Mortgage-Bond Transparency Plan Meets Resistance From Traders

The Financial Industry Regulatory Authority’s latest plan to increase transparency in a corner of the $6.5 trillion mortgage-bond market is meeting resistance from Wall Street’s largest lobbying group.

Investors and dealers are concerned that the level of detail Finra proposes to publish on trades of government-backed securities as so-called specified pools will reveal shifts in strategy because individual bonds are often owned by only one holder, according to the Securities Industry and Financial Markets Association.

“There’s a concern the confidentiality of that money manager’s trading patterns and positions would be jeopardized,” Chris Killian, a managing director in New York at Sifma, said in a telephone interview. The group is pushing for a “masking” of a bond’s unique identifier, known as a CUSIP, as Finra adds trade-by-trade disclosures including prices to its Trade Compliance and Reporting Engine, he said.

Finra has been expanding Trace to securitized debt after the murkiness of trading in securities including mortgage bonds without government backing contributed to the worst financial crisis since the Great Depression in 2008, by fueling doubt about the health of banks and funds. The non-governmental regulator oversees more than 4,400 brokerage firms.

The Trace system started in 2002, providing the first real-time data on most corporate bond trading to anyone with Internet access. Finra, which operates from Washington and New York, began last year disclosing daily market-level information culled from data on individual securitized-debt trades it had started collecting earlier.

Transparency Benefits

“The more light that’s shone on the market, the better off everybody is,” said David Land, a mortgage-bond manager at St. Paul, Minnesota-based Advantus Capital Management Inc., which oversees about $22 billion.

Land disagrees the planned disclosures should be limited in the way suggested by Sifma, an approach also sought by the Bond Dealers of America, which represents smaller brokerages. More transparency helps cut the differences between the prices at which dealers buy and sell debt, helping investors, he said.

Finra is reviewing comment letters from Sifma and BMA on its proposal, said Ola Persson, vice president in its transparency services division.

SEC Approval

The industry watchdog won approval from the U.S. Securities and Exchange Commission earlier this year on its plan for real-time dissemination of data on individual so-called To Be Announced trades involving government-backed mortgage securities. TBA trading is the largest part of the $5.4 trillion market for debt guaranteed by government-supported Fannie Mae and Freddie Mac or U.S.-owned Ginnie Mae. The disclosures may start this year, with the approved rule saying they’d begin no earlier than August.

In TBA trades, forward sales contracts are filled with any bonds matching a broad set of characteristics. Investors use specified-pool trades to acquire securities that have less risk of prepaying faster or slower than they want, paying a premium.

Finra altered its initial proposal for reporting TBA trade details after feedback from market participants. It scaled back the amount of information on trade sizes it will release, lowering a cap to $10 million from $25 million for securities that fail to match so-called good delivery guidelines. Any trades larger than the cap would simply be listed as at least $10 million.

Diluted Protection

Unlike TBA trades or corporate bonds, the specified-pool market “is very granular, and ownership very often is in the form of whole pools,” so “the protection that dissemination volume caps provide in other more widely-held markets” is diluted, Sifma said in a May 10 comment letter.

“When a single investor owns a large percentage of a specified pool, if the Finra proposal were finalized in its current form, the market would be able to know that this investor is buying or selling, and the market would then be able to track this investor’s activity, and reverse engineer and capitalize on its strategy,” the BMA said in a letter the same day.

Bryan Whalen, co-head of mortgage bonds at Los Angeles-based TCW Group Inc., which oversees about $124 billion, said he agreed with the groups’ viewpoint.

“If you disclose enough generic information, there’s definitely a middle ground where there’d be enough transparency,” he said. “Would I prefer everyone not to see what we’re doing in specifieds? Yeah, I would prefer that.”

Finra is also still studying how to approach dissemination of trading data for so-called collateralized mortgage obligations and asset-backed securities, Persson said. That debt accounts for the roughly 7 percent of volume in the structured-finance market not tied to agency pass-through mortgage bonds, he said. He declined to offer a timeline for further actions.

“Finra’s bias is to believe that transparency is good for the marketplace,” Persson said. “Having said that, these products are complex and the impact of transparency needs to be carefully studied.”

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