Personal Finance

Ontario’s securities regulator wants more transparency, modern technology and market integrity -- and individual investors could reap the rewards.
By Jess Morgan | 19/05/15

For the Ontario Securities Commission (OSC), “responsive regulation” was a top priority over the 2014-15 financial year. One of their major regulatory initiatives will be a response to long-standing barriers that have kept individual investors out of Canada's fixed income securities market.

About the Author
Jess Morgan is the associate editor of Morningstar Canada’s website. She began her career as a television producer and freelance writer, often making appearances on TV and radio as a commentator on politics and culture. She holds a BA in communications from the University of Winnipeg and a diploma in Creative Communications from Red River College.

The Canadian Fixed Income Market Report, released in April, claims the nature of Canada's $2 trillion fixed income market favours institutional investors, who have better access to data and dealers than their retail counterparts.

The report highlights four key aspects of the fixed income market that informed the OSC’s assessments: limited and fragmented public information; the decentralized, over-the-counter (OTC) nature of the market; slowness to adopt electronic and alternative trading systems; and the tendency of retail investors to invest in fixed income securities indirectly, through investment funds or pension plans.

”We believe there is a need for additional transparency, both to regulators and to market participants, as well as enhanced regulation,” says Susan Greenglass, director of market regulation at the OSC.

Using data from the 2012 Canadian Financial Monitor Survey, the report states fewer than 3% of Canadian households own any marketable bonds, and approximately 80% of those that do hold them have more than $100,000 in financial assets and are headed by an individual who is at least 50 years old.

A recurring theme in the report is the relative ease of the equity market, in which investors can find data such as prices, quotations and markets on central exchanges, often electronically, at little to no cost. In contrast, similar data in the fixed income market is not as publicly available, since bond sellers tend to work with investors through dealers.

In addition, institutional investors can afford to purchase bonds in larger quantities, reducing transaction costs. Their liabilities are also longer-term and easier to predict, the report says, making institutional bond purchases especially appealing to sellers -- and unlike retail investors, institutional investors have the option of reaching a trading desk directly.

User friendliness also plays a role in discouraging retail investors from the bond market. While the majority of equity market activity is electronic, “more than half of all trades (by volume) still take place over the phone in Canada” in the fixed income market, the report says.

And that's not for lack of freedom to trade electronically, says Greenglass: “The regulatory framework is in place for market participants to conduct trading on alternative trading systems.”

While there are some options for electronic bond trading in Canada, they are not necessarily designed to cater to all investors. Canada’s Big Five banks and the TMX Group -- which operates the Toronto Stock Exchange -- own CanDeal, offering a platform for institutional investors to request quotes; the service is not open to retail investors. Meanwhile, CBID -- operated by Perimeter Markets Inc., a subsidiary of CI Investments -- offers both retail and institutional trading platforms, although they only provide end-of-day prices for “a limited number” of bonds. Of these two, CanDeal dominates, executing over 85% of electronic fixed market trades between 2011 and 2013, according to the OSC report -- and both services combined represent less than one-fifth of all trades, electronic or otherwise, executed in that same timeframe.

In August 2014 -- one month after Bloomberg published an article in which traders called Canada’s bond market “among the worst” for transparency -- CanPX, a designated information processor, announced a partnership with CanDeal to provide free price information for 336 Canadian corporate bonds.

That hasn't been good enough, says the OSC report: “Most of the information that is freely available is consolidated and only available for a limited time.” The report also points out that investors don’t have access to historical prices from CanPX.

For an idea of how comprehensive the Canadian bond market could be, both the OSC and a Bank of Canada report from 2004 speak highly of TRACE (Trade Reporting And Compliance Engine), a series of rules in the United States governing bond transparency and an accompanying data platform, established in 2001 by the Securities and Exchange Commission (SEC). Regulators and investors alike say TRACE has improved the quality of the U.S. fixed income market; further improvements, such as mandatory disclosure of post-trade fees, may yet follow.

”We are monitoring regulatory developments in other jurisdictions to determine what steps are being taken to increase transparency of government bonds globally,” says Greenglass.

In the meantime, she says, investment funds and pension plans remain viable options for individuals looking to add bonds to their portfolios.

”The fact that retail investors generally access fixed income investments through investment funds is an important feature of the fixed income market structure. It is something that we need to consider when developing policy.”

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