A proposed rule change and guidance note published April 17 by the Investments Industry Regulatory Organization of Canada would amend existing requirements by mandating yield disclosure for fixed income securities, including bonds, on OTC markets.
If approved, the rules would require dealers to include disclosures on confirmations sent to retail clients if the firm’s remuneration has been added to the price (in the case of a purchase) or deducted (in the case of a sale). Such information is readily available on listed markets, but can be harder to obtain for OTC trades.
IIROC notes retail clients might not understand the inverse relationship between price and yield for these securities. And, they may not know about factors affecting yield calculations or the relative risk. “All these factors contribute to the difficulty retail investors are faced with when determining whether a particular fixed income security is fairly priced (and therefore offers an appropriate yield) and of appropriate risk,” the notice says.
IIROC says its rule change will give OTC clients access to bid and offer prices so that they can determine if prices are fair, based on where those securities are trading at the time. Access to that data will improve the quality of executions for clients.
While IIROC members are already required to deal fairly when marketing, entering into, executing and administering trades in the domestic debt market, the amendments establish clear, principles-based standards to ensure firms create, supervise and enforce policies and procedures for such transaction in the OTC market.
The rule also specifically requires that dealers, “fairly and reasonably price securities traded in OTC markets.”
The regulator will take comments on the proposal for 90 days, and amend the proposal to reflect concerns relayed by the industry.
(04/17/09)