SEC’s FIMSAC Considers Impacts of COVID-19 on Fixed Income Markets

Legal & Regulatory Update

SEC’s FIMSAC Considers Impacts of COVID-19 on Fixed Income Markets

October 15, 2020


The SEC’s Fixed Income Market Structure Advisory Committee (FIMSAC) met on October 5 to discuss the impacts of the COVID-19 pandemic and other developments on the fixed income markets. The committee focused on the definition of electronic trading, the corporate bond market, the municipal securities market, bond funds, and ETFs. Panelists discussed the evolution of electronic trading and the benefits that the widespread availability of market data has provided, as well as the record number of users trading U.S. credit during the work-from-home transition as a result of the pandemic beginning in March.

First, with regard to electronic trading, the committee recommended that the SEC: (i) clearly define electronic trading to cover platforms and trading functionality; (ii) consider factors such as single-dealer vs. multi-party execution and fully-electronic vs. post-trade processing in the definition; and (iii) establish industry standards for electronic trade reporting to address current inconsistencies.

Second, committee members discussed the role that electronic trading has played in the high rate of growth of the corporate bond market during this period and the heightened credit stress during the pandemic, the abundance of liquidity for corporate issuers, and the role that the Federal Reserve played in calming that market. Other observations included the decrease in commercial paper outstanding among U.S. corporates during 2020.

Third, the committee addressed municipal bond market transparency, including bond liquidity, index yields, trading spreads, and transaction costs during the pandemic. It also discussed COVID-19-related disclosures and new issuance data in 2020 compared to data from the 2008 financial crisis. The pandemic undoubtedly created anomalies in the municipal bond market, including huge spikes in trading volume starting in March 2020, an increased number of traders, and increases in sales in the municipal market.

Finally, the committee agreed that bond funds and fixed income ETFs performed as expected during the pandemic, provided an alternate source of liquidity, and posted large price discounts from NAV. Members also discussed how bond ETF volumes tend to accelerate during periods of volatility. They also addressed bond funds’ unprecedented outflows during the crisis, the concept that fund illiquidity amplifies fragility, and the fact that safer assets faced larger price disruptions during this crisis.

The FIMSAC’s recommendations related to defining electronic trading and the panelist presentations are available on the SEC’s website.   


TAGS: FIMSAC, Coronavirus, COVID-19, Trading

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