for an explicit reprieve, or more time to comply. The amendments were first proposed last year, but market participants assumed until recent months that the rules would continue to pertain to the stock market alone.

“We believe that such an application of the rule is overbroad and unnecessary”, wrote the Bond Dealers of America and the Securities Industry and Financial Markets Association.

The SEC’s 1971 statute, known as ‘rule 15c2-11’, governs the “publication or submission” of prices to buy and sell securities away from exchanges. Market participants have largely considered it an attempt to guard retail investors from predatory schemes and fraudulent activity in penny stocks. 

The rule requires broker dealers such as JPMorgan Chase and Citi to check a wide range of information on issuers, including quarterly and annual reports. Last year the SEC, then led by Jay Clayton, tweaked the rules for the first time in almost three decades, and included a requirement for the information to be publicly available.

“These retail investor-focused improvements to Rule 15c2-11 are long overdue,” said Clayton at the time, adding that advances in technology meant investors could be privy to more up-to-date information before trading.

The statute has never explicitly excluded bonds but, in practice, it has never applied to them in its 50-year existence. This has long suited a market where many corporate issuers are not listed on stock markets and do not routinely produce regular earnings reports. It is unclear what disclosures would be required for government bonds, such as those issued by the US Treasury.

But Michael Decker, vice-president of policy and research at BDA, said the SEC, led by new chief Gary Gensler, has confirmed the rules will also affect government and corporate bonds under the amendments outlined last year. Only municipal securities have an explicit exemption. 

“Here we are a matter of days away and very little work has been done. It is pretty clear to me that the SEC hasn’t really thought this through,” said Decker.

The SEC declined to comment. 

Rising awareness of the new requirements has sown confusion in the bond market as bankers, trading platforms and investors now face intense compliance demands ahead of an unforeseen month-end deadline. 

The concern is that without guidance or amendment from the SEC, trading in part of the bond market will cease when the rule comes into force at the end of this month, as broker dealers back away for fear of attracting an enforcement action from securities regulators. 

The SEC’s move comes at a time of increasing regulatory scrutiny of fixed income trading, with Gensler noting this month that he intends to bring greater efficiency and transparency to the market. 

Broker dealers are scrambling to understand how to gather, review and publish information on the companies whose bonds they trade. They are also questioning what counts as publication or submission of a quote on a bond — terms left undefined in the rule.  

Bond trading has increasingly transitioned to trading on electronic venues, with prices streamed on screens. In an attempt to avoid publishing quotes, some market participants could shift trading back to phones until clearer guidance is available. 

“The risk is that if the broker dealers feel they can’t be in compliance based on the interpretation of their internal teams then they might be forced to stop quoting certain bonds to ensure they aren’t out of compliance,” said Kevin McPartland, head of research, market structure and technology at Greenwich Associates.