Regulatory Changes Put Spotlight on Bond Pricing, Disclosure
New rules require more transparency around corporate, agency and municipal bond markups
Effective May 14, 2018, new regulations will be adopted aimed at increasing the transparency of bond pricing. The new rules require dealers of corporate, municipal and agency bonds to clearly disclose bond markups and provide retail investors with relevant price comparisons.
Although this initiative was spearheaded by the Municipal Securities Regulatory Board (MSRB) to cover municipal bonds, the Financial Industry Regulatory Authority (FINRA) has been working in tandem with the MSRB on language that covers corporate and agency bonds as well. Ultimately, the two regulatory agencies came up with similar sets of rules approved by the Securities and Exchange Commission that will be unveiled on the same timeline.
As retail investors discover the real cost of owning individual bonds, we believe these regulatory changes will strengthen the case for both fixed income exchange-traded funds (ETFs) and active fixed income investment managers.
What are bond markups?
When selling bonds, a dealer may acquire the bonds at one price and then sell them for a higher price as compensation for the dealer’s services. Markups represent the spread between the price paid for a bond and the price the dealer receives when selling the bond. Seeing the need to “enhance the transparency of costs associated with municipal securities transactions,” in November 2016 the MSRB amended existing Rules G-15 and G-30, which cover confirmation, clearance, prices and commissions. Working in concert with the MSRB, FINRA drafted disclosure requirements that are “materially the same” as the MSRB’s.1 The rule changes for both agencies take effect on May 14 and target non-institutional investors.
What has changed?
1. Increased disclosure around bond markups
In a nutshell, the new rules require bond dealers to disclose any markups (or markdowns) on bonds bought and sold to retail investors on the same day. Markups and markdowns must be expressed both in dollar terms and as a percentage of each bond’s prevailing market price.1
In order to make these disclosure requirements meaningful, retail investors must understand a bond’s prevailing market price. That is the other key component of the rule changes.
2. Determining prevailing market prices
In the case of municipals, dealers will be required to provide a hyperlink to the MSRB’s website, which hosts publicly available trading data for each security.1 Presumably, the data would allow retail investors to assess the fairness of the prices being charged by bond dealers. Because of its broader regulatory reach, FINRA offers its member firms wider latitude in disclosing prevailing market prices. Regardless of how members choose to disclose prevailing market prices, however, the “timing of the determination must be applied consistently across all transactions in corporate and agency debt securities.”2
Ramifications for retail investors
US bond trading volume eclipses that of the equity markets by a large margin. Nonetheless, bond markets have long been shrouded in mystery. Unlike stocks, bonds are traded over the counter rather than on standardized exchanges. This means that bond pricing is less transparent and trades are often conducted on a one-off basis through informal networks of dealers. As a result, bond pricing can be confusing, while US bond markets can be inaccessible to retail investors. We believe these changes should help de-mystify bond pricing.
We believe these regulatory changes also highlight the benefits of managed fixed income strategies. Invesco offers a broad lineup of active and passive fixed income strategies covering municipals, investment grade and high yield asset classes. Our fixed income professionals are experienced in navigating the complexities of the bond markets. In fact, Invesco Fixed Income is a leading global fixed income manager — focused entirely on helping clients meet their investment objectives. And because of Invesco Fixed Income’s global scale, we are able to purchase bonds in large blocks and secure institutional pricing.
Investors who currently invest in individual bonds might wish to consider our BulletShares suite of ETFs, which offers the precision and flexibility of individual bonds with the cost and tax efficiency of the ETF structure.3 BulletShares ETFs encompass both investment grade and high yield corporate bonds, enabling investors to build customized portfolios tailored to specific maturity profiles, risk preferences and investment goals.
Choosing Invesco as your fixed income partner can help simplify fixed income investing.
Learn more about BulletShares ETFs.
Source 1: Municipal Securities Rulemaking Board, July 12, 2017
Source 2: Financial Industry Regulatory Authority, “Fixed Income Confirmation Disclosure: FAQ”
Source 3: Since ordinary brokerage commissions apply for each buy and sell transaction, frequent trading activity may increase the cost of ETFs. Invesco does not offer tax advice. Please consult your tax adviser for information regarding your own personal tax situation.
Global Market Strategist
PowerShares by Invesco
Jason Bloom is the Global Market Strategist representing the PowerShares family of exchange-traded funds (ETFs). In this role, Mr. Bloom is responsible for providing the overall macro market outlook across all asset classes globally, in addition to leading the team’s specialized efforts in commodity, currency, and alternatives research and strategy. He joined Invesco PowerShares in 2015.
Prior to joining PowerShares, Mr. Bloom served as an ETF strategist with Guggenheim Investments for six years and then River Oak ETF Solutions where he helped launch several funds focused on both energy and volatility related strategies. Previously, he spent eight years as a professional commodities trader specializing in arbitrage strategies in both the energy and US Treasury markets.
Mr. Bloom earned a BA degree in economics from Gustavus Adolphus College and a JD from the University of Iowa College of Law.
Senior Client Portfolio Manager1
Stephanie Larosiliere is the senior client portfolio manager for the Invesco Municipal Bond team. Ms. Larosiliere works with the fund management team, acting as its representative to retail clients and other intermediaries.
Her responsibilities include working with sales staff and clients to provide insight on the municipal fixed income market and the investment strategies utilized by the team. She is also responsible for ongoing product development and marketing for the municipal bond products.
Ms. Larosiliere joined Invesco in 2011 as a senior product manager supporting the municipal and convertible businesses. Prior to joining Invesco, Ms. Larosiliere served as a vice president in the Goldman Sachs Asset Management fixed income product management team where she was responsible for portfolio analysis, product development, client retention and marketing. Prior to joining Goldman Sachs in 2008, she worked as an institutional product management associate for Brown Brothers Harriman. She began her career in the industry in 2003 as a risk management analyst with JPMorgan Chase where she was responsible for performing daily value at risk (VaR) analysis and monthly stress risk tests on the bank’s credit portfolio.
Ms. Larosiliere earned a BBA degree in finance and investments from Baruch College — The City University of New York (CUNY).
1 Not involved in managing assets of any fund.
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Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.
An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer’s ability to make payments of principal and/ or interest.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The funds’ return may not match the return of the underlying index. The funds are subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the funds.
Investments focused in a particular sector are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.
The funds are non-diversified and may experience greater volatility than a more diversified investment.
Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.
During the final year of the funds’ operations, as the bonds mature and the portfolio transitions to cash and cash equivalents, the funds’ yield will generally tend to move toward the yield of cash and cash equivalents and thus may be lower than the yields of the bonds previously held by the funds and/or bonds in the market.
An issuer may be unable or unwilling to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.
Shares are not individually redeemable and owners of the Shares may acquire those Shares from the Fund and tender those Shares for redemption to the Fund in Creation Unit aggregations only, typically consisting of 10,000, 50,000, 75,000, 80,000, 100,000, 150,000 or 200,000 Shares.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
All data provided by Invesco unless otherwise noted.
Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC, investment adviser. Invesco PowerShares Capital Management LLC (PowerShares) and Invesco Distributors, Inc., ETF distributor, are indirect, wholly owned subsidiaries of Invesco Ltd.
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Regulatory changes put spotlight on bond pricing, disclosure by Invesco