[Congressional Record (Bound Edition), Volume 145 (1999), Part 9]
[Extensions of Remarks]
[Pages 13487-13489]
[From the U.S. Government Publishing Office, www.gpo.gov]



             BOND PRICE COMPETITION IMPROVEMENT ACT OF 1999

                                 ______
                                 

                               speech of

                          HON. JOHN D. DINGELL

                              of michigan

                    in the house of representatives

                         Monday, June 14, 1999

  Mr. DINGELL. Mr. Speaker, as Ranking Member of the Committee on 
Commerce, as well as one of the original sponsors and a Floor-Manager 
of H.R. 1400, the Bond Price Competition Improvement Act of 1999, I 
rise to clarify a matter involving the legislative history of this 
legislation. My remarks are an extension of remarks that I made during 
House consideration of H.R. 1400 (June 14, 1999, Congressional Record 
at H4137).

[[Page 13488]]

  Prior to floor consideration of H.R. 1400, both the bill and the 
committee report had been processed on a fully cooperative, bipartisan 
basis that respected the rights of the majority and minority members of 
the Commerce Committee. For that, I commend the gentleman from Virginia 
(Mr. Bliley), distinguished chairman of the Committee on Commerce.
  During House consideration of H.R. 1400 on Monday of this week (June 
14, 1999, Congressional Record at H4132-4137, 4139-4140), I became 
aware of the intention of the Majority to insert in the Record as an 
extension of Chairman Bliley's remarks ``legislative history'' 
submitted by the Bond Market Association (BMA).
  When I questioned proceeding in this manner, I was assured by Mr. 
Bliley that the material was ``not a part of the legislative history at 
the moment'' and that the minority would be given an opportunity to 
peruse and approve the BMA remarks before they became legislative 
history (June 14, 1999, Congressional Record at H4136). However, I was 
informed by the gentleman from Virginia in a subsequent phone call that 
he had misspoken: the material had been inserted in the Record without 
the Minority's review and approval.
  I have the following comments on that material which is printed on 
pages H4134-4135 of the Congressional Record for June 14, 1999, 
immediately following the statement that Chairman Bliley actually 
delivered to the House:
  The Bond Market Association's representatives, who played a 
constructive role in the development of the legislation, have explained 
that they wanted to address several concerns raised by their lawyers 
with the Committee report. They felt that it was inaccurate and painted 
too bleak a picture of the state of bond market transparency. I have no 
particular quarrel with their goal. I have a large quarrel, as I stated 
on June 14, with the process. Furthermore, the BMA document itself 
contains inaccurate statements.
  Because the Majority did not include in the main body of the 
Committee report the findings of the SEC's review of price transparency 
in the markets for debt securities in the U.S., I included a summary 
thereof in my additional views (House Report No. 106-149 at 12). BMA 
admits that my summary is correct. The BMA summary that appears in the 
Record, however, is not correct (H 4134, carry-over paragraph, top 2nd 
column). For example, contrary to the BMA document's assertion, the 
entire U.S. Treasury market was not found to be ``highly transparent.'' 
The markets for ``benchmark'' U.S. Treasury bonds were found to be 
``highly transparent,'' while other Treasury and Federal agency bonds 
were found to provide a ``very good'' level of pricing information. 
While the differences that give rise to a ``highly transparent'' versus 
a ``very good'' rating may escape the untrained and uninitiated, the 
BMA document's failure to accurately reflect the SEC's conclusions begs 
the question whether this was sloppy draftsmanship or a deliberate 
attempt to mislead. The text of the SEC report's summary of findings 
appears at the end of these remarks. The entire report is printed in 
the September 29, 1998 hearing record, Serial No. 105-130, at pages 7-
18.

  The March 1998 Treasury-SEC-Federal Reserve Joint Study of The 
Regulatory System For Government Securities did report on private 
sector efforts to improve the timely public dissemination and 
availability of information concerning government securities 
transactions and quotes. Its conclusion at page 18 was that ``[t]here 
have been significant advances in transparency for government 
securities transactions over the past several years, primarily 
originating from commercial vendors'' (H4134, paragraph 1, 2nd column).
  Contrary to the impression given by the BMA's document, Nasdaq's 
Fixed income Pricing System (FIPS) has done little to make the high 
yield market more transparent. Specifically, FIPS does not make public 
any actual transaction reports for high yield bonds, although it is 
true that such transactions are reported to the NASD, mostly at the end 
of the day. FIPS publishes quotations, which are generally considered 
too inaccurate to be useful, for just 50 selected bonds, and also 
publishes transaction summaries giving the high price, low price, and 
aggregate volume for all registered high yield bonds (H4134, bottom 2nd 
column, top 3rd column).
  The BMA document notes testimony claiming vast differences in the 
level of price transparency between liquid and illiquid equities. 
However, NASD Bulletin Board stocks are subject to real time last sale 
reporting, as are many listed equities and listed options which are, in 
fact, highly illiquid (H4134, paragraph 1, 3rd column).
  There are nothing like 300,000 to 400,000 corporate bonds, as that 
term is commonly understood. The SEC has advised us that there are 
approximately 30,000 to 40,000. The estimate of 300,000 to 400,000 in 
the BMA document probably includes mortgage-backed securities 
guaranteed by GNMA which are issued by private corporations but are 
``exempt'' securities and not ordinarily understood to be corporate 
bonds. The BMA document gives a completely wrong impression of the 
characteristics of the market (H4134, paragraph 2, 3rd column).
  The close relationship that exists among some corporate bonds (but 
which falls well short of the ``fungibility'' claimed by the BMA 
document) is one of the reasons that transaction reporting can be 
valuable, since the price of one bond may be important information 
about the value of many others (H4135, carry-over paragraph, top 1st 
column).
  The BMA document is correct that the Finance Subcommittee did hear 
testimony expressing the concerns of some market participants about 
possible liquidity effects of the immediate disclosure of price and 
volume information for some transactions. However, SEC Chairman Levitt 
specifically testified at the Finance Subcommittee's March 18, 1999, 
hearing on this bill that he did not believe that transparency harmed 
liquidity.
  ``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.'' (Serial No. 106-8 at 12).
  However, the Commission has been sensitive to similar concerns in 
other contexts and can be relied on to reach an appropriate balance 
between liquidity concerns and the value of transparency. This was the 
conclusion of the Committee in its unanimous decision to give the SEC 
this responsibility. I believe it is echoed in the resounding 333-1 
vote of the House in favor of passing H.R. 1400 (H4135, 1st paragraph, 
1st column).
  The BMA document's partial quotation, ``the Commission shall take 
into consideration . . . private sector systems for the collection and 
distribution of transaction information on corporate debt securities,'' 
omits the significant phrase ``among other things.'' I strongly support 
private sector initiatives and solutions, where appropriate and 
effective. I believe that the purpose of this phrase in H.R. 1400 is to 
give the Commission flexibility to assure the effectiveness of 
transaction reporting by looking at and to the entire landscape, both 
private and government. It is not a mandate that there be competition 
beyond that already required under section 11A of the Exchange Act 
which requires actions that ``foster efficiency, enhance competition, 
increase the information available to brokers, dealers, and investors, 
facilitate the offsetting of investors' orders, and contribute to best 
execution of such orders'' (H4135, 2nd paragraph, 1st column).

                         I. SUMMARY OF FINDINGS

       Overall we believe the debt markets are functioning well. 
     Of the market segments we reviewed, U.S. Treasury securities 
     and other Federal Agency bonds are the most actively traded 
     and are also the most transparent and efficient. We found no 
     evidence in those markets that dealers have a substantial 
     advantage compared to institutional clients in terms of 
     market knowledge. Other market segments function effectively 
     as well, though some are distinctly less transparent and 
     efficient than the government securities markets. 
     Specifically, we found that:
       The markets for ``benchmark'' U.S. Treasury bonds are 
     highly transparent. Bids, offers and trade prices from the 
     interdealer market are widely available through interdealer 
     broker (``IDB'') screens, GovPX, Bloomberg and other vendors.
       Other Treasury and Federal Agency bonds, which trade in a 
     relatively stable relationship to benchmark Treasuries, are 
     ordinarily traded in terms of a basis point spread from the 
     Treasury yield curve set by the benchmark bonds. Quotes in 
     frequently traded securities are widely available, although 
     the spreads are not as narrow as those for benchmark 
     Treasuries. GovPX and others produce ``valuations'' on a real 
     time basis for securities that do not have current dealer 
     quotes. 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.
       Mortgage Backed Securities (``MBS'', and other structured 
     products such as Collateralized Mortgage Obligations 
     (``CMOs'') and Asset Backed Securities (``ABS'') are 
     primarily high credit quality securities with complex 
     structures. Values are largely determined by a) the Treasury 
     yield

[[Page 13489]]

     curve, b) the structure of the particular instrument, and c) 
     the relationship of similar instruments to the Treasury yield 
     curve. The relationship to Treasuries is established by 
     markets in generic forward contracts called TBAs (``to be 
     announced'') for which current dealer quotes are available 
     from IDBs, Bloomberg and other vendors. Relatively 
     sophisticated analytical tools to value MBS, CMOs, and ABS 
     are available from Bloomberg, Bridge and other vendors. 
     Dealers and some institutional investors have in-house 
     analytical models as well. At least two services make such 
     tools available over the Internet. Overall, the quality of 
     pricing information and interpretive tools available to the 
     market is good.
       High yield corporate bonds generally do not have a stable 
     relationship to Treasuries. Therefore, the transparency of 
     the Treasury market does not imply known values for high 
     yield bonds. Interdealer trading is facilitated by IDBs, but 
     prices are not shown on screens. Dealer indicated prices for 
     selected securities generally are transmitted to customers 
     each day by fax and/or e-mail. Overall, the quality of 
     pricing information available in the market for high yield 
     corporate bonds is relatively poor, although dealers do not 
     appear to enjoy a great advantage over their institutional 
     clients.
       Investment grade corporate bonds fall between high yield 
     corporates and government bonds both in credit quality and in 
     terms of the quality of pricing information available. They 
     are generally traded in terms of a spread from Treasuries but 
     the relationship is less stable than for non-benchmark 
     Treasuries and Federal Agency bonds. As with high yield 
     corporates, interdealer trading is facilitated by IDBs but 
     prices are not shown on IDB screens. ``Investment grade'' 
     covers a spectrum of quality and the sensitivity of a bond's 
     price to company or industry specific development tends to 
     increase with lower credit quality. Similarly, the quality of 
     pricing information available for investment grade bonds may 
     be described as ranging from fairly good to fair.
       Convertible bonds are not ordinarily traded in fixed income 
     departments. Their close relationship to equity is 
     demonstrated by the fact that both buy and sell side firms 
     typically trade convertible securities (including convertible 
     preferred) in their equity trading departments.
       Municipal bonds also do not trade in a close relationship 
     to Treasuries although Treasury prices are certainly very 
     important. The municipal market has become somewhat more 
     commoditized in recent years with more new issues carrying 
     credit insurance. However, this market is highly fragmented--
     and is characterized by an extremely large number of issues 
     and issuers with a relatively small trading volume, and is 
     highly regionalized. This is a market in which there are few 
     real prices in comparison to the number of different 
     securities. As a result, many securities are difficult to 
     value either for portfolio valuation or trading. All market 
     participants are impacted, but unlike other market segments, 
     retail investors represent an important part of the municipal 
     market (roughly 30% of holdings). The nature of the municipal 
     market is such that price discovery is necessarily difficult, 
     but the MSRB's transparency efforts will improve the 
     distribution of prices, and will also provide the tools that 
     the NASD requires to assure that the municipal market is 
     fair.
       Dollar denominated foreign sovereign debt securities, 
     particularly from emerging markets, also do not trade in a 
     close relationship to Treasuries. There are approximately 10 
     major dealers in this market. Brady bonds, which were largely 
     responsible for the development of this market, now account 
     for less than half of its trading volume and are declining 
     steadily in significance. Interdealer trading is facilitated 
     by IDBs and real time quotes and transaction prices for many 
     of these securities are provided by EDB screens to the dealer 
     community, but are not generally available outside that 
     group. End-of-day prices are readily available.
       Electronic trading of bonds is rapidly becoming a reality, 
     though its ultimate impact is far from clear. There are 
     several single dealer systems in operation, most of them 
     accessible through Bloomberg terminals, offering some form of 
     electronic trading of Treasury securities. Some also offer 
     Federal Agency securities and at least one offers municipal 
     and mortgage backed securities as well. One multi-dealer 
     system, Trade Web, is currently in operation with five 
     sponsoring dealers. Bloomberg, which provides access to 
     several single dealer systems, is preparing to offer a more 
     integrated facility providing access to the quotes of all 
     participating dealers on a single screen. Several other 
     electronic bond trading systems are known to be under 
     development. including at least one that will focus on high 
     yield corporate bonds. A recent survey by the Bond Market 
     Association. (``TBMA'') shows that there is a consensus in 
     the industry that electronic execution in some form will be 
     common within a few years.

     

                          ____________________