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Bond Market Ass'n. Raises Concerns About NYSE's Automated Bond System Plan

The Bond Market Association has submitted its views to the SEC regarding the NYSE's request for exemptive relief to allow its members to trade certain unlisted debt securities on the NYSE's Automated Bond System ("ABS"). The NYSE's proposal would enable its members to trade the debt securities of issuers whose debt is not listed and does not comply with the registration requirement of 1934 Act section 12(a). BMA believes that the initiative may increase the efficiency and competitiveness of the retail bond market and urged the SEC to let it proceed. However, BMA raised a number of concerns and questions that the SEC should consider before granting the exemptive relief.

BMA noted that the NYSE proposal essentially will allow the exchange to act as a broker which, in effect, will enable it to compete with brokers that also offer trading in the debt securities that will be traded on the NYSE. BMA does not object to the NYSE acting as a broker, but raised concerns about its doing so given its status as a self-regulatory organization. The NYSE may potentially gain a competitive advantage over the brokers with which it will be competing, according to BMA.

Most of the corporate securities transactions for which the NYSE plans to provide trade services must be reported on the NASD's TRACE system. Users of TRACE pay the NASD a fee to access the data reported on TRACE. BMA pointed out that the TRACE reporting requirements, if read literally, would apply to securities traded on ABS since the ABS securities will not be listed, which would impose additional reporting requirements on member firms. BMA said the trades of unlisted debt securities effected on ABS should not be required to be reported to TRACE by broker-dealers. If the SEC determines that the TRACE and ABS data should be integrated, BMA said the NYSE should report the ABS trades to TRACE or vice versa rather than subjecting broker-dealers to the additional expenses of accommodating dual reporting. BMA added that it would be helpful if the trading symbols were the same in both systems.

BMA urged the SEC to consider who will own the data generated by the ABS system. If the NYSE is deemed to own the data, member firms may have to pay significant additional charges for the information. BMA believes that data on trades should be owned by the parties making the trades but said that, at a minimum, any fees imposed by the NYSE should be reasonable and the NYSE should not benefit from data ownership rights that are superior to its competitors.

BMA said the SEC must consider the relationship between the NYSE's SRO status and its proposed role as a broker of unlisted corporate debt securities, especially in light of the NYSE's privatization initiative. BMA also raised concerns that the regulators may use enforcement actions or the threat of such actions to pressure firms to interact with NYSE quotes for best execution. The SEC should make clear that NYSE quotes will not receive any special or preferential treatment.

BMA is also concerned that the NYSE's operation of a closed trading system in fixed income securities could injure broker-dealers that are not members of the NYSE and could effectively force those firms to become members or to acquire trading rights. Once again, the NYSE's proposed privatization compounds those concerns. The SEC should consider opening ABS to all broker-dealers subject to a limited transaction fee, in BMA's view.

BMA suggested that the SEC consider the market impact of further exemptions, such as a request by other exchanges to trade debt securities on an unlisted basis and the conditions that may be imposed. The Association also urged the SEC to evaluate the blue sky exemption under 1933 Act section 18 to ensure that the securities traded on ABS will benefit from the blue sky exemption.