There has been a plan brewing recently to give bond dealers some extra time to reveal big corporate-debt transactions. This has sparked a lot of blowback from ETF (Exchange Traded Funds) traders.
The red flags have been particularly raised by a few companies that are deeply invested in the ETF fixed income market. Jane Street Group, which is one of the premier ETF market-makers, and Citadel LLC, which is an association of trading firms have both raised a ruckus about the enormous impact that lowering transparency will do to the market. The market for fixed income ETFs is worth an estimated 2.2 trillion US Dollars a year and the Vanguard Group and Dimensional Fund Advisors have said that it would exponentially increase costs for investors who will stop relying on the processes that have made fixed-income ETFs such a large force in the market today.
FIRA’s proposal under heavy fire
The funds, which get their value directly from the value of the cash bonds that they own have become almost akin to lighting rods for the torrent of complaints that accompanied the FIRA’s (Financial Industry Regulatory Authority) proposal. The complaints have surrounded the fact that if all the information surrounding the demand for bonds is not present from the start, it will be almost impossible to calculate the bonds true price. This would then reflect ETF’s badly as they wouldn’t actually be showing their true value based on the information that is present.
This opens up a number of opportunities for unscrupulous vendors to trick gullible people into buying into exchange-traded funds that are simply not worth as much as they claim to be while having legal backing to omit key information regarding demand for those bonds that are part of the ETFs. The traders would be hardest hit as it would significantly raise the stakes that the traders work under and would heavily encourage them to charge a hefty premium. This premium would only end up hurting investors int he both the short term and the long term.
It would be a given that traders of ETFs “risk bearing a significant portion of cost shifting that will occur as a result of not disclosing block trades,” Matt Berger who is Jane Street’s global head of fixed income and commodities. He wrote those words in a letter to FIRA. Those costs, he went on to explain to the regulatory authority, would then be passed on from ETF market-makers to ETF investors directly.
Increasing report time would help liquidity
The other side of the coin is argued by BlackRock Inc., who are suggesting that a smaller set of corporate bonds should be under the proposed new laws to see if they have intended effect of increasing bond liquidity. The decline of banks holding debt since the 2008 financial crisis is seen as a major problem by those who issue the debt.
These latest proposals have been an attempt for the regulator to increase liquidity, something that ETF traders say has already been accomplished by the introduction of ETFs.