The Investment Industry Regulatory Organization of Canada is taking steps to address fair pricing in the fixed income market, as well as in other securities traded over the counter.
“Fixed-income is a large and important market for retail investors,” said Susan Wolburgh Jenah, chief executive and president of IIROC. “The standards are designed to give individual retail and institutional investors more confidence that the price they pay for bonds and other fixed-income securities is a fair price.”
Having received regulatory approval to proceed, IIROC is rolling out the OTC Securities Fair Pricing Rule, along with changes to the Trade Confirmation Requirements.
These set out clear standards for IIROC-regulated firms to have policies and supervisory procedures in place to ensure they offer fair and reasonable prices, as well as clear disclosure to their clients.
The OTC fair pricing rule will take effect on October 3, 2011; and the confirmation disclosure requirements will take effect on September 4, 2012.
The rule requires IIROC-regulated firms to:
• provide fair and reasonable prices for fixed-income and other securities traded in OTC markets;
• disclose yield to maturity on trade confirmations for fixed-income securities and include notations for callable and variable rate securities, where applicable; and
• Include a statement on trade confirmations to clients indicating that they earned remuneration on transactions, unless otherwise disclosed.
The new standards are intended to provide more transparency in the OTC markets, which have until now been quite nebulous. Since bonds are sold from inventory, retail investors have little bargaining power, compared to the relatively transparent pricing of a stock exchange.
Institutional investors have a distinct edge over individual investors in OTC markets, as they have the resources to determine the fairness of a security’s price. There is a widely held perception that retail investors will get fleeced in these markets.
To read the IIROC notice, click here.