[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
           THE BOND PRICE COMPETITION IMPROVEMENT ACT OF 1999

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                    FINANCE AND HAZARDOUS MATERIALS

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 18, 1999

                               __________

                            Serial No. 106-8

                               __________

            Printed for the use of the Committee on Commerce


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 55-636CC                    WASHINGTON : 1999
------------------------------------------------------------------------------
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                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

            Subcommittee on Finance and Hazardous Materials

                    MICHAEL G. OXLEY, Ohio, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     EDOLPHUS TOWNS, New York
  Vice Chairman                      PETER DEUTSCH, Florida
PAUL E. GILLMOR, Ohio                BART STUPAK, Michigan
JAMES C. GREENWOOD, Pennsylvania     ELIOT L. ENGEL, New York
CHRISTOPHER COX, California          DIANA DeGETTE, Colorado
STEVE LARGENT, Oklahoma              THOMAS M. BARRETT, Wisconsin
BRIAN P. BILBRAY, California         BILL LUTHER, Minnesota
GREG GANSKE, Iowa                    LOIS CAPPS, California
RICK LAZIO, New York                 EDWARD J. MARKEY, Massachusetts
JOHN SHIMKUS, Illinois               RALPH M. HALL, Texas
HEATHER WILSON, New Mexico           FRANK PALLONE, Jr., New Jersey
JOHN B. SHADEGG, Arizona             BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York              JOHN D. DINGELL, Michigan,
ROY BLUNT, Missouri                    (Ex Officio)
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)



                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Campell, J. Patrick, Chief Operating Officer and Executive 
      Vice President, National Association of Securities Dealers, 
      Inc........................................................    21
    Green, Micah S., Executive Vice President, the Bond Market 
      Association................................................    27
    Levitt, Hon. Arthur, Chairman; accompanied by Robert L.D. 
      Colby, Deputy Director, Division of Market Regulation, 
      Securities and Exchange Commission.........................     7

                                 (iii)



           THE BOND PRICE COMPETITION IMPROVEMENT ACT OF 1999

                              ----------                              


                        THURSDAY, MARCH 18, 1999

                  House of Representatives,
                             Committee on Commerce,
           Subcommittee on Finance and Hazardous Materials,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 11:07 a.m., in 
room 2322, Rayburn House Office Building, Hon. Michael Oxley 
(chairman) presiding.
    Members present: Representatives Oxley, Ganske, Lazio, 
Shimkus, Fossella, Blunt, Bliley (ex officio), Towns, Stupak, 
Engel, DeGette, Barrett, Luther, Capps, and Markey.
    Staff present: David Cavicke, majority counsel; Linda 
Dallas Rich, majority counsel; Brian McCullough, professional 
staff member; Robert Simison, legislative clerk; Consulea 
Washington, minority counsel.
    Mr. Oxley. The subcommittee will come to order. The Chair 
would like to recognize the chairman of the full Commerce 
Committee, the gentleman from Richmond, Mr. Bliley for an 
opening statement.
    Chairman Bliley. I thank the chairman, the members of the 
committee, and the people who will testify. I'm very happy to 
see a good friend, Mr. Levitt, the Chairman of the SEC. I 
unfortunately have to be in two places at one time, which is a 
difficult thing to do at best. But, we have a hearing on 
electricity restructuring at 11 a.m. down in 2123, so I'll have 
to shuttle back and forth.
    In the 105th Congress, the committee conducted an inquiry 
into the U.S. bond markets and we learned three things. First, 
the bond market in the United States is huge. The ability of 
trading of Government securities exceeds $300 billion; daily 
trading of corporate debt, about $15 billion; the daily trading 
in municipal bonds about $9 billion. In comparison, the average 
daily value of stock traded on the New York Stock Exchange is 
about $25 billion.
    Second, the bond market offers a way for companies and 
cities to raise money with interest rates more favorable than 
those offered by banks. To the extent that companies and cities 
use the bond market, their cost of capital will be lower. They 
will be more competitive and they will save taxpayer's money. 
Indeed, today, in the Wall Street Journal, there's an article 
that AT&T may be about to raise somewhere between $6 and $8 
billion in the bond market by themselves.
    Third, the level of transparency in parts of the bond 
market is poor. Transparency needs the ability of someone 
buying a bond to know the price at which the bond is trading. 
When people buy cars or furniture, they often comparison shop 
and make decisions based on price. For many investors in bonds, 
this comparison shopping is not possible. We heard testimony in 
September that two investors buying the same bond at the same 
time from the same dealer can be given very different prices, 
prices differing by as much 6 percent, a full year's worth of 
interest.
    I believe this situation is unacceptable. We have received 
a study from a professor at Purdue and an economist at the 
Federal Reserve that indicates that improved transparency will 
reduce spreads and improve prices to investors in the bond 
market. I ask unanimous consent that that study be made a part 
of today's hearing record.
    Mr. Oxley. Without objection.
    [The study appears at pg. 42.]
    Chairman Bliley. Today, we will consider a committee draft 
of legislation designed to improve transparency in the bond 
market. It is simple legislation. It directs the SEC to adopt 
rules facilitating transparency in these markets with certain 
minimum standards in that rulemaking. The SEC will take 
comments from the affected parties and will come up with the 
best way to improve price competition in these markets.
    This is an important goal for our markets and investors. 
Anyone using the bond market to save for retirement or 
education will benefit from it. Each of the witnesses has 
worked cooperatively with the committee to develop this 
bipartisan legislation. I commend Chairman Oxley for holding 
this hearing and for working with me on this legislation. I 
also commend John Dingell, Ed Towns, and Ed Markey for their 
cooperation in the project.
    I urge all members to consider this important legislation. 
After the hearing, it will be revised based on the testimony we 
hear today. It will then be introduced. I ask all members to 
consider co-sponsoring this legislation with me, and I yield 
back to balance my time. And, again, thank you, Mr. Chairman.
    Mr. Oxley. I thank the chairman and appreciate his remarks. 
The Subcommittee on Finance and Hazardous Materials has 
developed a track record of legislative accomplishments in the 
last two Congresses, improving our financial markets through 
competition. Competition forces change and change produces 
efficiency. Our commitment to apply these principles to the 
financial markets has translated into tangible results that 
benefit investors, as well as businesses.
    Of the many accomplishments of which the subcommittee can 
be proud, the most notable recent examples include the decimal 
pricing initiative, the National Securities Market Improvement 
Act, reduction of stock transaction fees, and securities 
litigation reform legislation. The decimal pricing effort, 
although not fully implemented, had an immediate impact for 
investors and business, alike.
    When the Exchanges voluntarily moved to reduce the minimum 
increment for trading stocks from \1/8\th to \1/16\th, 
individual investors and institutional investors began saving 
money immediately. And with the addition of twice as many 
prices at which to buy or sell a stock, the markets have 
experienced greater volume. We obviously don't take credit for 
the robust market volume that we've experienced over the last 2 
years, but there is sufficient evidence that the move has in no 
way harmed market liquidity.
    Our current effort to improve the transparency in the 
corporate bond market originates with the same philosophy: 
improve information, eliminate anti-competitive and regulatory 
barriers and greater competition will result to benefit all 
aspects of the markets.
    When this subcommittee first examined this issue last 
September, the consensus was that the corporate bond market was 
not as transparent as other segments of the bond market. We 
determined that the market for these bonds could become more 
transparent. The more that relevant price and yield information 
is available, the more competition will improve. This in turn 
will improve prices for people buying bonds, their pension 
funds, and their mutual funds.
    Chairman Bliley challenged the bond market participants to 
improve transparency of the bond market. They have responded 
well. On their own initiative, the private sector has devoted 
its own resources to develop a system to begin to shed more 
light on the corporate bond market. I understand that one of 
these initiatives is scheduled to be operational within the 
next 2 months. I commend them for their efforts.
    Today, we are going to examine legislation to buildupon 
this work. The SEC has possessed the authority since 1975 to 
facilitate price transparency in the bond markets. The 
committee draft being considered today instructs the SEC to use 
that authority to guarantee transparency in these markets. 
Additionally, the committee draft sets certain minimum 
standards for transparency in the corporate bond market and 
calls for a study of transparency in the municipal market.
    I commend Chairman Bliley for his leadership in this 
initiative. I also thank the witnesses for their constructive 
comments in the drafting process. I recognize Ed Towns, our 
ranking member, John Dingell, the ranking member of the full 
committee, and my friend from Massachusetts for their help and 
support of this legislation. We anticipate that the legislation 
will be refined on the basis of today's hearing and then 
introduced. I hope we will have the support of all members for 
this worthwhile legislation.
    That ends the Chair's opening statement and I now turn to 
the ranking member, the gentleman from New York, Mr. Towns.
    Mr. Towns. Thank you, very much, Mr. Chairman, for holding 
this hearing. I appreciate having the opportunity here from our 
distinguished witness on bond market transparency and the 
committee draft bill, the Bond Price Competition Improvement 
Act of 1999.
    In 1972, Don Riggins stated in his book, A View From the 
Street, that at present, Wall Street is hiding behind a 
protective pricing system. While it preaches free competition 
and free market, as I mentioned in a public speech, that is 
like catching Carrie Nation tickling in the basement.
    We say that competition is good for everyone. We base our 
investment advice on the competitive stance of economy we are 
analyzing. The price of a stock is set by the forces operative 
in the marketplace. Yet, we live with this anomaly of a fixed 
rate structure. We know there's exceptions to our own rules. 
Prices are arrived at by a study of cost and markup for 
profits. Prices change as cost rise or fall. And as the demand 
for the product of service changes, they react to new 
efficiencies, to inflationary or deflationary pressures. That's 
the creed. Wall Street must learn to live by it. So, I suggest 
that in stock trading, we crown the customer king.
    In the 1975 Act Amendment, Congress abolished fixed 
commission rates and mandated that the SEC facilitate a 
national market system inequities that included implementation 
of a composite tape and quotation system. Twenty-five years 
later, we have the most transparent, efficient, liquid, fair, 
and competitive securities market in the entire world. The 
customer is king. But not so in the bond markets. Wall Street 
largely still lives as an exception to its own rules.
    Mr. Chairman, I'm pleased that we are going to try to shed 
a little sunlight on those markets, as well. It is long, long, 
long overdue. In June of last year, the hearing on on-line 
trading, this subcommittee heard testimony from Mr. Fondren, 
that at present, no centralized exchange for bonds, current 
price information remains in the hands of a small group of 
insiders perpetuating a system that is both inefficient and 
unnecessarily costly.
    In September, Mr. Chairman, Mr. Levitt gave a speech, 
calling for increased price transparency in the corporate debt 
market, to help investors make better decisions and increase 
confidence in the fairness of the markets. At this 
subcommittee's gala September 29, 1998, Chairman Bliley issued 
a challenge to the SEC and to the bond market to get going and 
clean up this--clean this market up. I look forward to hearing 
their reports this morning on what progress has been made. Both 
contend, in their written statements, that they are uniquely 
qualified to develop the system for public dissemination of 
bond transaction information. But, I hope we are not being 
asked to anoint any one system at this point. It would seem 
that there is room for both, if not others, as well.
    I understand that the draft bill was not finished in time 
for the witnesses to include detailed comments on the draft in 
their testimony, and I understand that. So, I hope that the 
chairman will direct them to submit written comments and hold 
the record open for that purpose. I look forward to working 
with the chairman of the full committee and the chairman of the 
subcommittee. I salute you both for leadership. And, at this 
time, I would yield back and say to you that I look forward to 
working very closely with you in the days and months ahead.
    Mr. Oxley. I thank the gentleman for his opening statement. 
The gentleman from Iowa, Mr. Ganske.
    Mr. Ganske. Thanks, Mr. Chairman. I look forward to the 
testimony from Chairman Levitt and I yield back.
    Mr. Oxley. The gentlelady from Colorado, Ms. Degette.
    Ms. Degette. Thank you, Mr. Chairman, and thank you for 
having this hearing today. I, too, look forward to the 
introduction of the Bond Price Competition Improvement Act of 
1999. I think that there are three broad economic benefits that 
price transparency can bring to us.
    First of all, it can bolster investor protection by 
providing investors with better opportunities to monitor the 
behavior of the entities that make markets of secondary 
securities. Second, it can improve market liquidity by boosting 
investor market maker con-

fidence in the market. Finally, it can enhance market 
efficiency by boosting a price discovery process of moving 
toward the optimal price for a particular security.
    With that, Mr. Chairman, I think there are great benefits. 
I would commend Mr. Levitt and others through their work in 
this area, as well as you. And I'm so eager to hear my 
colleague from Massachusetts comments, which I know are always 
wonderful. Usually, I have to follow him when I speak, so I'll 
yield back the balance of my time.
    Mr. Oxley. The gentlelady bravely yields back her time, and 
we now recognize the aforementioned gentleman from the Bay 
State.
    Mr. Markey. Thank you, Mr. Chairman, very much. And over 
the years, I've found that the single most difficult thing to 
actually have fun with is the bond market.
    By definition, it's dull. I mean, it's really dull. At 
least with class, you get a little bit attention. But, in the 
bond market, it's really--it's hard, you know. It's a hard 
thing to talk about.
    I'm so glad that we have our great Chairman of the 
Securities and Exchange Commission with us today; he's going to 
go down in the annals of the Securities and Exchange 
Commissions as one of the greats. If there's a Mount Rushmore, 
they'd be carving his picture out right now. He's at the top. 
So, we're very glad to have him here with us today, and you, as 
well, Mr. Colby. We thank you for coming.
    As you know, the Commerce Committee has had a long 
tradition of leadership in eliminating obstacles to the 
dissemination of market information to investors. It goes back 
a long, long way. The goal has always been to ensure that the 
public got market information.
    At the time that the 1975 Act passed, Congress added 
amendments to the Exchange Act, which directed the SEC to 
facilitate the creation of a national market system for 
qualified securities. When Congress enacted that legislation, 
it did not limit its application merely to stocks, but to all 
securities, including debt securities. In fact, the only type 
of securities that were not included were the so-called exempt 
securities, which had defined in the securities laws to include 
treasury bonds, government agency securities, and municipal 
securities.
    At the time this legislation passed, there were many in the 
broker-dealer community, who opposed it. But some 24 years 
later, the Dow Jones industrial average is pleased to top 
10,000 mark and all observers agree that our stock market are 
much more efficient and more liquid, in large part due to their 
increased transparency.
    Over the years the SEC has not made much use of the powers 
Congress granted to it in this area to bring transparency to 
the corporate bond market. A decade after passage of the 
National Market System legislation, this committee also became 
concerned about the inadequacy of price transparency in the 
government securities market. Those concerns ultimately led the 
committee to include in the Government Securities Act of 1986 a 
provision mandating a General Accounting Office study of the 
matter. The GAO's final report in 1990 called for Federal 
regulation of price transparency in the government bond market. 
Based upon this recommendation, I crafted legislation, which 
would have extended the SEC price transparency authority to the 
government market.
    But this provision had to be dropped from the final version 
of the Government Securities Act Amendments of 1993, due to the 
intense opposition of the government bond dealers. Instead, the 
committee mandated that the SEC include, in its annual report 
to Congress, a requirement that the SEC analyze the report on 
the nature and adequacy of price transparency in the government 
securities market, and on any remedial legislation needed to 
address any future deterioration in investor access to market 
information. I look forward to hearing from Chairman Levitt 
this morning regarding the SEC's administration of this 
reporting provision.
    But the principle reason we are meeting here today is to 
review new draft legislation, which would direct the SEC to use 
the authorities Congress granted it back in 1975, to issue 
rules within 12 months to improve price transparency in the 
corporate bond market. I support this initiative, because I 
believe that bond investors deserve to get full access to the 
type of market information that will better enable them to 
determine whether they are getting the best price for their buy 
and sell orders.
    I know that Chairman Levitt has already taken some 
preliminary steps to move the industry forward in this area and 
that, as a result of his leadership, the NASD is currently 
considering rule changes that would create transparency in 
audit trail systems for the corporate bond market. In addition, 
I understand that the Bond Market Association has also stepped 
in with a plan to make certain market information available. I 
welcome each of these initiatives and would suggest that the 
legislation we are reviewing today should be seen as 
complimenting these efforts.
    I look forward to the testimony of the Chairman and our 
other distinguished witnesses. And Mr. Chairman, I congratulate 
you on the vigor with which you are continuing to pursue your 
chairmanship, looking into areas in which we can move on a 
bipartisan manner, to ensure that the market works in a more 
transparent fashion. And I thank you.
    Mr. Oxley. I thank the gentleman from Massachusetts. And 
try, as he might, to make the bond issue a little more sexy, 
you failed just a little bit.
    But, that was a good try. It was kind of like Boston 
College trying to get into the NCAA tournament, but that's 
another story.
    The gentleman from Missouri.
    Mr. Blunt. Of course, the Southwest Missouri State Bears 
play Duke tomorrow in the NCAA and after that 30 point win on 
Tennessee, which was harder to predict than anything in the 
bond market, I think Mr. Chairman, I'll just listen today.
    Mr. Oxley. I thank the gentleman. The gentleman from Long 
Island.
    Mr. Lazio. Once again, thank you for your interest and 
commitment and drive on this. And although we've had some 
disagreements in the past, I can say now, I think you were more 
right than I was. I look forward to the rest of the hearing. 
Welcome, my witnesses.
    Mr. Oxley. Did the reporter get that down?
    The gentlelady from California.
    Ms. Capps. Thank you. Thank you, Mr. Chairman. I'm a new 
member to this Subcommittee on Finance and Hazardous Materials 
and I can't think of a more fitting introduction to the 
committee than to hear the testimony today from the Honorable 
Arthur Levitt and from Mr. Robert Colby. So, I look forward to 
your presentation. Thank you, very much.
    Mr. Oxley. Thank you and welcome to the subcommittee. The 
gentleman from the upper peninsula.
    Mr. Stupak. Thank you, Mr. Chairman. I'll pass on the 
opening statement and look forward to our witnesses. And thanks 
for holding this hearing.
    Mr. Oxley. I thank the gentleman. We now turn to our 
distinguished Chairman of the Securities and Exchange 
Commission. We appreciate, as usual, Chairman Levitt, your 
participation in this debate; and Mr. Colby, welcome, as well. 
We were honored to visit the SEC at your request. I think 
speaking from all the members and staff who attended, it was 
the most worthwhile opportunity to learn more about what goes 
on over there and to understand fully the major 
responsibilities that you have and that you've done so well in 
carrying out. So, thank you and you're welcome to begin any 
time.

  STATEMENTS OF HON. ARTHUR LEVITT, CHAIRMAN; AND ROBERT L.D. 
    COLBY, DEPUTY DIRECTOR, DIVISION OF MARKET REGULATION, 
               SECURITIES AND EXCHANGE COMMISSION

    Mr. Levitt. Thank you, very much. I am accompanied by Bob 
Colby, who is the Deputy Director of the Division of Market 
Regulation and an absolutely essential component in dealing 
with the many complex issues that division deals with, in our 
effort to see to it that competition in our markets is both 
fierce and fair.
    Let me say at the outset that I support the draft bill, the 
Bond Price Competition Improvement Act of 1999, which directs 
the Commission to use its existing authority to bring 
transparency to the corporate debt market. By adding the weight 
of congressional action to that of the Commission, I think the 
bill sends a strong message throughout the marketplace as to 
the importance of this initiative. I know that your intent is 
not to constrain prompt Commission action in any way. There is 
a provision within the bill that we have some reservations 
about, but I know we're working closely with the committee 
staff to resolve that issue.
    Again, as I said in my speech last fall and previous 
testimony before this subcommittee, I think the time has come--
it's probably long overdue--to illuminate this needlessly dark 
corner of the Nation's capital markets. Clearly, the technology 
now exists to address this issue, to gather transaction prices, 
to distribute them, and probably most importantly to interpret 
them in a timely, accurate, and efficient fashion.
    Today, the bond market touches just about every aspect of 
our lives, from the cost of building schools and hospitals to 
corporate investments in plant and equipment. It impacts the 
assets of public and private pension funds, and it channels 
funds to mortgages, to car loans, and a whole universe of 
activities important in our day to day lives.
    The increase in the significance of the bond market is due, 
in part, to its absolutely phenomenal growth. Since 1990, 
corporate bond issuance has increased more than fourfold; and, 
for high yield bonds, more than tenfold. In effect, movements 
in the bond market represent a daily vote on the part of 
investors throughout the world, in terms of America's economy. 
As you see prices go up and down, it's nothing less than a 
reflection of that vote, which takes place minute by minute. 
With $2.4 trillion outstanding, the corporate debt market today 
is nearly twice the size of the municipal debt market and 
almost 70 percent as large as the outstanding treasury market.
    Yet, even in the light of this very impressive growth, the 
corporate debt market has failed to keep pace with the 
transparency improvements that have taken place in our other 
markets, including, as Mr. Markey noted, in the government and 
municipal bond markets. Some corporate bonds are traded by 
interdealer brokers. But transaction prices, even for 
interdealer transactions, are certainly not displayed, nor are 
they reported in an organized way. Other transactions are not 
even reported at all. And without a trading desk and a 
sophisticated research department, it's nearly impossible to 
gather and to interpret market data.
    Investors, who lack the resources at their disposal, are 
really left with incomplete information. And as far as I'm 
concerned, incomplete information leaves investors vulnerable. 
And that, I think, is unacceptable. Guesswork can never be a 
substitute for readily available pricing data. Because bond 
values are often closely related, the price of one bond can 
very often give us important information about other comparable 
bonds. And that's why I think comprehensive price transparency 
is so absolutely crucial.
    Last fall, the Commission asked the NASD to adopt 
transaction reporting rules for corporate debt and to develop 
systems to collect and redistribute transaction prices on an 
immediate basis. We, also, requested that the NASD create a 
data base of transactions and a surveillance program to better 
detect fraud in the corporate debt market. In response to that, 
the NASD has formed a committee of market participants. It's 
called the Bond Market Transparency Committee, and their 
mission is to develop an industry guided proposal that will 
increase price transparency and oversight for the corporate 
debt market. We expect to see this proposal before the end of 
the summer. It will, I hope, lead to transaction reporting for 
corporate debt, improving transparency as pricing data is 
distributed to the public. In addition, we expect that the 
NASD's efforts will lead to improved surveillance for the 
market.
    The Bond Market Association is also developing a proposal 
for collecting or disseminating transaction information from 
interdealer brokers, but only investment grade corporate debt 
securities up to now. A lot of the details of that proposal and 
its relationship with the NASD's initiative are still unclear. 
I absolutely welcome industry support for increased 
transparency. And I certainly commit to working closely with 
the Bond Market Association, as we look forward with our 
initiative.
    Today, market information moves at the speed of light. The 
availability of accurate information to ensure the long-term 
viability of our markets has never been more important. 
Transparency is more significant, more effective than almost 
any regulatory fix. The corporate debt market is certainly not 
immune from these realities. And without reform, I believe that 
its current strength cannot guarantee its future prominence in 
an increasingly, and fiercely, competitive global market. I'm 
encouraged by the progress that we have seen since last fall. 
I'm encouraged by a cooperative spirit in both the public and 
private sector that appears to characterize this initiative.
    A concensus is developing, and I believe that NASD and 
industry action will demonstrate that seeking timely and 
accurate pricing information is both feasible and practical. 
Transparency leads to fair, more efficient, and clearly more 
effective markets. That's in the interest of investors. It's in 
the interest of our markets, dealers, and our economy as a 
whole.
    I thank the committee.
    [The prepared statement of Hon. Arthur Levitt follows:]
  Prepared Statement of Hon. Arthur Levitt, Chairman, Securities and 
                          Exchange Commission
    Chairman Oxley, Representative Towns, and Members of the 
Subcommittee: Thank you for giving the Securities and Exchange 
Commission (``Commission'') the opportunity to present its views on an 
issue in which we are actively engaged--enhancing transparency in the 
United States debt market. Today, I'd like to focus on three topics: 
(1) how transparency promotes fairness and efficiency in the U.S. 
capital markets, and how regulatory surveillance bolsters investor 
confidence in those markets, (2) why we believe this is the right time 
for improved transparency in the corporate bond market, and (3) the 
progress that has been made in this area since the Fall of last year, 
when I testified before you about the need to improve corporate bond 
transparency.
  i. regulatory goals of enhanced transparency and market surveillance
Transparency
    The Commission has long believed that transparency--the extent to 
which prices are visible and understandable to market participants--
plays a fundamental role in promoting the fairness and efficiency of 
U.S. capital markets. Despite differences between the debt and equity 
markets, the Commission believes that transparency is just as important 
for bonds as it is for stocks. Indeed, because the value of a bond is 
usually closely related to the value of other bonds, the price paid for 
one bond may be important information about the value of many other 
bonds.
    In order to make informed decisions, investors must know the prices 
recently paid for debt instruments generally, as well as for the 
specific bonds they hold or that are being offered in the market. 
Often, there are no recent market prices for the bonds an investor 
holds, and their value must be imputed from the prices of other bonds. 
Comprehensive price transparency is therefore critical to informed 
investment decisions. Informed investors, armed with accurate 
information, ensure that market prices represent fair values. And fair 
market prices, in turn, ensure that the markets perform their economic 
function of efficiently allocating capital resources.
    Because transparency increases the fairness and efficiency of 
markets and fosters investor confidence in those markets, it has the 
added benefit of encouraging greater participation by investors. This 
participation means more trading, more market liquidity, and perhaps 
even new business for bond dealers. Thus, we believe that a sound and 
sensible approach to bond market transparency will benefit almost 
everyone--investors, dealers, and the economy as a whole.
     The Commission has a long history of supporting price 
transparency. When Congress adopted the 1975 Securities Act Amendments, 
it gave the Commission substantially greater authority over quotation 
and transaction reporting. Since then, the Commission has pressed 
repeatedly for increased transparency in equity markets. Each time 
opponents have predicted doom, and each time the results have shown 
that more transparency leads only to more liquid and efficient markets. 
Recent experience in the debt markets has reinforced the Commission's 
belief in the benefits of price transparency.
    For example, in 1991, with encouragement from the Commission and 
Congress, the industry created GovPX, an electronic reporting system, 
to distribute real time quotes and transaction prices for U.S. Treasury 
securities. Treasury markets today exhibit an extraordinary combination 
of high liquidity and low transaction costs. Trading volume has 
increased from $111 billion per day in 1990 to $227 billion per day in 
1998, and the spreads for benchmark bonds 1 are near zero.
---------------------------------------------------------------------------
    \1\ Benchmark Treasury bonds are generally considered to be the 
most recent issues of two, five and 10 year Treasury notes, and the 
most recently issued 30 year Treasury bond.
---------------------------------------------------------------------------
    In 1995, again with the Commission's encouragement, the Municipal 
Securities Rulemaking Board (``MSRB'') began collecting the details of 
dealer-to-dealer transactions in the municipal bond market and 
distributing daily summary reports. In August of last year, with 
Commission approval, the daily reports were expanded to include 
customer trades as well as interdealer trades. Most recently, just last 
November, the Bond Market Association began offering daily summaries on 
its Internet Web site, making municipal bond prices for the previous 
day available for the first time to the general public. This new Web 
page received 17,000 hits in its first three weeks of operation, 
suggesting a high level of interest by the public.
    Although we view the MSRB transparency program as a successful 
effort, the full impact of transparency in the municipal market will 
not be clear until trade reporting is done on a real-time basis, which 
the MSRB has committed to do and which we continue to support.
    In retrospect, we believe the government and municipal securities 
market transparency initiatives demonstrate both the benefits of price 
transparency in the debt markets, and the wisdom of being sensitive to 
the specific qualities of each market. The Commission's corporate bond 
transparency initiative will be carried out in the same spirit, seeking 
to further transparency goals in a manner uniquely tailored to that 
market.
Regulatory Surveillance
    Market surveillance, like transparency, is a fundamental means of 
promoting fairness and confidence in markets. In fact, the two go hand-
in-hand. Transparency promotes fairness and efficiency by making 
essential information available to all market participants, assuring 
that market decisions are based on appropriate information. 
Surveillance efforts, in turn, are designed to promote fairness and 
investor confidence by detecting and preventing fraudulent practices, 
such as market manipulation, and other potential abuses. Surveillance 
and transparency efforts, in essence, unite to provide a comprehensive 
program for protecting investors and promoting the effectiveness of 
capital markets.
     Effective market surveillance systems require that comprehensive 
trade information be reported to regulators. This reported trade 
information is subsequently used to produce audit trails and other 
sophisticated market surveillance tools. The key to meaningful 
surveillance is regulatory access to comprehensive trading information, 
essentially the same information that is required for price 
transparency.
     Today, no regulator has routine access to transaction information 
for the broad universe of corporate bonds and preferred stocks. 
Consequently, there is no organized system for routine surveillance of 
trading in that market. Regulators must depend on examinations of 
broker-dealers, or react to complaints brought by investors, which are 
cumbersome tools. A system of comprehensive trade reporting will permit 
the creation of a regulatory database and appropriate tools for 
proactive supervision of the corporate debt markets.
                  ii. importance of u.s. debt markets
Recent Growth
    We encourage this focus on the corporate bond market now, because 
in recent years it has grown in importance, but not in openness. In 
1985 the corporate bond market, measured by outstanding debt, was 
smaller than the municipal bond market. Today, at $2.4 trillion 
outstanding, it is about $1 trillion larger than municipal debt. It is 
also about 70% as large as the outstanding Treasury debt. Corporate 
bond issuance has increased more than four fold since 1990, and for 
high yield bonds, more than ten fold.
Corporate Bond Transparency
     Despite its unprecedented growth, however, the corporate debt 
market has failed to keep pace with transparency improvements in other 
markets, including the government and municipal bond markets. Timely 
and accurate pricing information on the broad spectrum of corporate 
bonds is not available to the public or even to mar-

ket participants. Some corporate bonds are traded by interdealer 
brokers, but transaction prices, even for interdealer transactions, are 
not displayed or reported in an organized way. As a result, in order to 
obtain accurate valuations of corporate debt instruments, corporate 
bond market participants must have a trading desk and a research 
department with sophisticated analytical tools to gather and interpret 
market information. Generally these kinds of resources are available 
only to large broker-dealers and institutional investors.
    The time has come to illuminate this needlessly dark corner of the 
capital markets. The technology now exists to gather transaction 
prices, distribute them, and interpret them in a timely, accurate, and 
efficient manner. Developing such a mechanism seems the next logical 
step.
                        iii. current initiative
    The initiative started last Fall to improve corporate debt 
transparency is moving forward. As we testified in September, we have 
asked the NASD to adopt transaction reporting rules for corporate debt, 
and to develop systems to collect and redistribute transaction prices 
on an immediate basis. We also requested that the NASD create a 
database of transactions and a surveillance program to better detect 
fraud in the corporate debt market.
    The NASD subsequently formed a committee of market participants--
the Bond Market Transparency Committee --to work toward an industry-
guided solution that will increase price transparency and oversight for 
the corporate debt market.
    The NASD was asked to take on this initiative for two reasons. 
First, the NASD is the self-regulatory organization for the over-the-
counter market, where almost all corporate debt transactions take 
place. While the NASD is already responsible for surveillance of this 
market, it generally lacks access to the market information needed to 
do so effectively. Second, the NASD already has in place much of the 
required infrastructure. For example, the NASD has a national network 
that collects transaction reports in Nasdaq and listed securities 
traded over-the-counter. It performs on-line comparison and 
reconciliation of those transactions, and redistributes the reported 
information to vendors and to the NASD's regulatory subsidiary, NASDR. 
We believe that much of this technology is adaptable to the corporate 
debt market and will obviate the need to ``reinvent the wheel.'' 
Finally, the NASD will be able to create systems that combine trade 
reporting and comparison that will further the industry's goal of T+1 
settlement, which is also supported by the Commission.
    The NASD, and the industry committee it formed, are working toward 
a proposal for market transparency tailored to the unique features of 
the corporate bond market. We expect to see such a proposal before the 
end of the summer. We expect that the proposal will lead to transaction 
reporting for corporate debt that will improve transparency as pricing 
information is distributed to the public. Similarly, we expect that the 
NASD's efforts will also lead to improvements in its surveillance of 
the market.
    The Bond Market Association (``TBMA'') is also developing a 
proposal for collecting and disseminating transaction information from 
interdealer brokers, but only in investment grade corporate debt 
securities. While the details of that proposal and its relationship 
with the NASD's initiative are still unclear, we welcome industry 
support for increased transparency. We believe that TBMA's efforts 
will, at a minimum, demonstrate the feasibility of immediate price 
reporting in the corporate debt markets.
                             iv. conclusion
    In conclusion, the Commission believes that we are making strides 
toward greater transparency for corporate bonds. Transparency is both 
feasible and practical, and it will lead to fairer, more efficient and 
more effective markets. Almost everyone will benefit--investors, 
dealers, and the economy as a whole.
    Thank you. I would be happy to respond to any questions you may 
have.

    Mr. Oxley. I thank the Chairman for his statement and I 
recognize myself for 5 minutes for questions.
    Let me begin by asking, Chairman Levitt, as you know, the 
SEC has had the authority to improve transparency in corporate 
debt since the 1975 Act. Why do you think over the years that 
that has not been pursued aggressively on the part of the SEC?
    Mr. Levitt. Well, it hasn't been for lack of interest. When 
I first came to the SEC, our top priority, at that point, was 
beginning to look at our debt markets, particularly our 
municipal markets, because we felt that, at that point in time, 
that market almost totally lacked transparency. But the vast 
number--the growing number of retail investors in that market 
were absolutely operating in the dark. It was almost like an 
oriental bazaar: individuals didn't know what they were buying, 
what they were paying, whether the bonds were rated or unrated. 
And there was a culture of pay to play, which characterized the 
way dealers got that business. So, we spent several years 
addressing that issue.
    But, it is clear from that time that our debt markets 
require additional attention. And I guess the shortest answer 
to your question would be in terms of priorities. We never felt 
that this was a low priority, but we felt that other issues 
really required our attention, at that point. And, frankly, the 
initiatives in the municipal market and the way the industry 
worked closely with us to attain our goals in that regard have 
set the stage for this initiative; I think it makes a concensus 
solution much more likely. And, although I share your desire to 
have attained this 5 or 6 years ago, I think we will attain it 
more comprehensively and more completely, at this time, as a 
result of a lot of the work that has been done in the past.
    Mr. Oxley. I appreciate that. Of course, 1975 was long 
before your tenure began anyway and, obviously, there was, even 
going back into the 1970's and into the 1980's, very little 
interest in this subject. I think probably other than Ed 
Markey, there was very little interest on the Hill, as well. We 
appreciate your efforts in working with us toward a better 
good.
    Mr. Chairman, should investors have to pay for market data 
on bonds?
    Mr. Levitt. This service is so important, such a 
significant benefit to investors, that we simply have to find a 
way to fund providing that service. And that means that various 
vendors, various dealers are going to have to account for some 
of the resources for providing that service. Now, as to whether 
investors pay directly, I mean, that's an open question, at 
this point. But, I think that it does have to be paid for and 
it does have to be provided. Now, I think there are resources 
in the community to provide that service.
    Mr. Oxley. Do you support giving investors bond prices at 
real time? There's some argument that doing so may affect 
liquidity.
    Mr. Levitt. I think that transparency is good for 
liquidity. I reject the notion that it is bad for liquidity. I 
think a market that is open, transparent, available to anyone 
who wants to access that market is a market that throughout the 
history of markets has attracted the greatest amount of 
interest. I believe that, while real time is a goal, it's 
certainly one that is realizable, and I am supportive of moving 
in that direction.
    Mr. Oxley. Do you support the increased transparency for 
bonds issued by government-sponsored entities, or should they 
be, because of very unique nature, be the only ones that 
shouldn't be required to provide more transparency?
    Mr. Levitt. I think we have to look very carefully at that. 
I think clearly what GovPX did for treasuries was something 
very important, in terms of public good. And certain aspects of 
the government market, I think, are attracting greater and 
greater public support and involvement. We have to consider 
that area, as we move forward.
    Mr. Oxley. Thank you. The gentleman from New York.
    Mr. Towns. Thank you, very much, Mr. Chairman. Chairman 
Levitt, on the next panel, the Bond Market Association will 
testify that an industry-sponsored solution is the best way to 
enhance transparency in the bond markets, but this market-based 
solution should be assessed before regulatory response is 
determined or mandated, and that the Association believes that 
legislation mandating regulatory action is unnecessary and 
unwanted, at this time. Do you agree or disagree with that?
    Mr. Levitt. You know, I think that industry solutions are 
always the ones that we try to be mindful of, and, wherever 
possible, the Commission works closely with the industry. It's 
an industry, after all, that I came out of and spent most of my 
life in. And, in general, I think the industry has a 
significant contribution to make, particularly in this area. 
But, the legislation doesn't obviate that fact. The legislation 
asks the Commission to more forward with its rulemaking process 
and covers areas that the industry solution does not presently 
address.
    The industry is dealing in the present iteration of that 
solution with highly rated, very liquid bonds. And I think, 
with retail investors moving into other aspects of the 
corporate debt market, we have to extend beyond that area. It's 
terribly important that we cover all areas. And I think it 
would be a mistake to hold up our approach in favor of waiting 
for the industry or, for that matter, holding up the industry 
to wait for us. We're going to move as quickly as we can. I 
hope that the industry will move with us. But, I think we both 
have the incentive, as a result of this legislation, to move 
expeditiously and get this behind us.
    Mr. Towns. Thank you. The committee draft includes language 
requiring the SEC to take into consideration the effectiveness 
of private sector initiatives. In your determination about 
whether rules or other actions are necessary, do you agree with 
the need for such an assessment?
    Mr. Levitt. I don't think that has to be placed in the 
legislation. I think if you trace the history of the 
Commission, in terms of its dealing with the industry that we 
regulate, our history shows that we work closely with them. 
We're not operating in a vacuum. I'm concerned that, the way 
that language is worded, it could indeed force us to wait for 
an industry solution. I think that should be left to our 
working with the industry and seeing to it that the two of us 
move as expeditiously as possible.
    I'm told that the language in its present form might be an 
impediment. And why place it there, unless you're fearful that 
we wouldn't do that? I would assure you that, as we always do, 
we will be consulting with all the parties and all our 
constituents that have an interest in this area.
    Mr. Towns. Well, I'm happy to know that you indicated you 
will be consulting and talking here, because I think that the 
chairman raised an issue, in terms of sort of who would pay for 
the service. And, of course, I think all these are issues that 
really have to be talked about a great deal before anybody can 
move forward.
    Mr. Levitt. Absolutely.
    Mr. Towns. At this time, I yield back, Mr. Chairman.
    Mr. Oxley. The gentleman yields back. The gentleman from 
Missouri.
    Mr. Blunt. Thank you, Mr. Chairman. Let me pursue that just 
a little bit more, Chairman Levitt. What about the idea of 
paying the market-based solution? Is there any reason that we 
should be concerned about the industry making a profit from 
market data? Is that going to dramatically impact, in your 
opinion, the wide access to that data? Do you think we ought to 
be thinking about that, as we craft this legislation? Or do you 
think that there likely is competition going to mean that the 
data is going to be available in an affordable and easy way? Or 
just talk to me a little bit more about that.
    Mr. Levitt. Well, this is part of an issue that goes far 
beyond this bill. This goes to the whole issue of how market 
data is gathered and disseminated, how it should be funded, who 
should fund it.
    I think we have to take a step back and analyze our whole 
regulatory system, which is predicated on the cooperative 
efforts of the self-regulatory organizations, the Commission, 
and private rights of action. Without all three of those 
bodies, I can say to you that we simply would not be able to 
protect investors, as effectively as the system has protected 
investors for the past 65 years.
    The self-regulatory organizations have established a 
substantial network of services that include testing, 
surveillance, and enforcement efforts. The NASD has built a 
very commendable and effective regulatory mechanism. And you 
have to ask yourselves what is the best method of paying for 
that. Clearly, their membership, through dues and fees and 
services, have to pay the bulk of it. And if we take away a 
substantial portion of the revenues from any of those entities, 
what would happen to them?
    When I was the Chairman of the American Stock Exchange, 
nearly 60 percent of our revenues came from providing data. 
Now, you may say to me, well, that's crazy. Who wants to run a 
business based upon that? That's not your mission. And I'd say 
I worried about it and worried about it a lot, because I felt 
that, if we ever came to the day when that source of revenue 
was not there, I didn't know what we could do. So, if you take 
away that money from one of the exchanges, clearly somebody, 
some institution, some entity is going to have to make up the 
difference. They'll have to develop other charges, and some 
subsequent SEC chairman will be sitting here answering the 
question of why do you allow those charges to be imposed upon 
this or that participant in the marketplace.
    I don't really know the answer to it. I understand that 
we're going to have hearings at some point on this subject. And 
I've written a letter to all of the institutions that provide 
this service, telling them that we are in the process of 
analyzing it and coming back with recommendations. And I'd like 
to complete this rather long winded response to your question 
by saying that we are addressing the issue, which is complex, 
and we look forward to work-

ing closely with this committee, as we try to reach some 
reasonable conclusions.
    Mr. Blunt. Certainly, your experience at the American Stock 
Exchange would indicate that the industry providing data and 
providing it at a cost has worked effectively?
    Mr. Levitt. Yes.
    Mr. Blunt. The only other question I've got, just on the 
whole issue of implementation. I know that more than 20 years 
ago, the SEC was given authority to work to make corporate debt 
more transparent, has decided that wasn't necessary. This is, I 
think, a little more directed. But, more importantly, just for 
my view on this, you do think this is important and if we pass 
this legislation, would move toward the goal of transparency?
    Mr. Levitt. I absolutely commit to it. I commend the 
sponsors of this initiative. I think it's probably long 
overdue. And I commit to working closely with the committee and 
being sure that this is reality, as quickly as possible.
    Mr. Blunt. Thank you, Mr. Levitt. Thank you, Mr. Chairman.
    Mr. Oxley. I thank the gentleman. The gentlelady from 
Colorado.
    Ms. Degette. Thank you, Mr. Chairman. I'd like to follow 
up, Chairman Levitt, on an issue that Mr. Towns talked to you 
about, which was the industry's voluntary initiative to collect 
price data on certain bonds and they disseminate the data to 
the public and regulators. And you talked a little bit about 
that. I'd like to hone in a little bit more specifically and 
ask you to address two aspects of that.
    First of all, how effective do you think the industry can 
be, in monitoring itself, in collecting price data on 
investment corporate bonds from interdealers?
    And then a second and related question is that how do we 
know--and this might be a better question for the panel 
following it, except I have to leave, so I'll ask you to opine 
and then maybe when they testify, they can tell us--tell my 
staff or something. But my second question is how can you be 
confident that dealers will actually participate, in a 
meaningful way, in some kind of voluntary program?
    Mr. Levitt. Well, I think the industry is really capable of 
doing this. The Bond Market Association, which is coordinating 
the industry effort, is the same group that worked closely with 
the Commission, in our municipal initiative. And I think the 
genius of the creation of this bill, mandating the Commission 
to move forward on this, I think will really catalyze the 
industry to rapidly bring to closure their part of this and 
hopefully carry it beyond their present inclination. So, I 
think the combination will work very well.
    Ms. Degette. I thank you. I don't have any other questions.
    Mr. Oxley. Thank the gentlelady. The chairman of the full 
committee is recognized.
    Chairman Bliley. Just a couple of questions, Mr. Chairman. 
Information is a public good, so why should exchanges or 
dealers be able to cross subsidize other parts of their 
business to profits from market data?
    Mr. Levitt. Well, the providing of market data is something 
that has concerned the Commission, and, indeed, about 2 weeks 
ago, I sent a letter to all self-regulatory organizations that 
were providing that data. As I mentioned earlier in my 
testimony, that data represents a substantial part of the 
revenues of some of these institutions: 15 percent in the case 
of the New York Stock Exchange, a substantial part for the 
American Stock Exchange and the Pacific Stock Exchange. And we 
are studying this issue and going to come up with 
recommendations, as part of a much broader package.
    But, because the numbers involved are so considerable, we 
have to decide collectively with the self-regulatory 
organizations how they can fund themselves. If they don't get 
it from this source, where will they go to get those funds to 
provide the all important investor protections that they are 
providing? I mentioned before that we will work very closely 
with the committee, as we work through a study with the 
industry to determine what fair pricing would be and how that 
pricing is related to the actual cost of providing that 
information and what other sources of funding the industry can 
develop to see to it that they are viable institutions in doing 
their self-regulatory jobs.
    Chairman Bliley. Well, that's reassuring that you will have 
some guidelines, at least, to somewhat relate the cost of 
providing the information with the cost that they charge.
    Will improved transparency improve price competition among 
bond dealers?
    Mr. Levitt. I think it will. I think improved transparency 
creates the kinds of markets which will attract more and more 
public attention, and more transparency, I think, by virtue of 
competitive pressures, will improve pricing, as well.
    Chairman Bliley. Thank you, Mr. Chairman. And thank you, 
Mr. Chairman. I have no further questions.
    Mr. Oxley. I thank the gentleman. The gentleman from 
Michigan.
    Mr. Stupak. Thank you, Mr. Chairman. Just a question or 
two, Mr. Levitt. Maybe you could help us a little bit on the 
bill that's been introduced, and I know you said you support 
it. In plain English, could you help me out a little bit on 
page two? They go in there and they say, ``Action required, the 
Commission shall adopt rules and take such other actions.'' It 
goes on to say, ``To assure the prompt, accurate, reliable, and 
fair collection, processing, distribution, publication, 
transaction information, including the last sale data, with 
respect to covered debt securities, so that information is 
available to all exchange members, brokers, dealers, securities 
information processors, and other persons.''
    And then they bracket it. And it's my understanding you 
have some concerns about the bracketed language in--from the 
brackets on line 19 to 24. Are you suggesting some alternative 
to the bracketed language? Can you break that down for me?
    Mr. Levitt. My concerns about that language are that it 
could be interpreted that the Commission would have to defer 
addressing this issue for a solution by the private sector. I 
mentioned before that, on any of our regulatory initiatives, we 
work very closely with the private sector. And I think all of 
us feel, judging by the statements that I've heard this 
morning, that this is something we should approach 
expeditiously. The private sector solutions that have been 
recommended thus far, I think, are commendable, move in the 
right direction, are not as comprehensive as we would like it, 
and are limited to only one part of the market. I believe that 
this initiative should carry to other parts of the market.
    Now, for instance, the high yield market, is part of the 
market that more and more retail investors are getting into. 
It's obviously a part of the market that holds greater risks 
than the other ends of the market. And, because of that, I 
think we've got to look very carefully at that. We can't leave 
the high yield market totally out in left field.
    So, I guess my feeling is that we will accomplish 
everything that is intended to be accomplished by this 
paragraph. But by casting it in stone, in a piece of 
legislation, I believe it defies our expediting the process. 
I'd like to ask Mr. Colby to comment on this, as well, if I 
might.
    Mr. Colby. Sure. We think the bill would be better without 
the paragraph included. If you decide to go forward----
    Mr. Stupak. The bracketed part?
    Mr. Colby. That's right.
    Mr. Stupak. It would be better without the bracketed part?
    Mr. Colby. That's right, because it raises ambiguities and 
we think that it's something that we don't need in order to do 
the job we're planning to do, that we've said we would do. We 
have some language, if the committee decides to keep something 
similar to the bracheted language, that would reflect that. One 
of our goals is not just to create a data base, but it's also 
making sure that the market can be monitored. So, we need to 
take into account surveillance, and to be able to create a 
surveillance data base, as well.
    Mr. Stupak. And any suggested language you have, I'm sure, 
any member on this committee will be receptive, at least take a 
look at it.
    Can I ask you, Mr. Levitt, then, on page three, because you 
said you didn't want to leave anything out in left field, and 
page three, I think line five, starts, ``Covered debt 
securities.'' And they say, ``covered debt securities'' and 
then they say, ``exempted securities.'' So, what securities are 
carved out by the exempted securities and should they be and 
what securities might the SEC carve out by its grant of 
exempted authority?
    Mr. Colby. Exempted securities are treasury securities, 
agency securities issued by Fannie Mae, Freddi Mac, and others, 
and municipal securities. Municipal securities are covered by a 
separate scheme under the Act. Treasuries are typically covered 
by a separate scheme also. And agencies are covered, at this 
point, by page three of the bill. It's a technical issue--it 
may be covered by another provision.
    Mr. Stupak. Well, should they be carved out? Should they be 
accepted?
    Mr. Colby. For agency securities, the straight bonds that 
are issued by Fannie Mae and others are already covered very 
well by the existing GovPX system. What's left is mortgage pass 
through securities and collateralized mortgage obligations, 
which are quite complicated, in order to cover everything in 
this process.
    Mr. Stupak. Could I just ask him to follow up my second 
part of the question? Are there any securities that the SEC 
might want to see carved out?
    Mr. Colby. I believe the reason that this is written the 
way it is, is so that if, after consultation with the industry, 
there are securities that immediate disclosure creates problems 
for, this would give us the authority to carve those out.
    Mr. Stupak. Thank you.
    Mr. Oxley. The gentleman's time has expired. The gentleman 
from Statan Island.
    Mr. Fossella. No questions.
    Mr. Oxley. The gentleman from New York.
    Mr. Engel. Thank you, Mr. Chairman. How come you said 
Statan Island for him and you didn't say Bronx and Westchester 
for me?
    Mr. Oxley. I choked. I couldn't remember.
    Mr. Engel. Thank you. Chairman Levitt, first of all, let me 
say that--let me thank you for the job that you do and thank 
you for your accessibility. There has not been a time when I've 
called you that you haven't gotten back immediately, and I know 
every on the committee feels the same way. So, I wanted to just 
say that publicly, I really appreciate it.
    You spoke, in your testimony, you talked about corporate 
debt transparency. And I'm just wondering, is that where you 
see the most trouble or the most difficulty nowadays? Is it 
lack of transparency? Is it the corporate debt problem?
    Mr. Levitt. Well, if I began to assess priorities, in terms 
of what's going on in the markets, I'd have a pretty long list. 
But, almost every issue that would be on that list are issues 
that could be enhanced by virtue of increased transparency. And 
what this bill proposes to do is really an extension of what 
the Commission has embarked upon, in both the corporate and the 
municipal market, and is something that was directly and 
appropriately mandated in 1975. And the circumstance that more 
and more individuals are using our debt markets today than ever 
before in history makes this a particularly timely, appropriate 
step to take.
    Mr. Engel. Thank you. The Bond Market Association, it's 
concerned that the premature release of transaction information 
might inhibit the trading activity of vital market 
participants. Could you respond to those concerns and how this 
might affect the implementation of tools to improve market 
transparency?
    Mr. Levitt. Well, again, I remember from my own days in the 
industry, while the industry is enormously progressive, in 
terms of new products and new ways of funding our capital 
marketplace, the industry sometimes is reluctant to implement 
change, in terms of how they deal with the public. I believe 
that the industry is extremely progressive and the fact that 
they did such a superb job, in terms of our municipal markets, 
tells me that they are equally capable of doing the same job, 
with respect to our corporates. And I understand the 
reservations that they have, because this is bringing light to 
a market, which was clearly not as liquid as our equity 
markets, cannot be treated overnight in the same way that we 
treat our equity markets.
    But the goal is the same. The goal is greater 
understanding, greater transparency. Congress has appropriately 
recognized that goal and is mandating the Commission to come up 
with a solution, which I assure you will be sensitive to the 
industry, but most sen-

sitive to the public interest. And I think that that sense of 
balance, between Congress, the private sector, and the public 
sector is exactly the way to go and the time to go there is 
now, not 6 months or a year from now.
    Mr. Engel. I think it was about 5 years ago, NASD 
introduced a fixed income pricing system to improve 
transparency in the high yield sector. How well has that 
worked?
    Mr. Levitt. I think it's worked extremely effectively for 
what it was meant to do.
    Mr. Engel. And the SEC's recommendations to NASD, how might 
that increase the timely dissemination of information?
    Mr. Levitt. I think what we've asked the NASD to do, 
essentially, is adopt rules, which require dealers to report 
all transactions in U.S. corporate bonds and preferred stocks 
to the NASD and to develop a system to redistribute that on a 
timely basis; and second, to create a data base of 
transactions, in both corporate bonds and preferred stock; and 
finally, and I think in some ways most importantly, to create a 
surveillance program to better detect fraud in this market, 
something that you simply can't do in the absence of taking the 
steps that you've asked us to take. And I think they are in the 
best position to do this. They are already geared up to move 
forward on this. I believe they have the resources and the 
experience, and I'm very comfortable having this done by a 
self-regulatory organization, rather than having government do 
it.
    Mr. Engel. Thank you, very much.
    Mr. Oxley. I thank the gentleman. The time has expired. The 
gentleman from Wisconsin, Mr. Barrett.
    Mr. Barrett. Thank you, Mr. Chairman. I just have a couple 
of quick questions. Is there anything specifically that you 
would like to see added to this measure?
    Mr. Levitt. Well, I think working together with the 
committee, the legislation appears to be thoughtful and 
sufficiently comprehensive to do the job I think it's intended 
to do.
    Mr. Barrett. In the ideal world, would there be any tools 
that you would want to have or do you feel that you have the 
tools necessary?
    Mr. Levitt. I think with respect to this particular 
initiative, it gives us the tools necessary to do the job.
    Mr. Barrett. I have no further questions.
    Mr. Oxley. I thank the gentleman. The gentleman from 
Massachusetts.
    Mr. Markey. Thank you, Mr. Chairman. Mr. Chairman, you said 
earlier that there were limitations to the Bond Market 
Association transparency initiative that necessitate SEC and 
NASD action. I'd like to explore those limitations further.
    First, isn't it true that the scope of the initiative is 
limited to investment grade debt?
    Mr. Levitt. With respect to the Bond Market Association, 
yes, that's correct.
    Mr. Markey. So, all the non-investment grade corporate 
bonds wouldn't even be covered?
    Mr. Levitt. That's correct.
    Mr. Markey. Isn't it also true that the industry initiative 
relies entirely upon voluntary participation?
    Mr. Levitt. That is correct.
    Mr. Markey. So, if an interdealer-broker doesn't volunteer 
to join the system, its trades wouldn't be displayed; is that 
right?
    Mr. Levitt. Yes.
    Mr. Markey. And a direct dealer to dealer or dealer to 
customer trade that doesn't use an interdealer-broker, who 
voluntarily joins the system also wouldn't be recorded; is that 
true?
    Mr. Levitt. That is correct.
    Mr. Markey. Now, I, also understand that the voluntary 
industry initiative would provide for hourly dissemination of 
summary price information. Wouldn't you agree that the value of 
price information decreases proportionately in time?
    Mr. Levitt. Yes.
    Mr. Markey. Wouldn't you, also, agree that in today's fast 
moving markets, hour old market data could prove pretty stale?
    Mr. Levitt. It would.
    Mr. Markey. The SEC has also called for full electronic 
audit trails for market surveillance purposes. Can you tell me 
why this is needed and how such information could assist the 
SEC and the NASD enforcement efforts?
    Mr. Levitt. Well, again, to the extent to which information 
is available, to the extent to which an audit trail is 
implemented, to the extent to which reporting is as broad as 
possible, that enables the NASD and the Commission to do their 
surveillance job much more comprehensively and accurately. And 
without that information--I think it's a question of how soon 
we get there. I think getting there overnight in a market, 
which is not analogous to our equity markets, for many reasons 
may not be possible. But I do believe that to say that we will 
take half measures indefinitely would be equally erroneous.
    And I'd like to ask Bob Colby to answer that question, as 
well.
    Mr. Colby. Right now, there is no comprehensive way to 
oversee activity in the corporate debt market. And if you 
wanted to know what's going on, you'd have to do an individual 
examination of each of the hundreds participating in that 
market. And this would allow them to look for problem trends 
and then focus examinations.
    Mr. Markey. Mr. Chairman, in your opening statement, you 
expressed some concern about bracketed language in the 
Chairman's draft, which would require the SEC to take into 
consideration private sector transparency efforts, as it 
considers adoption of new rules or other measures to bring more 
transparency to the corporate debt market. Should we delete 
this provision from the bill?
    Mr. Levitt. I would hope so. That would be my preferred 
recommendation.
    Mr. Markey. Now, I had read this language not as a 
limitation on the SEC's authority, but merely as a 
congressional suggestion that the SEC consider what was 
happening the industry, as it moved forward, but still leaves 
you entirely free to take whatever action you deem necessary in 
the public interest, all for the protection of investors. You 
don't interpret that language that way?
    Mr. Levitt. In the staff's analysis of that language, they 
felt that it did represent an impediment. And my feeling is, 
given the history of this, the fact that, as you pointed out so 
correctly, since 1975, the Commission has not taken this 
action, and since, as a matter of practice, we work very, very 
closely with the industry as we consider these issues, the very 
fact that you would give this directive, I think could serve as 
an impediment.
    On the other hand, by deleting the language, you certainly 
create a very strong incentive for all parties to move 
expeditiously to attain this goal. And if we're looking for an 
optimum solution, why not go for it, rather than taking a 
chance of putting anything in its way.
    Mr. Markey. Thank you, Mr. Chairman. Thank you, Mr. Colby, 
very much.
    Mr. Oxley. I thank the gentleman. If I could conclude, Mr. 
Chairman, by just asking one question. You had talked about 
fraud and obviously the necessity for targeting against fraud. 
Is there or do you have any evidence that fraud is any more 
prevalent in the bond market than in the equities market?
    Mr. Levitt. I think that, with respect to insider trading, 
the use of convertible bonds or certain other bond issues has 
become more of a factor, in terms of prevalence of fraud. I 
think to the extent to which bonds have become more and more 
attractive to retail investment, we have to consider that very, 
very carefully and seriously. And it's another reason why I 
welcome your initiative, at this time.
    Mr. Oxley. Has there been some enforcement actions in 
regard to those convertibles?
    Mr. Colby. I believe there have, but I'd have to check.
    Mr. Oxley. Thank you. Mr. Chairman, Mr. Colby, we thank 
you, again, for your participation and your leadership on this 
very important issue.
    Mr. Levitt. Thank you.
    Mr. Oxley. The Chair will call the second panel. The chair 
would recognize the second panel, Mr. Micah S. Green, the 
Executive Vice President for the Bond Market Association; and 
Mr. J. Patrick Campbell, Chief Operating Officer and Executive 
Vice President of the NASD Stock Market. Gentlemen, welcome to 
both of you. And we have no preferred order of appearance, so 
if you want to go alphabetically, that's fine with us. Mr. 
Campbell, welcome.

 STATEMENTS OF J. PATRICK CAMPELL, CHIEF OPERATING OFFICER AND 
 EXECUTIVE VICE PRESIDENT, NATIONAL ASSOCIATION OF SECURITIES 
 DEALERS, INC.; AND MICAH S. GREEN, EXECUTIVE VICE PRESIDENT, 
                  THE BOND MARKET ASSOCIATION

    Mr. Campbell. Thank you. The NASD supports the 
subcommittee's and the SEC's initiative to bring clearer price 
transparency, the extent to which timely data on prices is 
visible to all market participants to the bond markets, and 
wants to express our gratitude to you, Mr. Chairman, and to 
Chairman Bliley for your leadership in this area. While 
recognizing the contributions of other organizations, we 
continue to work with them for greater transparency.
    The NASD is uniquely situated to develop the systems and 
rules for the public dissemination of bond transaction 
information. These benefits stem from the NASD's self-
regulatory status, its proven network, consistent capabilities, 
and its potential to provide comparison and settlement 
improvements to reduce systemic risk. The NASD is a self-
regulatory organization under the 34 Securities Exchange Act. 
It is subject to direct SEC regulation and oversight, to ensure 
that it meets its obligations under that Act. Because no 
private organization is subject to the full ray of SEC 
oversight and review, the NASD is alone in its regulatory 
protections it provides among those seeking to improve bond 
market transparency.
    In addition to its SRO status, the NASD has developed the 
NASDAQ Stock Market into the world's premier electronic trading 
system, with the larger share volume of any market in the 
world. Its trade data are provided through one of the most 
extensive private networks in the world, which is being 
expanded.
    As part of that network, the NASD operates the automated 
confirmation transaction service, or ACT, which handles the 
post trade process for NASDAQ trade, and in a multi-dealer 
market similar to the current bond market structure. Among 
other things, ACT provides mandatory 90 second trade reporting, 
last sale dissemination, on-line trading comparison and 
reconciliation, risk management, real time regulatory 
oversight, and forwarding trades for clearing and settlement. 
ACT, as we have it today, thus could readily be adapted as a 
basis for bond reporting and trade comparison system that could 
provide both heightened oversight and reduced systemic risk.
    Since the SEC requested us to undertake this initiative in 
September of last year, the NASD has conducted extensive 
research on the depth and breadth of corporate market, reviewed 
reporting, surveillance elements, met with data vendors, 
clearing firms, and network display vendors. To pursue the 
initiative with all deliberate speed, the NASD has empaneled a 
bond market transparency committee, representing investors in 
all major segments of the bond market, to ensure that enhanced 
bond transparency is implemented appropriately and can be 
provided at the earliest possible time. We are proud of the 
wide representation that we have been able to obtain on this 
extremely important committee. Represented on it are individual 
investors, academia, institutional investors, major U.S. 
investment banking firms, large discount firms, regional 
investment banking firms, foreign-based investment banking 
firms, brokers, brokers, the Bond Market Association, the 
Securities Industry Association, and our own regulatory fixed 
income committee.
    Our committee has made substantial progress. The committee 
has agreed, in principle, as to the securities that should be 
included in the system, which now includes all registered debt 
securities in 144(a) securities. The committee will determine 
what will be disseminated and within what timeframe, to ensure 
maximum transparency, without disrupting markets and, 
consequently, harming liquidity. The committee has agreed that 
the NASD's automated confirmation transaction system will be an 
important tool for the confirmation of reported trades, 
especially as settlement cycles ultimately shorten the trade 
date plus one for settlement. The committee has also 
established that the information that it has collected should 
be widely disseminated to all vendors, to the maximum extent 
possible.
    The NASD is strongly supportive of the objectives and 
principles embodied in the Commerce draft of the Bond Price 
Competition Im-

provement Act of 1999, and expresses its appreciation, too, Mr. 
Chairman, for your efforts in this important area. We 
particularly want to stress the importance of the provision in 
Section II of that bill, that expressly preserves all of the 
Commission's authority under Section 11(a). We believe that 
this provision is especially important in making it clear that 
the Commission has the authority to approve all the terms on 
which market information may be obtained and distribute, 
including the power to ensure that fees charged are fair, 
reasonable, and non-discriminatory.
    The NASD will work, as we have, with the SEC and the 
securities industry to make the necessary changes at the 
earliest possible time, with the maximum benefit to the 
investor and the minimum disruption to the industry. Thank you, 
Mr. Chairman.
    [The prepared statement of J. Patrick Campell follows:]
Prepared Statement of J. Patrick Campbell, Chief Operating Officer, The 
                          Nasdaq Stock Market
    I am J. Patrick Campbell, Chief Operating Officer of the Nasdaq 
Stock Market, Inc.
    The NASD would like to thank the Subcommittee for this opportunity 
to testify again on bond market transparency and the changes needed to 
improve that transparency for investors and other market participants. 
It was my pleasure to testify before this Subcommittee last September 
29 and share with you our thoughts on bond market transparency. Since 
that testimony we have made significant progress, which I would like to 
describe today. I will also accept the Subcommittee's invitation to 
comment on its draft bill, the Bond Price Competition Improvement Act 
of 1999.
                                the nasd
     Let me briefly outline the role of the NASD in the regulation and 
operation of our securities markets. Established under authority 
granted by the 1938 Maloney Act Amendments to the Securities Exchange 
Act of 1934, the NASD is the largest self-regulatory organization for 
the securities industry in the world. Virtually every broker-dealer in 
the U.S. that conducts a securities business with the public is 
required by law to be a member of the NASD. The NASD's membership 
comprises 5,600 securities firms that operate in excess of 70,000 
branch offices and employ more than 590,000 registered securities 
professionals.
    The NASD is the parent company of The Nasdaq Stock Market, Inc, the 
American Stock Exchange, and NASD Regulation, Inc. (NASDR). These 
wholly-owned subsidiaries operate under delegated authority from the 
parent, which retains overall responsibility for ensuring that the 
organization's statutory and self-regulatory functions and obligations 
are fulfilled. The NASD is governed by a 27-member Board of Governors, 
a majority of whom are non-securities industry affiliated. Board 
members are drawn from leaders of industry, academia, and the public. 
Among many other responsibilities, the Board, through a series of 
standing and select committees, monitor trends in the industry and 
promulgate rules, guidelines, and policies to protect investors and 
ensure market integrity.
The Nasdaq Stock Market
    In keeping with the NASD's mission of facilitating capital 
formation for the ultimate benefit of investors, the Nasdaq Stock 
Market develops and operates a variety of market systems and services.
    The Nasdaq Stock Market is the largest electronic, screen-based 
market in the world, capable of handling trading levels of at least one 
and a half billion shares a day. Founded in 1971, Nasdaq today accounts 
for more than one-half of all equity shares traded in the nation and is 
the second largest stock market in the world in terms of the dollar 
value of trading. It lists the securities of 5,100 domestic and foreign 
companies, more than all other U.S. stock markets combined.
The American Stock Exchange
    As the nation's second largest floor-based exchange, the American 
Stock Exchange has a significant presence in both listed equities and 
equity derivative securities. It lists 770 companies, and is widely 
known for its development of successful new investment products.
NASD Regulation
    NASD Regulation is responsible for the registration, education, 
testing, and examination of member firms and their employees. In 
addition, it oversees and regulates our members' market-making 
activities and trading practices in securities, including those that 
are listed on The Nasdaq Stock Market and those that are not listed on 
any exchange.
    NASDR carries out its mandate from its Washington headquarters and 
14 district offices located in major cities throughout the country. 
Through close cooperation with federal and state authorities and other 
self-regulators, overlap and duplication is minimized, freeing 
governmental resources to focus on other areas of securities 
regulation.
    NASDR has examination responsibilities for all of its 5,600 
members. In addition to special cause investigations that address 
customer complaints and terminations of brokers for regulatory reasons, 
NASDR conducts a comprehensive routine cycle examination program.
               the bond and equity markets are different
    The NASD is well aware of the important differences between the 
debt and equity markets. These differences include:

 Size--The bond markets are many times larger than the equity 
        markets. For example, the combined equity trading on the Nasdaq 
        Stock Market and New York Stock Exchange--the two most active 
        markets in the world, based on dollar volume--totals $44 
        billion per day. The bond markets' total trading volume is 
        approximately $350 billion per day, or eight times larger.
 Number of bond issues--There are many more bond issues than 
        stock issues. For example, about 15,000 stocks trade publicly 
        on US stock markets, but there are more than one million bond 
        issues outstanding.
 Trading activity--Bonds trade most heavily in the first weeks 
        after they come to market. After that time, they tend to be 
        placed in portfolios by institutional and various retail 
        accounts and held longer term. Equities tend to trade more 
        frequently and are usually held for a shorter period of time.
 Yield--In most areas of the debt market, bonds trade on yield 
        rather than on dollar price and are valued in comparison to 
        benchmark government securities. Bond trading relies on 
        interest rates, inflation expectations, economic data, quality 
        of debt, and the terms of the bond itself, more than on factors 
        that are unique to the issuer.
 Intermediaries--Certain sectors of the bond markets rely 
        heavily on the role of the ``brokers' brokers.'' These 
        intermediaries provide anonymity between bond dealers to avoid 
        divulging their dealers' market positions. The brokers' brokers 
        also provide dealers with information to give greater insight 
        into current market situations.
 Over the counter--About 90% of all bond trades take place in 
        the over the counter market rather than on an exchange.
 Transparency--As discussed below, corporate bond markets trade 
        with less price transparency, that is, the extent to which 
        timely data on prices is visible to all market participants.
    Although there are clear differences in the bond and equity 
markets, the NASD believes that there are principles that apply equally 
to both, such as the need for price transparency and effective 
regulation based on modern surveillance systems that examine actual 
trade data.
                     the sec calls for transparency
    While public perception of the differences between the debt and 
equity markets has been growing slowly, SEC Chairman Levitt's September 
9, 1998 statement brought the problem with the lack of transparency in 
the bond markets clearly into the public's awareness.
    Chairman Levitt identified a clear need for corporate debt market 
price transparency, saying:
          ``Investors have a right to know the prices at which bonds 
        are being bought and sold. This will help them make better 
        decisions, and it will increase confidence in the fairness of 
        the markets. The sad truth is that investors in the corporate 
        bond market do not enjoy the same access to information as a 
        car buyer or a homebuyer or even a fruit buyer. And that's 
        unacceptable. Guesswork can never be a substitute for readily 
        available price data.''
    Noting that the corporate debt market remains one of the last major 
US markets to not have some type of electronic price disclosure system, 
Chairman Levitt announced the NASD's agreement with the SEC to take 
several actions:

 Propose rules requiring dealers to report all transactions in 
        U.S. corporate bonds and preferred stocks to the NASD and 
        develop systems to receive and redistribute transaction prices 
        on an immediate basis;
 Create a database of transactions in bonds and preferred 
        stocks that will enable regulators to take a proactive role in 
        supervising the corporate debt market, rather than only 
        reacting to complaints brought by investors; and
 Create, in conjunction with the development of a database, a 
        surveillance program to better detect fraud to foster investor 
        confidence in the fairness of these markets.
    We are committed to working with the SEC, the Subcommittee, and 
other parties to develop approaches to bring greater transparency to 
the bond markets. We believe that transparency is indispensable to 
market integrity, and we are confident that our efforts will provide 
greater transparency to the corporate bond market.
                    nasd bond transparency benefits
    While recognizing the contributions of other organizations, and 
continuing to work with them for greater transparency, the NASD is 
uniquely situated to develop the systems and rules for the public 
dissemination of bond transaction information. These benefits stem from 
the NASD's SRO status, its proven network and systems capabilities, and 
its potential to provide comparison and settlement improvements to 
reduce systemic risk.
SRO Status
    The NASD is a Self Regulatory Organization under the 1934 
Securities Exchange Act. It is subject to direct SEC regulation and 
oversight to ensure that it meets its obligations under that Act.
    These obligations include: protection of investors and the public 
interest; promotion of just and equitable principles of trade; fair 
representation of members; equitable allocation of dues and fees; 
prevention of fraud and manipulation; fostering cooperation with the 
clearance and settlement system; facilitation of securities 
transactions; discipline of members for rule violations; governing the 
form and content of non-exchange quotations; compliance with SEC 
requirements on system standards for redundancy, capacity and security; 
provision of audit trail capability; and maintenance of market 
surveillance systems.
    Because these extensive obligations are neither required of or by 
any private organization, nor is a non-SRO private organization subject 
to the full array of SEC oversight and review, the NASD is alone in the 
regulatory protections it provides among those seeking to improve bond 
market transparency.
NASD Network and Systems Experience
    The NASD has developed the Nasdaq Stock Market into the world's 
premier electronic trading system, with the largest share volume of any 
market in the world. Its quotes and trade data are provided through its 
extensive network to over 300,000 screens worldwide.
    The NASD has not rested on its success, however, and is constantly 
improving its systems. The NASD is now deploying a new, high capacity, 
high reliability, state-of-the-art enterprise wide communications 
network to service the more than 7,000 Nasdaq workstations throughout 
the country. The new network will initially provide us with four 
billion share day network capacity, expandable to more than double that 
amount. It uses leading edge communications technology and transparent 
back-up capability to provide far greater reliability. This new 
network, one of the world's largest, will ensure that NASD capabilities 
will be more than adequate to meet any additional capacity required by 
a bond transparency initiative.
    In addition to its market building success and its systems capacity 
improvements, the NASD operates systems that are relevant to providing 
additional transparency to the bond markets.
    For example, the Automated Confirmation Transaction service (ACT), 
handles the post-execution process for Nasdaq issues' trades that were 
negotiated over the telephone or executed in the various execution 
systems of The Nasdaq Stock Market. Among the critical post-execution 
steps that ACT handles are: mandatory 90 second trade reporting, last 
sale dissemination, on-line trade comparison and reconciliation, risk 
management, forwarding trade data to NASDR Market Regulation for real-
time oversight, and forwarding trade data to the National Securities 
Clearing Corporation for clearing and settlement.
    ACT could serve as a basis for a bond reporting and trade 
comparison system that could provide both heightened oversight and 
reduced systemic risk. Risk would be reduced by improving the 
comparison rate for bonds, permitting earlier settlement, simplifying 
processing, and reducing uncompared trades. In addition, ACT could 
accommodate the changes needed when the time for settlement is reduced 
from T+3 to T+1.
                         nasd progress to date
    Since the SEC requested us to undertake this initiative in 
September of last year, the NASD has conducted extensive research on 
the depth and breadth of corporate markets, reviewed reporting and 
surveillance elements, and met with data vendors, clearing firms, and 
network display vendors.
The Bond Market Transparency Committee
    In order to ensure that enhanced bond transparency is implemented 
appropriately and can be provided at the earliest possible time, the 
NASD has empanelled a Bond Market Transparency Committee representing 
investors and all major segments the bond market. These segments and 
Committee members include:

 Individual Investors--Dr. John Markese of the American 
        Association for Individual Investors.
 Academia--Dr. Ian Domowitz, Pennsylvania State University
 Institutional Investors--Ian MacKinnon of the Vanguard Group 
        and Edward Wiese of T.Rowe Price Investment Services.
 Large Discount Firms--John Ladensack of Charles Schwab & 
        Company.
 Regional Investment Banking Firms--Stanley Becchetti of A.G. 
        Edwards and Sons, and Michael Shea of J.C. Bradford & Company.
 London-Based Investment Banking Firm--Mark E. Field of 
        Schroder & Company.
 Major Investment Banking Firms--Jane Carlin of Morgan Stanley 
        Dean Witter & Company, Kelly Martin of Merrill Lynch & Company, 
        and Michael Mortara of Goldman, Sachs & Company
 Brokers' Brokers--James Jacoby of Asiel & Company, LLC and 
        Joseph Shea of Cantor Fitzgerald Partners.
 Bond Market Association--William H. James of Lazard Freres & 
        Company.
 Securities Industry Association--Jeffrey Theodorou of 
        Prudential Securities.
 NASDR Fixed Income Committee--Zachary Snow, Chairman of the 
        Fixed Income Committee.
The Committee's Progress
    Our Bond Market Transparency Committee has worked diligently from 
its first meeting on January 14 and is moving quickly to identify and 
solve the issues involved with increasing transparency. The Committee 
has made substantial progress.
    The Committee has agreed in principle as to the securities that 
should be included in the system, which now includes: investment grade 
corporate debt; medium term notes issued by U.S. companies; corporate 
``Yankees,'' including development banks, and sovereigns; capital trust 
securities; convertibles; units; asset-backeds; floating rate notes, 
and 144A securities.
    The Committee will determine what will be disseminated and within 
what time frame in order to ensure maximum transparency without 
disrupting markets and consequently harming liquidity.
    The Committee has agreed that ACT will be important to the 
confirmation of reported trades, especially as the settlement cycle 
shortens to T+1.
    The Committee has established that the information that is 
collected should be widely disseminated to all vendors, to the maximum 
extent available.
           the bond price competition improvement act of 1999
    The invitation letter to this hearing asked us to provide our 
comments on the Committee Draft of the Bond Price Competition 
Improvement Act of 1999.
    The NASD recognizes that the goal of the bill is to ensure that the 
momentum started by Chairman Levitt and Chairmen Bliley and Oxley last 
Fall continues toward bond market transparency. The bill would require 
the SEC to adopt rules on the collection and distribution of 
transaction information on covered debt securities. In addition, the 
bill would amend the definition of exempted securities in the 1934 
Securities Exchange Act to cover government sponsored enterprises under 
the bill. Finally, the bill would require studies of inactively traded 
securities and municipal securities by the GAO, in consultation with 
the SEC and the Municipal Securities Rulemaking Board.
    The NASD is strongly supportive of the objectives and principles 
embodied in the bill of enhanced bond transparency and remains 
committed to work with you and your staff as this bill works its way 
through the legislative process. We particularly want to stress the 
importance of the provision in Section 2 of the bill that expressly 
preserves all of the Commission's authority under Section 11A. We 
believe that this provision is especially important in making it clear 
that the Commission has the authority to approve all of the terms on 
which market information may be obtained and distributed, including the 
power to assure that fees charged are fair, reasonable, and 
nondiscriminatory.
                               conclusion
    The NASD thanks the Subcommittee for this opportunity to update it 
on our progress toward increased bond transparency and our views on the 
recently introduced bill.
    We strongly support the goals and objectives of the Committee Draft 
of the Bond Price Competition Improvement Act, a bill to enhance bond 
market transparency. We believe that our experience in developing 
systems for both the equity markets and the high yield bond markets 
will serve as a strong foundation as we prepare to fulfill our 
commitment to the SEC to improve transparency in the bond markets. 
Although we would all like to implement important changes like 
transparency quickly, we are proud of our efforts to date and pledge 
our continued efforts. We will work with the Congress, the SEC and the 
securities industry to make the necessary changes a reality at the 
earliest possible time, with the maximum benefit to the investor and 
minimum disruption to the industry.

    Mr. Oxley. Thank you, Mr. Campbell. Mr. Green.

                  STATEMENT OF MICAH S. GREEN

    Mr. Green. Thank you, very much, Mr. Chairman. It's a 
pleasure to be before the subcommittee today. If I could ask 
that my entire written testimony be submitted for the record 
and I will talk more topically about the legislation and the 
Bond Market Association's initiative.
    Mr. Oxley. Without objection, both statements will be made 
part of the record.
    Mr. Green. Thank you. Before going into the legislation and 
our initiative, I want to first commend you and the members of 
the subcommittee and the leadership of the committee and the 
staff of the committee for everything they have done since the 
hearing last September, in urging the industry and the NASD and 
the SEC to get involved in this effort. Since September, we've 
taken your guidance and your urging very seriously and we 
commend you for your leadership in bringing this issue to the 
level of public attention that it surely needed. And I'd also 
like to commend the SEC Chairman Levitt, the entire SEC staff 
and members, as well as the NASD and our friend Pat Campbell 
for everything they have done in reaching out to the industry, 
so that we can work cooperatively in this effort. There's not a 
competition between a private sector initiative and what the 
NASD is working on. Frankly, they are very complementary 
efforts. But, we are working very, very closely with the NASD 
and look forward to that good working relationship going 
forward on this and other issues. So, I commend them for their 
leadership.
    We represent--the Bond Market Association represents 
underwriters and dealers of municipal bonds, corporate bonds, 
government securities, and virtually all bonds that are traded 
and sold by issuing authorities throughout the country and 
throughout the world. And we're very proud of the fact and 
several times over the last many, many years, when this 
committee has brought to the at-

tention of the industry and the regulators problems that exist 
in the marketplace, that we have tried to step up to the plate 
and address those issues. And in so doing, we have tried to be 
not only responsive to the industry--to the concerns of Members 
of Congress and the regulators, but have also tried very 
seriously to look very deeply into ourselves and to make sure 
we're not missing something. And throughout the consideration 
of the Government's Securities Act, as well as the municipal 
securities market and now the corporate market, we've tried to 
step up and to say what's right and what's wrong about these 
markets and work vigorously and objectively to try to address 
those issues.
    Our written statement, unfortunately, was submitted prior 
to the issuance of the final draft of legislation. And I want 
to state here today that the latest draft that we saw is a 
draft that the Bond Market Association can be supportive of. We 
feel very strongly that the legislation reflects the interest 
of the free marketplace, by acknowledging that private sector 
initiatives should be considered by regulators prior to 
finalizing a direction for the regulator to take. And we don't 
view this as a delay at all, because as you'll hear in a 
moment, our private sector initiative is weeks away from 
becoming an absolute reality. But, we do believe that when an 
industry acknowledges the criticism that is raised by 
policymakers and is willing to take the actions necessary to 
address the concerns raised by those policymakers, there should 
be absolute consideration of the results of that work, because, 
otherwise, would make all this work meaningless and this work 
is very important. In a sense, we've become a laboratory for 
price transparency in the corporate bond market.
    So, we commend the subcommittee for including that 
bracketed language that was talked about earlier. Frankly, I 
view the brackets more as a highlight, that it's the most 
important of the bill. And I know that there will be debate on 
it. But, we do view that if this legislation is not intended to 
impart new regulatory authority to the SEC, but, in fact, to 
impart a congressional desire to employ regulatory authority 
that already exists, what you're doing with this bill is laying 
out your views, as to how that existing authority should be 
utilized. And by simply adding that they shall consider--and 
shall consider the private sector initiatives in carrying out 
the provisions of this Act, is not an impediment. In fact, it 
will make the whole process work that much better and the 
Commission and the regulators and the NASD will have the value 
of our initiative in moving forward.
    Second, the legislation is tremendously improved by 
including language in there that requires the consideration of 
the effect on liquidity in the marketplace. We don't sit here 
today to say that price transparency will hurt liquidity in the 
marketplace. Rather, we say that liquidity in the marketplace 
is extremely important; that if you lose liquidity, you hurt 
the ability of states and corporations and governments to come 
to market and get the very best prices on their bonds and get 
the very lowest cost of borrowing. So, it should be a 
consideration when looking at price transparency in the 
corporate bond market. And if it proves that it's not a 
problem, carry on. If it proves that it is a problem, it should 
influence how the final outcome appears.
    And then finally, we are also very appreciative of the fact 
that your legislation does not spell out a specific form of 
transparency and you leave that up to what the SROs are doing 
and what the marketplace is doing, to try to figure out what 
the best way to approach that issue is. So, we commend you for 
the current version of legislation and we do look forward to 
working with you on that.
    Now, if I may very briefly talk about where our initiative 
is and what the derivation of our initiative. The derivation of 
our initiative is this subcommittee. This subcommittee, and I 
can hear the words coming out of many of the subcommittee 
member's mouths, as if it were yesterday, and it was only a few 
months ago, that the industry had to do something. And we came 
out of our hearing immediately and met with Arthur Levitt, and 
after forming a transparency committee, informed him that we 
were prepared to do something very tangible in this area. And 
we presented a proposal to him and we sent it, of course, to 
the committee, as well. And immediately thereafter, we issued a 
request for proposal, an RFP, from various information 
providers and information services, to try to implement our 
price transparency system. We asked that those proposals be 
delivered by December 31. We really thrilled a lot of people 
for the Christmas holidays. But by December 31, we received 
nine proposals from a wide array of information providers.
    During the first 2 weeks of January, we reviewed those 
proposals. And at the end of January, we awarded a contract to 
GovPX. Why GovPX? Because GovPX is a facilitator of 
information. Just as it has provided tremendous market-based 
information in the government securities market, as well as, as 
Bob Colby said, the agency market, GovPX can be a facilitator 
here. And to address Congresswoman's Degette's point, they, 
also, have fabulous quality control measures at work right now 
in the government securities market, and we wanted them to be 
employed here, too. And now, we're about to test. Next week we 
have beta testing planned for this, in the hopes that this 
system, as designed to try to capture transaction information 
on a continuous basis through the day on actively traded 
securities, becomes alive at the end of April.
    Now, we're not saying it's the end all and be all. What 
we're saying is we are doing what we can, as an industry, to 
facilitate addressing your concerns as a committee as quickly 
as possible. We are working very closely with the NASD in this 
whole process, to try to move forward and beyond. But, at this 
stage, we are a few weeks away of having something up and 
running that would give everyone, the public, market 
participants, better information. And it would give regulators 
the information they need to survey the market, albeit as was 
said, not for all securities in the market, but for those that 
we can capture quickly that would give better surveillance and 
enforcement information and, more importantly, it would give 
regulators and this committee information as to what price 
transparency should look like going forward.
    So, we believe very strongly that it would be short sighted 
to move forward on a specific regulatory approach right now, 
until you've seen the results of this, which is, as you can, by 
the chart over there are just weeks away. And as soon as it 
goes on live, we will start seeing information. And also to 
answer several questions that came out about cost, we intend 
that this information, on cor-

porate bond transaction information for those actively traded 
securities would be available through our onsite 
www.investingandbonds.com, free of charge to investors, just 
like we do it now for the municipal market. And as Chairman 
Levitt's written statement said, that municipal market Website 
is hit many, many times throughout the day.
    So, we're very proud of this effort, but we, also, realize 
that regulators and legislators want more. And we're willing to 
work toward the next steps beyond this, but we, also, feel very 
strongly that this laboratory that we've set up will have 
results from that experiment and they should be allowed to be 
analyzed and looked at, as we move forward.
    So, with that, I welcome your questions. And Mr. Chairman, 
I thank you and the committee.
    [The prepared statement of Micah S. Green follows:]
  Prepared Statement of Micah S. Green, Executive Vice President, The 
                        Bond Market Association
    The Bond Market Association appreciates the opportunity to comment 
on price transparency in the bond markets, and to present our views on 
associated legislative and regulatory issues. The Bond Market 
Association represents securities firms and banks that underwrite, 
trade, and sell debt securities both domestically and internationally. 
We commend Chairman Bliley, Chairman Oxley, and the subcommittee for 
taking the time to examine this important issue.
    Last September, this Subcommittee held a hearing that examined the 
state of price transparency in the bond markets. At that hearing, 
Chairman Bliley and others challenged the industry to improve price 
transparency in the bond markets. Securities and Exchange Commission 
Chairman Arthur Levitt made a similar call in a New York speech on 
September 9th, and again at the hearing. The industry has heeded those 
calls.
    In September, we pledged our support for the goal of providing 
investors with meaningful price information and reaffirmed our 
commitment to improve price transparency in the corporate bond markets. 
In keeping with that pledge, the Association is sponsoring a private-
sector initiative that will provide price data on inter-dealer broker 
trades of investment grade corporate bonds to all market participants 
and investors. Beginning next month, the Association expects to 
inaugurate a service that makes transaction price data available 
directly to regulators and to the public through a wide range of data 
vendors and free of charge on our investor website. Under a contractual 
arrangement, the transparency product--Corporate Trades I--is being co-
developed by the Association and GovPX Inc. GovPX is a leading provider 
of price and volume data in the government securities market and will 
operate the system for data collection and dissemination.
    This initiative represents our initial attempt to improve the 
availability of price data to the public for the corporate bond 
markets. In addition, the initiative creates a laboratory in which both 
market participants and regulators can obtain important insights into 
the interaction between transaction reporting and liquidity. We are 
pleased to report at this time that the timeframe for the inauguration 
of public reports by the end of April remains realistic and achievable. 
At the same time, we acknowledge that this initiative is merely one 
part of a longer process through which a variety of different systems 
and solutions will evolve.
    Historically, industry-based solutions to transparency challenges 
in the bond markets have addressed the needs of legislators, 
regulators, and market participants alike, and have resulted in 
significant improvements in the amount and quality of price data 
available to the public without disruption of market liquidity. The 
Bond Market Association played a major, proactive role in the design 
and implementation of systems to enhance price transparency in the 
government and municipal bond markets. We will do the same in the 
corporate markets.
    In the government securities market, the Association was 
instrumental in the creation of the GoxPX system for Treasury 
securities. Today, GoxPX is recognized as a leading provider of real-
time price and volume information, and is widely credited with 
significantly improving price transparency in the government securities 
markets. In the municipal market, we worked closely with the Municipal 
Securities Rulemaking Board (MSRB) to develop a transaction reporting 
system that provides relevant data to investors. Last November, the 
Association, in coordination with Standard & Poor's J.J. Kenny, began 
posting the MSRB's price and volume data--enhanced by yield, credit 
rating, call dates, and other useful information--on its investor 
website, investinginbonds.com. This user-friendly service enables 
investors to obtain enhanced end-of-day pricing information--from the 
previous trading day--on actual municipal bond transactions free of 
charge.
    Clearly, this industry has established a tradition of responding 
promptly and efficiently to calls for increased price transparency in 
the bond markets. The corporate markets are no exception. In less than 
six months, the industry has made substantial progress toward 
implementing a system that will enhance corporate bond price 
transparency. [See the attached timeline that illustrates the progress 
of our transparency initiative.] Our commitment to improving 
transparency is serious, and we are making it happen. Therefore, we 
believe it would be premature at this time, to enact legislation 
designed to immediately mandate transparency through regulatory decree.
    In this statement, we focus on three themes. First, we will present 
our views on the critical relationship between price transparency and 
market liquidity in the corporate bond markets. Second, we will discuss 
the progress the industry has made toward improving price transparency 
since September. Finally, we will discuss why legislation to improve 
transparency through regulatory decree is not necessary at this time.
Transparency Policy Issues
    The Association fully supports the goal of enhancing price 
transparency in the corporate bond markets. However, price transparency 
should not be confused with regulatory reporting. Regulatory reporting 
involves providing trade information to regulators for audit trail or 
other market surveillance purposes. The Association fully supports the 
timely transmission of corporate bond transaction information to 
regulators and/or Self-regulatory Organizations if such reporting is 
necessary to properly surveil the market to prevent and detect market 
abuses. However, the appropriate definition of ``timely'' depends on 
the regulatory objectives.
    The Association encourages regulators to consider the costs and 
benefits of implementing a system that would require immediate 
reporting of every trade in the corporate bond markets. The differences 
between the equity market and the bond markets have long been 
recognized by regulators. Chairman Levitt himself is on record stating 
he is ``not suggesting that we transpose the national market system 
built for equities to the debt markets.'' The Association urges 
Congress and regulators to keep this in mind as they move forward with 
plans for enhancing regulatory reporting systems to supplement dealer 
books and records which have long been available for inspection.
    In contrast to regulatory reporting, price transparency is the 
timely dissemination of trade information to the public. Here, the 
objective is to provide the public--including both large institutional 
investors that dominate the corporate bond markets and individuals--
with useful information about the current price levels of bonds they 
hold or wish to buy or sell--without jeopardizing their ability to 
trade these bonds. Here, we raise the issue of real-time price 
dissemination because some have indicated their belief that the public 
has a right to know the prices and volumes of all trades 
instantaneously.
    The nature of the corporate bond markets creates some unique 
challenges for the design of systems that would efficiently distribute 
meaningful price data to all investors. First, there are many different 
bond issues outstanding, and over 95 percent of corporate bonds are 
held by institutional investors. In the corporate bond markets alone 
there are an estimated 400,000 individual bonds 
outstanding.1 Second, the vast majority of outstanding bonds 
trade very infrequently, i.e., the bond markets are not continuous 
trading markets. Unlike the stock market where most issues trade daily, 
it is not unusual for months to pass between trades in a particular 
bond issue. For example, in 1996, of the approximately 400,000 
corporate bonds outstanding, only 4 percent traded at some point during 
the year.2
---------------------------------------------------------------------------
    \1\ Source: CUSIP Service Bureau. Estimate includes corporate 
bonds, medium-term notes, asset-backed bonds, and non-agency mortgage 
securities outstanding as of September 1998.
    \2\ Bond Market Association estimate.
---------------------------------------------------------------------------
    The Association is also quite concerned about the negative effect 
that real-time dissemination could have on liquidity in the corporate 
bond markets. Since dealers and institutions trade large blocks of 
bonds, revealing prices and trading volumes instantaneously could hurt 
market liquidity. If market participants (i.e., potential 
counterparties) had access to information about other market 
participant's trading strategies, it would be more difficult to conduct 
further trades. Given the non-con-

tinuous trading environment of the bond markets, a market participant 
attempting to ``unwind'' a large position would definitely not want the 
prices of sales posted before the position was fully liquidated. Often, 
a small number of institutions or dealers hold very large blocks of a 
particular issue, and thus, a liquidation of their position would be 
obvious to the market. Additionally, once the bonds are taken into 
inventory by a dealer, it could take days, or even weeks to find a 
buyer for these less-liquid bonds.
    The bond markets depend on the willingness of dealers to take 
positions in bonds and carry inventory, thereby shifting market risk to 
the financial intermediary and creating liquidity for investors. The 
premature release of transaction information could inhibit the trading 
activity of these vital market participants. Clearly, a prolonged 
reduction in market liquidity would have serious consequences not only 
for the bond markets, but for the economy as a whole. Liquidity 
disturbances, such as those that occurred in the bond markets last 
fall, can lead to a higher cost of capital for bond issuers, and 
inhibit capital formation. Higher capital costs for America's 
corporations translate into less funding for capital expansion--a 
significant factor affecting economic growth. This is why the 
Association's initiative is designed to strike an important balance 
between transparency and market liquidity.
    Regulators have long recognized the differences between highly 
liquid markets--such as those for most listed equities, and less liquid 
markets--when crafting rules for various markets with respect to the 
timeliness and content of public dissemination. In most of the equities 
markets, price transparency has been equated with real time last sale 
reporting. While real-time transaction price and size dissemination 
characterizes the nature of price transparency for liquid equity 
securities, transparency for illiquid equities is quite different. 
Trade data for liquid equities must be reported to the NASD within 90 
seconds of the transaction via the Automated Confirmation System (ACT), 
which automatically disseminates trade information to the public. 
However, trades in illiquid equity securities are reported to the NASD 
for regulatory purposes--but not via ACT--and these trades are not ever 
reported to the public. Additionally, odd-lot transactions in National 
Market securities and private placements (in reliance on Section 4(2) 
of the Securities Act) are not required to be reported through the ACT 
system.
    Likewise, transparency initiatives for the OTC bond markets need to 
take into account the individualistic nature of bonds, differences in 
liquidity, and differences across instruments in the various bond 
markets. Historically, these differences have been recognized by 
Congress and regulatory authorities as evidenced by the differences 
between existing bond market transparency systems that have been 
developed and have been found to be providing adequate information to 
date. The attached table illustrates the characteristics of several 
transaction reporting systems currently operating in U.S. financial 
markets.
    In the government securities market, GovPX is a leading provider of 
real-time benchmark pricing for all active and off-the-run Treasuries. 
The liquid nature of Treasury securities led to a solution that 
provides prompt price dissemination for Treasury securities. In the 
municipal market, price transparency has been greatly enhanced by the 
Municipal Securities Rulemaking Board's (MSRB) end-of-day trade 
reporting, a system that currently includes both dealer and customer 
trades. Beginning in November 1998, the Association began posting this 
data on its investinginbonds.com website free of charge. Investors can 
access CUSIP numbers, security descriptions, number of trades, volume, 
and high and low prices for municipal bonds that trade four or more 
times on the prior day. Additionally, investors can sort the data 
according to State or other criteria. This enhanced user-friendly 
format has been well-received by the investing public. The less-liquid 
nature of the municipal securities market led to the development of 
this time-delayed and synthesized trade reporting system. It is 
important to note that individual investor response to this data has 
been extremely favorable and liquidity in this market was apparently 
unharmed by the implementation of this system.
    In the corporate market, a price transparency system for high-yield 
bonds has been in place since 1994. The NASD introduced the Fixed 
Income Pricing System (FIPS) to enhance transparency in the high-yield 
sector. FIPS provides for the collection, processing, and real-time 
display of firm quotations and summary transaction data for 50 
designated (mandatory) high-yield bonds. Interestingly, actual 
transactions are never disseminated to FIPS participants or to the 
public. Again, it should be noted that regulators fully recognized the 
possible harm that could be brought about by real-time transaction 
dissemination and by imposing a system on the entire market. In a 1991 
report to Congress, then SEC Chairman Richard Breeden acknowledged that 
mandating increased price transparency to the entire high-yield market 
could be harmful:
        . . . mandating increased transparency for the large segment of 
        the market that is illiquid could further reduce dealer 
        participation in that segment of the market, and is therefore 
        only practical where a ``critical mass'' of market participants 
        exists.
    The foregoing review of transparency systems in the market for 
illiquid equities and in the bond markets highlights a critical fact. 
Currently, there are no real-time transaction reporting systems in 
existence that require or provide immediate public dissemination of 
every trade in a given class of illiquid securities. Furthermore, 
regulators have recognized the difference between liquid and illiquid 
securities when developing regulations for equities and for high-yield 
bonds. Therefore, the Association would object to any system that 
mandates dissemination of the price and size of every bond trade to the 
public on a real-time basis. Given that there is no precedent for 
requiring such an extensive system, the negative impact on the markets 
would be difficult to quantify since it has not been observed in any 
market for relatively illiquid securities. However, academic research 
has shown that too much transparency can actually increase market 
volatility and lower market liquidity in markets where trading volume 
is thin--precisely the type of characterization that applies to a large 
number of securities in the corporate bond markets.3 
Therefore, the Association is concerned that market liquidity could be 
negatively affected by the mandatory real-time disclosure of all 
trades.
---------------------------------------------------------------------------
    \3\ See Ananth Madhavan, ``Security Prices and Market 
Transparency,'' Journal of Financial Intermediation, no. 5, 1996, pp. 
255-283.
---------------------------------------------------------------------------
    The Association believes the best way to expeditiously achieve 
meaningful price transparency in the corporate bond markets is to 
embrace a market-oriented approach that is designed to preserve market 
liquidity. This approach will also allow for the reassessment of 
existing systems and adjustments to the systems over time. This is 
consistent with the historical approach to price transparency that has 
proven to be successful in the government and municipal bond markets.
The Association's Transparency Initiative
    The Association has taken the lead in developing a system that will 
enhance price transparency in the investment grade corporate bond 
market. In September, the Association organized a Price Transparency 
Steering Committee, under the auspices of our Corporate Bond Division, 
to examine the issues that must be considered when designing 
appropriate systems to improve price transparency without damaging 
market liquidity. The Committee is comprised of senior bond officials 
from dealer and inter-dealer broker firms. After the Subcommittee 
hearing last September, the Committee resolved to implement a system 
that would respond directly to the challenge put forth by Congress and 
the SEC.
    Members of the Steering Committee met with SEC Chairman Levitt in 
October to express the industry's desire to design and implement a 
first-phase transparency solution within a six-month period. 
Recognizing that the industry initiative would likely have to meld with 
the longer-term goals envisioned by the SEC, the Steering Committee 
proceeded with the plan to design an initial price transparency system 
for investment grade corporate bonds.
    In November, the Association issued a ``request for proposals'' 
(RFP) that asked pricing and information vendors, as well as others who 
could facilitate this initiative, to submit proposals presenting how 
they would implement the Association's initiative by enabling inter-
dealer brokers to submit investment grade corporate bond transaction 
data and redistribute such data to the public through electronic means. 
The Association also held a bidders conference to answer questions and 
discuss other aspects of the plan with prospective bidders.
    By the end of December, the Association had received nine proposals 
from an impressive group of bidders. Following interviews and 
deliberation in January, the Steering Committee selected GovPX as the 
vendor that would design and operate the system for the industry's 
transparency initiative. GovPX proposed a collection mechanism that is 
extremely flexible and can be adapted over time to include a wider 
range of reporting entities and/or securities. The ability of the 
initial system to expand and adapt to future modifications is a strong-
point of the GovPX system. In addition, from the perspective of the 
Association, GovPX is essentially a ``facilitator'' with a strong track 
record and financial incentives to redistribute price data through the 
broadest range of existing and prospective data vendors. Finally, GovPX 
has extensive experience collecting price data from inter-dealer 
brokers and disseminating that data for the entire range of government 
securities.
    Last month, the Steering Committee adopted a set of initial display 
parameters for the transparency system, and intends to consider 
adjustments to these preliminary parameters after the system has become 
operational. The initial parameters were developed in consultation with 
a broad range of the Association's membership not only from Wall 
Street, but from across the country. Of paramount importance to the 
Committee was the intention to protect the confidentiality of 
investors' positions, particularly with regard to less-liquid debt 
securities. Over the past several months, the Committee collected 
valuable input from inter-dealer brokers, dealers, and their customers 
before determining the initial parameters for the transparency 
initiative.
    The Association's Voluntary Price Transparency Initiative product, 
called Corporate Trades I, will collect price data on investment grade 
corporate bonds from inter-dealer brokers to meet this Subcommittee's 
priority to disseminate data to the public, and to meet the SEC's and 
the NASD's priority to obtain information for surveillance purposes. 
The Association expects that inter-dealer brokers active in the 
investment grade corporate bond market will report data on all 
transactions to GovPX. To date, seven leading inter-dealer brokers--
which account for approximately 90 percent of investment grade trades 
of all inter-dealer brokers--have informed the Association of their 
intent to participate in this voluntary initiative. GovPX will then 
make the data available to the public consistent with the preliminary 
display parameters agreed to by the Steering Committee and the 
Corporate Bond Division of the Association.
    With respect to dissemination of transaction data to the public, 
the initial display parameters will provide for continuous reporting 
throughout the day of the prices of all investment grade corporate 
bonds that have been traded at least four times and involve individual 
transactions of $10 million or less. This information will be 
disseminated to GovPX subscribers within one hour of the occurrence of 
the fourth trade and within one hour for all trades in the same 
security thereafter. At the end of each trading day, the price and size 
range of every trade meeting these parameters will be disseminated to 
the public and enhanced with descriptive information including credit 
ratings and yield-to-Treasury data.
    Actual sizes of individual trades will not be revealed publicly in 
order to preserve investor anonymity, which is important due to the 
concentrated ownership of corporate bonds. The Association's 
preliminary view is that these public display parameters strike a fair 
balance between our objective of enhancing transparency without 
jeopardizing market liquidity. However, for surveillance purposes, 
regulators will be provided with a file of all price and volume data 
for all trades reported to GovPX.
    We expect this new information product to be available to the 
public through data vendors before the end of April. In addition, the 
Association plans to make the data available in a user-friendly format 
on its investinginbonds.com website free of charge at the same time or 
shortly thereafter.
Legislation Mandating Regulatory Action is Not Needed
    The Association believes that legislation mandating immediate 
regulatory action for price transparency is unnecessary and unwarranted 
at this time. This industry has responded promptly to calls for 
increased transparency. Widespread market abuses have not been 
identified in the corporate bond markets, nor have investors clamored 
for more protection due to opaque conditions in the corporate markets. 
While it is appropriate and commendable for Congress to examine the 
issues related to price transparency in the bond markets, the 
industry--given our response and action since last September's 
hearing--should be given the opportunity to complete development of 
appropriate, market-specific solutions.
    It is our strong belief that, as in the other bond markets, this 
market-based solution should be assessed before a regulatory response 
is determined or mandated. In this regard, the Association would be 
willing to provide Congress with a report that details our progress on 
implementing the system after it has become operational for a 
reasonable amount of time. It is our sincere hope that the SEC and 
NASD, who have already begun a regulatory review of this matter, will 
take into account the results of this important initiative before 
decisions are made about a regulatory response. However, if legislation 
is deemed to be necessary, legislation embodying a logical and orderly 
market-oriented process would be preferable to legislation that 
prematurely mandates regulatory action, as the latter would signal 
regulators to proceed regardless of the results of the industry's 
initiative.
    Some have proposed expanding the National Market System for 
equities to include the bond markets. In addition, some have advocated 
expanding the definition of non-exempt securities under Section 11A of 
the Securities Exchange Act to include federally-sponsored agency 
securities and securities issued by international financial 
organizations, such as the World Bank. The Association opposes such 
proposals for several reasons.
    First, the legislative history surrounding the 1975 Amendments that 
enacted Section 11A reflects the fact that Congress' intended focus in 
creating a National Mar-

ket System (NMS) was on the regulation of the equity markets. The NMS 
framework and goals were born out of the unique circumstances that 
characterized the market structure for corporate equity securities in 
the early 1970s. Bond markets were then, and continue be, significantly 
different structurally from the equities market.
    The SEC and Chairman Levitt have been vocal in their belief that 
the National Market System should not be transposed on the debt 
markets. In his speech last September, Chairman Levitt said:
          I am not suggesting that we transpose the National Market 
        System built for equities to the debt markets. For many 
        reasons, that would not work.
    Finally, the proposed expansion of the definition of non-exempt 
securities to include agencies and issues of international financial 
organizations, is not warranted based on the findings of recent 
regulatory reports. Last March, the Treasury Department, the SEC, and 
the Federal Reserve Board released their ``Joint Study of the 
Regulatory System for Government Securities,'' which considered the 
state of transparency in the Treasury and agency securities markets. 
The report recognized the ``variety of pricing and related 
information'' that is available from financial publications and online 
vendors. The report concluded that the government securities market--
which by definition includes federally sponsored agencies--is 
functioning smoothly:
          The market continues to function smoothly, and the three 
        agencies do not believe it is flawed in any fundamental sense. 
        As a result, we believe no additional rulemaking authority 
        under the [Government Securities Act], as amended, is required 
        at this time.
    Additionally, the SEC's Debt Market Review came to a similar 
conclusion regarding Treasury and federal agency securities:
          The combination of real time data for benchmark Treasuries 
        and supplementary quotes and other information for the other 
        securities appears to provide a very good level of pricing 
        information for all government bonds.
    The Review also examined non-agency mortgage and other structured 
products and concluded that the ``quality of pricing information and 
interpretive tools available to the market is good.'' The SEC has 
repeatedly decided not to pursue regulatory changes to the markets for 
agency and non-agency mortgage-and asset-backed securities. The Bond 
Market Association supports the conclusions of the SEC regarding this 
matter.
Conclusions
    For over a decade, The Bond Market Association has been at the 
forefront of efforts to improve price transparency in the bond markets. 
Our most recent initiative will deliver price data on investment grade 
corporate bonds to the general public on our investor website--free of 
charge--in the coming weeks. While we agree that enhancing price 
transparency for liquid securities is a laudable goal, we maintain that 
widespread dissemination of trade data for illiquid securities will 
likely have a negative impact on market liquidity and on bond market 
investors. We will continue to work with the Members of this 
Subcommittee, the SEC, the NASD, and others, to ensure that investors 
have access to meaningful price information on bonds. However, we do 
not believe that legislation mandating immediate regulatory action is 
warranted at this time. We believe that policy-makers should consider 
the industry's efforts before determining what regulatory actions may 
be necessary.

                                              Voluntary Price Transparency Initiative Timeline of Progress
--------------------------------------------------------------------------------------------------------------------------------------------------------
        September 1998           October 1998      November 1998     December 1998     January 1999     February 1999      March 1999       April 1999
--------------------------------------------------------------------------------------------------------------------------------------------------------
At transparency hearing,       Association       Association       Association       Association       Association's    Association and  Association and
 Association pledges to work    members meet      issues a          receives          reviews nine      Transparency     GovPX plan to    GovPX plan to
 to enhance price               with SEC          request for       proposals from    vendor            Steering         begin testing    launch
 transparency.                  Chairman Levitt   proposals to      bidding vendors.  proposals and     Committee        system to        Corporate
                                and begin to      develop                             selects GovPX     adopts           transmit and     Trades I.
                                develop           transparency                        as vendor for     parameters for   disseminate      Association
                                industry          product and                         the industry      the              prices.          plans to post
                                initiative.       hosts bidders.                      initiative.       transparency                      data on its
                                                                                      Association       system--Corpor                    investingbonds
                                                                                      hosts open        ate Trades I.                     .com website
                                                                                      forum on price
                                                                                      transparency.
--------------------------------------------------------------------------------------------------------------------------------------------------------


                              Characteristics of Selected Transaction Reporting Systems: Ranked from High to Low Liquidity
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Security's General                         Dissemination        Dissemination       Release Actual
            Security                   System          Liquidity Type         Reporting           Timeframe            Audience        Trades  to Public
--------------------------------------------------------------------------------------------------------------------------------------------------------
Exchange-listed Equities.......  ACT (Nasdaq) DOT    Very high.........  Within 90 seconds   Instantly-price     Market participants   Yes
                                  and OARS (NYSE).                        of trade (ACT)      and volume.         and consolidated
                                                                          and automatically                       tape.
                                                                          in DOT and OARS.
Treasury Securities............  GovPX.............  High..............  Instant-built into  Instant-price and   GovPX participants    Yes
                                                                          system.             volume.             and subscribing
                                                                                                                  vendors.
Agency Bonds...................  GovPX.............  High..............  Instant-built into  Instantly-price     GovPX participants    Yes
                                                                          system.             and volume.         and subscribing
                                                                                                                  vendors.
High Yield Bonds-Mandatory       NFIPS (Nasdaq)....  Relatively high...  Within 5 minutes    Every Hour-Price    FIPS participants     No
 Issues \1\.                                                              of trade.           and Volume          and data vendors.
                                                                                              Summary.
Municipal Bonds................  MSRB (NSCC).......  Varies but          End of day........  Next Day price and  Data vendors and The  No
                                                      typically low.                          summary volume      Bond Market
                                                                                              data for bonds      Association's
                                                                                              that traded 4 or    website-
                                                                                              more times.         investinginbonds.co
                                                                                                                  m.
Investment Grade Corporate       Corporate Trades I  Varies but          Within 15 minutes   Within 1 hour       GovPX subscribers     No
 Bonds.                           (The Bond Market    typically low.      of trade.           after 4th trade     and investors
                                  Association/                                                and within 1 hour   through
                                  GovPX).                                                     for subsequent      Association's
                                                                                              trades--prices      website-
                                                                                              released for        investinginbonds.co
                                                                                              trades of $10       m.
                                                                                              mil. or less.
New York Stock Exchange-Listed   ABS (NYSE)........  Varies but          Instant-built into  Instantly-price     market participants   Yes \2\
 Bonds.                                               typically low.      system.             and volume.         and high speed
                                                                                                                  quote line; summary
                                                                                                                  data in newspapers.
High Yield Bonds-Nonmandatory    FIPS (Nasdaq).....  Low...............  By 5 p.m. on day    None..............  None................  No
 \3\.                                                                     of trade.
Non-Nasdaq Equities \4\........  Non-Nasdaq          Low...............  Price and volume    None..............  No..................  No
                                  Reporting System                        data reported
                                  (NASD).                                 between 4 p.m.
                                                                          and 6:30 p.m. on
                                                                          trade date or
                                                                          between 7:30 a.m.
                                                                          and 9 a.m. on
                                                                          next business day.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Mandatory FIPS bonds are the 50 most active high-yield bonds as designated by an advisory committee; this committee meets every six months to
  reassess the mandatory list.
\2\ The vast majority of NYSE bond trades are retail, odd-lot transactions.
\3\ Non-mandatory FIPS issues are all bonds rated BB+ or lower by Standard & Poor's, excluding those designated as mandatory FIPS issues.
\4\ Non-Nasdaq equities are defined as securities that are neither included in The Nasdaq Stock Market nor traded on any national securities exchange.


    Mr. Oxley. I thank both the gentlemen, and we appreciate 
your good work in this area. Let me begin by asking Mr. Green: 
what should we be looking for in April, when this program is 
going to become available? What are you going to be looking for 
and what do we need to look for, in terms of the applicability 
of this program and its effectiveness?
    Mr. Green. Well, in April, and assuming all the beta 
testing and everything goes well, but so far, so good, 
transaction information on the investment grade corporate bonds 
that are traded through interdealer brokers will begin getting 
reported on a continued--on a continuous basis throughout the 
trading day to GovPX. GovPX will then pipeline that information 
out to information vendors, to the Bond Market Association for 
use on our Website, and also to regulators. And regulators will 
frankly get complete information, so that they can do their 
surveillance enforcement activity on those sets of bonds 
throughout the trading day. Also at the end of the day, there 
will be more complete reports about the total volumes and 
buckets of volumes to see what transacted through the trading 
day. But, immediately when it's turned on, that reporting 
process will begin.
    Now, with regard to our Website, we hope it's--we hope the 
Website, itself, is ready to take that feed at the end of April 
and that's--it may be a few weeks after that, once we see the 
information flowing.
    Mr. Oxley. Let me ask Mr. Campbell, what role then does 
NASDAQ play in this whole process? Take us through the 
mechanics of this, if you will. Also, what will you be looking 
for in terms of the effectiveness of the GovPX program?
    Mr. Campbell. Mr. Chairman, we have, since last September, 
had many meetings with our committee on bond transparency. We 
have done a fine job in defining and getting in the process of 
writing rules. We expect to be delivering those rules to the 
Securities and Exchange Commission very early summer, hopefully 
in the month of June.
    During the period of time that the Bond Market 
Association's experiment with collecting and disseminating the 
bond transaction information, we should be very sensitive to 
what we can learn from them through this initiative and 
incorporate that into the rules that we write to follow the 
Securities and Exchange Commission, that all broker-dealers 
will ultimately have to abide by. And I think the fact that we 
have included on our committee a representative of the Bond 
Market Association to assist us in the process, we believe that 
we should gain some insights that will help us do a better job 
in the formulation of those rules.
    Mr. Oxley. Let me ask Mr. Campbell, what about junk bonds? 
First of all, how would junk bonds be in this mix and how would 
they be treated?
    Mr. Campbell. At the current time, we have an existing 
system that collects information on high yield or junk bonds. 
We would expect to include that, as has already been determined 
by the committee, that we would collect and disseminate that 
information. That is--that decision has already been made. And, 
in fact, we can continue to use the FIPS system, as Chairman 
Levitt discussed, to continue to collect that information and 
dovetail that into the ultimate process.
    But at the current time, we have made available in our 
architecture of the collection system, every vendor out there, 
who has a terminal out there, including the development and 
building of a Web-based browser system to those firms, who do 
not have the technical expertise or the funding to go on a 
computer interface or subscribe to any of those services, we 
will allow them to have the input over a Web-based browser 
system for timely reporting, too. So, we fully expect and have 
already decided that we will include those securities in the 
timely reporting, as with the rest of the fixed income 
securities.
    Mr. Oxley. Thank you. Mr. Green, your plan is basically 
dealer to dealer? Do you see, at some point, the expansion of 
dealer to customer arrangement?
    Mr. Green. Well, within--the voluntary initiative, quite 
frankly, there's no question, we are not a regulator. We are 
not a self-regulator. The key element that we're trying to do 
is to get people, get firms, get market participants to 
volunteer to do something. And why we picked, you know, 
interdealer brokers and why we picked corporate--investment 
great corporate debt, in part, is because the FIPS program 
already exists. A lot of odd lot retail transactions are 
already covered by the New York Stock Exchange's ABS system. 
And we wanted to try to find something that currently wasn't 
hit by anything with the universe that we could get to 
volunteer, and to go beyond that voluntarily would probably be 
more difficult, as an overall industry.
    But, I think we need to see what the results of this effort 
are, and not a long timeframe for results. But, to see how this 
works, to see how useful the information is, to see the 
mechanism with which the information is distributed, to see if 
it's being used by investors, if it's being interpreted 
correctly, if it's being structured properly, and that will 
serve as a model for the steps beyond.
    Mr. Oxley. Thank you. My time has expired. The gentleman 
from New York.
    Mr. Towns. Thank you, very much, Mr. Chairman. Mr. 
Campbell, do you support the committee draft?
    Mr. Campbell. Yes, sir, we support it.
    Mr. Towns. Do you think there's anything that's not in 
there that should be in there?
    Mr. Campbell. No, sir. We believe that the committee draft 
encompasses the intent of the committee and the work that 
everybody is doing in this area. I think that we would support 
the draft document and we have--I had the pleasure of 
participating with this committee and the staff in the 
assistance and drafting.
    Mr. Towns. Mr. Green, same question.
    Mr. Green. The way the legislation is currently drafted, 
the Bond Market Association can support the current draft.
    Mr. Towns. What about any additional information that 
should be put in or anything that's left out that should be in?
    Mr. Green. Well, we might cross Ts differently or dot Is 
differently. But with the provisions that I talked about in my 
testimony, it provides a very balanced approach to ensuring 
that private sector initiatives and market liquidity are very 
much a part of the consideration of anything going forward. And 
for that, we would support it.
    Mr. Towns. The NASD says that they're uniquely situated to 
develop a system that moves for the public dissemination of 
bond transaction information. The Bond Market Association 
believes that an industry-sponsored solution is the best way to 
enhance transparency in the bond market. Who is right?
    Mr. Green. Well, we both are. Because if one----
    Mr. Shimkus. We're the politicians.
    Mr. Green. Because if one could address all the needs of 
policymakers through voluntary industry efforts, one would 
surely choose to do it that way. But, I think it's incumbent 
upon industries to self-analyze and recognize that things that 
can be done, should be done. And then if things need to go 
further, that's when you may need the next step beyond 
voluntary, to a level of self-regulation. And if self-
regulation doesn't work, you have regulation. And if regulation 
doesn't work, the Hill will produce legislation that will 
provide regulators with the means to do it. So, we're at the 
voluntary stage right now.
    Mr. Campbell. In last September's testimony, we weren't 
given a choice as to whether we wanted to do this or not. We 
were challenged by this committee and responded very directly 
to the SEC in their call for increased bond market 
transparency. We do believe that what we are doing also is a 
very industry-led solution. We have the largest to the smallest 
underwriters on the committee; we have firms that represent 
customers only; we have individuals, who represent specifically 
the individual investors; as well as the largest purchasers of 
corporate debt securities in the United States.
    So, we do believe that, although my friend and I and our 
associations differ on very minute, but important issues, that 
we have continued to make every effort to work together in a 
collegial fashion, to move this forward for the very best 
interest of the investor. We continue to gain insights on the 
committee from the representation of all the associations that 
really have an interest in this, from the Securities Industry 
Association, to the Bond Market Association, to the Association 
of American Investors. We believe that this effort that we're 
undertaking and have been in the process of is not going to be 
injurious to the industry. The industry is hard at work in the 
process to make this the finest resolution, to provide the 
transparency that they know how to provide. So, they are deeply 
involved and will continue to work with the Bond Market 
Association. And between all of us, we will have a product that 
we can be proud of and the investor will benefit from.
    Mr. Towns. I think you're saying you can work together? Is 
that what you're saying?
    Mr. Campbell. We plan to go to lunch very shortly here.
    We have been to dinner. We have served on the same panels. 
We're proud of our competitive instincts, but recognize that we 
have one final goal, and that's to get this to the investor, so 
the people benefit from increased information.
    Mr. Towns. Thank you, very much. And maybe you two guys 
should try breakfast.
    Mr. Campbell. We'll try it, thank you.
    Mr. Towns. I yield back, Mr. Chairman.
    Mr. Oxley. The gentleman's time has expired. The gentleman 
from Illinois, Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. I apologize for not 
being here earlier. I had another subcommittee. You know, I'm 
very punctual.
    But energy power also is a big issue for Illinois and 
that's my other subcommittee.
    This question was asked to a previous panel, but I'd like 
to address it also to you both. Do you agree that price 
information is a public good?
    Mr. Campbell. Absolutely. We, in the NASDAQ market today, 
trade over a billion shares a day; have an infrastructure that 
not only collects and disseminates this information as widely 
as any other capital market in the world. We have a Website 
that dispenses this information free to the public that has, in 
excess, of 20 million hits a day. We spend close to $40 million 
a year in Web initiatives that are freely accessible to the 
public. There is nobody that is a strong believer, stronger 
than NASDAQ, that information and transparency is a positive.
    Mr. Shimkus. Mr. Green?
    Mr. Green. I would complement the Website, by the way. I 
have it book marked and it's really wonderful information. I 
guess the--I think prices information should be available to 
the public. There's no question about it. But the price 
information that the public can get free of charge is either 
delayed or paid for by someone else. Because, in a sense, 
market information overall is almost a form of intellectual 
property. So, where you draw the line between what's 
intellectual property and when does it become public domain, I 
think is an argument that lawyers can argue over many lunches, 
breakfasts, and dinners, and I don't have the answer for that.
    But, I think the public policy desire is to get price 
information to the public. And where it goes from being 
intellectual property that has a value that cost money, to 
something that becomes free of charge, is--I don't know where 
to draw that line.
    Mr. Shimkus. Is it safe to assume that dealers get a better 
deal than the public--the consumer?
    Mr. Campbell. I think that's probably not true. Today, if I 
am a public individual and I'm desirous of receiving real, on 
time, instantaneous quotes, I can presently do that for a 
maximum amount of only $4 a month, and we have and will have in 
front of our Board later on this month a proposal to 
essentially reduce that by half. Most of what happens in those 
charges are very accessible by any public individual. They can 
receive it on their PC at home; they can receive it on their 
pager; and there are many different avenues for them to get 
that.
    Mr. Shimkus. Mr. Green?
    Mr. Green. Well, if Pat's talking about cutting the fees 
that are paid by members, I have nothing to add.
    Mr. Shimkus. But, do you agree? I mean, the question really 
was----
    Mr. Green. Dealers pay for the data. You know, when instead 
of going to nasdaq.com, you get the price through a dealer's 
Website, the dealers pay for that data. So----
    Mr. Shimkus. There's a pass along charge for just 
information.
    Mr. Green. Right. Either direct or----
    Mr. Shimkus. So, you made the argument, then, that if an 
individual consumer is buying direct, with the dealer, it's 
going to be an increased cost?
    Mr. Green. If the marketplace allows it to be passed along. 
It's a very competitive marketplace now driving down the cost 
of transactions and it's not always recoupable.
    Mr. Shimkus. Let me go to one last question. A lot of 
information is provided to regulators. Why can't investors get 
what is given to government bureaucrats?
    Mr. Campbell. That's an excellent question. We are in the 
process of implementing, over the next 12, 18 months, a system 
called an order audit trail. That is primarily an SEC driven 
initiative for equity securities. There is no reason why that 
can't ultimately be transferred to debt securities, whereby 
very possibly in the next 18 months, 24 months, you can 
actually go on the Website and find your specific order and be 
able to track it. And what the public wants more than anything 
is they want the price that they paid validated. And the way 
they validate it is to see other transactions along with 
theirs.
    Mr. Shimkus. Mr. Green, do you have anything to add?
    Mr. Green. Yeah, I would just say that we don't want to 
prejudge whether or not that's doable. But, that's where the 
issue of considering the effect of liquidity on the marketplace 
is crucial, because the difference between sending information 
to a regulator for surveillance and enforcement purposes and 
disseminating that same very information to the public, in this 
particular market where you're dealing with large wholesale 
institutional sized transactions, that can take actually some 
time to occur and unwind. The premature dissemination of 
information could affect the pricing of that transaction all 
along the way.
    But, we're not going to prejudge that. We feel that in 
designing a system that is going to provide for that price 
transparency, the effect on liquidity should be a 
consideration, because if it adversely affects liquidity, it 
will increase risks in that marketplace, and the dealer 
community puts up the capital to create the markets. But more 
importantly, the issuing community needs to get the lowest 
possible cost of capital. When AT&T comes to market later this 
week for $6 to $8 billion worth of bonds, our quarter-point 
here or a basis point there makes a lot of difference, and that 
happens when liquidity is good or liquidity is bad. So, all 
we're saying, in designing and fashioning a final system, 
liquidity should be a consideration, as it relates to the 
public dissemination, to ensure that the mere dissemination 
doesn't hurt the marketplace that you're trying to help.
    Mr. Shimkus. Mr. Chairman, my time has expired and I'll 
yield back.
    Mr. Oxley. I thank the gentleman for participation and we 
thank you both for a most enlightening testimony. I think we're 
on the right track and we appreciate all the hard work you've 
done on your side to make this a reality. Too many times from 
our perspective we nod in the right direction and say go to it, 
and don't give you a whole lot of encouragement. In this case, 
I think, it's a good example of the private sector initiative 
working very well at our directive, not necessarily in a 
dictatorial way, but in terms of a cooperative way. I think at 
the end of the day, that's exactly what's going to happen. It 
will benefit ultimately the marketplace and the consumer.
    So, thank you all for your testimony. And the subcommittee 
stands adjourn.
    [Whereupon, at 12:49 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

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