U.S. GOVERNMENT PRINTING OFFICE

55–636CC WASHINGTON : 1999

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

(

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COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

THOMAS C. SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

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

Vice Chairman

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

STEVE LARGENT, Oklahoma

BRIAN P. BILBRAY, California

GREG GANSKE, Iowa

RICK LAZIO, New York

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ROBERT L. EHRLICH, Jr., Maryland

TOM BLILEY, Virginia,

(Ex Officio)

EDOLPHUS TOWNS, New York

PETER DEUTSCH, Florida

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

FRANK PALLONE, Jr., New Jersey

BOBBY L. RUSH, Illinois

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

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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)

(1)

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

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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 cosponsoring 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 1⁄8th to 1⁄16th, 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

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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

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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 conVerDate 29-OCT-99 11:18 Nov 01, 1999 Jkt 010199 PO 00001 Frm 00007 Fmt 6633 Sfmt 6633 Z:\HSECOM\55636 txed01 PsN: txed01
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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 socalled 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

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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.

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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.

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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

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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.

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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.

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. 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 marVerDate 29-OCT-99 11:18 Nov 01, 1999 Jkt 010199 PO 00001 Frm 00013 Fmt 6633 Sfmt 6621 Z:\HSECOM\55636 txed01 PsN: txed01
11

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?

12

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

13

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.

14

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 workVerDate 29-OCT-99 11:18 Nov 01, 1999 Jkt 010199 PO 00001 Frm 00017 Fmt 6633 Sfmt 6602 Z:\HSECOM\55636 txed01 PsN: txed01
15

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

16

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

17

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?

18

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 senVerDate 29-OCT-99 11:18 Nov 01, 1999 Jkt 010199 PO 00001 Frm 00021 Fmt 6633 Sfmt 6602 Z:\HSECOM\55636 txed01 PsN: txed01
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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 selfregulatory 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?

20

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

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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

22

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

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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.

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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.’’

25

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, stateof-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 backup 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.

26

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.

27

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 atVerDate 29-OCT-99 11:18 Nov 01, 1999 Jkt 010199 PO 00001 Frm 00030 Fmt 6633 Sfmt 6602 Z:\HSECOM\55636 txed01 PsN: txed01
28

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.

29

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 corVerDate 29-OCT-99 11:18 Nov 01, 1999 Jkt 010199 PO 00001 Frm 00032 Fmt 6633 Sfmt 6602 Z:\HSECOM\55636 txed01 PsN: txed01
30

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 interdealer 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

31

1Source: 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.

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

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-conVerDate 29-OCT-99 11:18 Nov 01, 1999 Jkt 010199 PO 00001 Frm 00034 Fmt 6633 Sfmt 6621 Z:\HSECOM\55636 txed01 PsN: txed01
32

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:

33

3See Ananth Madhavan, ‘‘Security Prices and Market Transparency,’’ Journal of Financial

Intermediation, no. 5, 1996, pp. 255-283.

. . . 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.

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

34

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 MarVerDate 29-OCT-99 11:18 Nov 01, 1999 Jkt 010199 PO 00001 Frm 00037 Fmt 6633 Sfmt 6621 Z:\HSECOM\55636 txed01 PsN: txed01
35

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 assetbacked 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.

36

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

pledges to work toenhance pricetransparency.

Association members meet

with SEC ChairmanLevitt and begin to develop industry initiative.

Association issues a request for proposals to

develop transparencyproduct and hosts bidders.

Association receives proposals from bidding

vendors.

Association reviews nine vendor

proposals and selects GovPXas vendor for the industry initiative. Association hosts openforum on price transparency.

Association’s Transparency

Steering Committee adoptsparameters for the transparency system—CorporateTrades I.

Association and GovPX

plan to begin testingsystem to transmit anddisseminate prices.

Association and GovPX

plan to launch Corporate Trades I. Association plans to postdata on itsinvestingbonds.comwebsite

Characteristics of Selected Transaction Reporting Systems: Ranked from High to Low Liquidity

Security System Security’s General Liquidity Type Reporting Dissemination Timeframe Dissemination Audience

Release

Actual

Trades

to Public

Exchange-listed Equities .. ACT (Nasdaq) DOT and

OARS (NYSE).

Very high ........................... Within 90 seconds of trade (ACT) and

automatically in DOT and OARS.

Instantly-price and volume ....................... Market participants and consolidated tape ................. Yes

Treasury Securities ............ GovPX ................................ High ................................... Instant-built into system .......................... Instant-price and volume .......................... GovPX participants and subscribing vendors .............. Yes

Agency Bonds .................... GovPX ................................ High ................................... Instant-built into system .......................... Instantly-price and volume ....................... GovPX participants and subscribing vendors .............. Yes

High Yield Bonds-Mandatory Issues 1. NFIPS (Nasdaq) ................. Relatively high .................. Within 5 minutes of trade ........................ Every Hour-Price and Volume Summary ... FIPS participants and data vendors ............................ No

Municipal Bonds ............... MSRB (NSCC) .................... Varies but typically low .... End of day ................................................. Next Day price and summary volume data

for bonds that traded 4 or more times.

Data vendors and The Bond Market Association’s

website-investinginbonds.com.

No

Investment Grade Corporate Bonds. Corporate Trades I (The Bond Market Association/GovPX). Varies but typically low .... Within 15 minutes of trade ...................... Within 1 hour after 4th trade and within 1 hour for subsequent trades—prices released for trades of $10 mil. or less. GovPX subscribers and investors through Associa- tion’s website-investinginbonds.com. No

New York Stock ExchangeListed Bonds. ABS (NYSE) ....................... Varies but typically low .... Instant-built into system .......................... Instantly-price and volume ....................... market participants and high speed quote line; sum- mary data in newspapers. Yes 2

High Yield Bonds-Nonmandatory 3. FIPS (Nasdaq) ................... Low .................................... By 5 p.m. on day of trade ........................ None ........................................................... None .............................................................................. No

Non-Nasdaq Equities 4 ...... Non-Nasdaq Reporting

System (NASD).

Low .................................... Price and volume data reported between

4 p.m. and 6:30 p.m. on trade date orbetween 7:30 a.m. and 9 a.m. on nextbusiness day.

None ........................................................... No .................................................................................. No

1Mandatory 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.

37

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

38

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 Webbased 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

39

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.

40

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.

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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 diVerDate 29-OCT-99 11:18 Nov 01, 1999 Jkt 010199 PO 00001 Frm 00044 Fmt 6633 Sfmt 6602 Z:\HSECOM\55636 txed01 PsN: txed01
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rective, 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.]

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