FR 2021-01438

General Summary

The document outlines a rule change approved by the Securities and Exchange Commission (SEC) for the Financial Industry Regulatory Authority (FINRA) concerning the creation of a Corporate Bond New Issue Reference Data Service. This new service mandates that underwriters of corporate bonds must report certain key data about new bond issues to FINRA. Once collected, FINRA will share this information with the public. The intent is to reduce the disparities in information availability—often termed "information asymmetry"—that currently exist in the corporate bond market. By ensuring all market participants have timely access to important bond data, the rule aims to improve market efficiency, enhance transparency, and foster fair competition.

Significant Issues or Concerns

A major concern associated with this new service is the potential burden, both operational and financial, that reporting obligations might place on underwriters, particularly smaller ones. It is suggested that fixed costs related to setting up reporting infrastructure may disproportionately affect underwriters that underwrite fewer bond deals. Moreover, this centralized data service could create a "single point of failure." If the quality or timeliness of FINRA's data falters, it could affect many relying on it. Concerns about the reliability stem from past instances where FINRA's data services, such as the TRACE system, have experienced issues with error rates.

Additionally, some argue that the centralized data service may hinder innovation and reduce competition among existing private data vendors, who currently operate in this space without the mandatory data-sharing regulations imposed in the new system. Others worry that the separation of fee structures into future filings may restrict stakeholders' ability to perform comprehensive cost-benefit analyses.

Impact on the Public

For the general public, including individual investors, this rule change is intended to offer more equitable access to crucial bond information at the inception of a bond's trading. It should enhance market transparency, allowing more participants, including smaller retail investors, to engage with the bond market in a more informed manner. By reducing the information advantage that large institutional investors traditionally hold, it democratizes access to market data which is often locked behind paywalls or inaccessible due to private data monopolies.

Impact on Specific Stakeholders

Corporate Bond Market Participants

For market participants, the rule promises more streamlined processes for obtaining new issue reference data, purportedly reducing costs associated with acquiring and verifying this information. However, it could compel firms to reorganize how they access and integrate market data, potentially disrupting existing workflows, at least temporarily.

Underwriters

Underwriters could face additional reporting burdens, particularly smaller ones who may not have the infrastructure to easily adapt to these reporting requirements. On the other hand, those already working with comprehensive systems may face minimal additional costs.

Data Vendors

Private data vendors could experience increased competition as the rule may level the playing field, allowing new entrants to access datasets historically monopolized by a few key players. However, it may also nullify some competitive advantages these vendors currently possess, potentially affecting their revenue streams and incentives for innovation.

FINRA

The rule solidifies FINRA's role as a central data repository, increasing its influence and operational responsibilities in the market. Ensuring the timeliness and accuracy of the data will be crucial to maintaining reliability and trust in this role.

In conclusion, while the rule presents risks and challenges—particularly in relation to operational burden and market competition—it offers significant potential benefits in terms of market transparency and fairness. The final outcomes will largely depend on the effectiveness of the implementation and the eventual fee structure, which remains to be clarified in future proposals.

In reviewing the financial references in the document, several key points about money-related matters are highlighted. These points relate to the development of the Financial Industry Regulatory Authority's (FINRA) New Issue Reference Data Service and how financial aspects might impact market participants.

Proposed Fees and Financial Access

FINRA initially proposed a structure for fees related to the corporate bond new issue reference data service. These fees were designed to be $250 per month for internal purposes and $6,000 per month for usage that involved retransmitting or repackaging the data for outside dissemination. The fee structure indicates the costs for accessing different tiers of market data, which raises discussions about fair access and potential financial burdens, particularly for different-sized financial institutions.

Impact on Underwriters

An argument presented by a petitioner notes that during 2019, significant investments, quantified as "millions of dollars" over decades, were made by companies building data services. This investment magnitude underscores the substantial resources allocated towards developing and maintaining competitive financial products and services. Furthermore, there is a mention of 33 underwriters handling more than $1 billion in notional transactions up till October of that year. In contrast, many smaller transactions, under $25 million, were also occurring. This disparity raises concerns about the data reporting compliance burden on small versus large underwriters. It suggests that smaller underwriters might face disproportionate financial pressures due to the additional reporting requirements, possibly affecting their competitive standing.

Market Trends and Financial Dynamics

The document also notes that in mid-2018, electronic trading of significant first-day transactions over $250 million experienced growth, increasing its market share on Alternative Trading Systems (ATS) to 39%. This growth highlights ongoing shifts in market dynamics, where larger transactions are increasingly traded electronically. Financial strategies and allocations presumably influence these shifts, impacting how data services and their associated costs are perceived by market players.

Commentary on Financial Investments and Innovation

The petitioner's mention of "tens of thousands of hours and millions of dollars" invested into bond-reference data services raises the point of innovation investment. These investments reflect not only a financial strategy geared towards occupying a strategic market position but also point to possible financial losses if FINRA's proposal limits market opportunities or diminishes the necessity for diverse data providers.

In summary, the document presents financial considerations at different levels: the proposed fee structure for accessing FINRA's data, the varying financial impact of compliance on underwriters of different sizes, and the broader financial implications for market competition and innovation. This financial lens can provide insights into the regulatory decisions affecting market structures and the strategic financial maneuvers by market participants.