By Anirban Sen
NEW YORK (Reuters) -Goldman Sachs is urging U.S. regulators to allow large banks that sell corporate bonds on behalf of investors to delay public reporting of the largest trades of such bonds, according to an internal white paper published by the bank.
In the paper, which was reviewed by Reuters, Goldman is arguing that current disclosure requirements set by Wall Street regulators force large liquidity providers to disclose sensitive details of a transaction before dealers can manage the risk resulting from large portfolio trades, which can potentially move markets.
Portfolio trading allows investors to move large baskets of bonds in a single transaction.
Under current rules set by the Financial Industry Regulatory Authority (FINRA), banks are required to disclose secondary trades of investment grade and high-yield bonds within 15 minutes of such transactions being executed, irrespective of the size of the trades.
The Wall Street bank is arguing that reporting of portfolio trades larger than $250 million in value should be exempt from the standard 15-minute public distribution rule.
Instead, Goldman is recommending that bond trades ranging between $250 million and $500 million should be disclosed by the end of a given trading day, and those above $500 million should be settled over a day, or over the T+1 settlement schedule, and by the end of that day. All single-bond transactions and portfolio trades up to $250 million would continue to be disclosed within 15 minutes, Goldman said.
Goldman estimates the suggested changes for trades above $250 million would touch roughly 0.5% of all portfolio trades, as the vast majority of corporate bonds are less than $250 million in size.
Large Wall Street liquidity providers have for years complained that current reporting rules hamper their ability to hedge risk on large bonds.
“When numerous market participants are aware of a potential block portfolio trade, liquidity providers will factor information leakage and market signaling into their quotes, limiting the price improvement that can be offered to end investors,” Goldman said in the paper.
Goldman’s latest proposal comes as the structure of the U.S. corporate bond market has been transformed over the years through electronic trading, increased disclosure requirements, and the rise of the corporate bond exchange-traded fund (ETF) market.
Electronic trading currently accounts for more than 50% of U.S. investment grade volumes, while bond ETF volumes average $10.4 billion a day, according to Goldman estimates.
Portfolio trading was launched in 2018 to make trading of corporate bonds more efficient for investors who wanted to trade a collection of individual corporate bonds in one sweep with a single dealer.
Experts say portfolio trading has reshaped the market for relatively less liquid corporate bonds because they are clubbed together with more popular bonds.
The bank, in its paper, said that the framework for FINRA’s current reporting requirements, which are known as Trade Reporting and Compliance Engine (TRACE), was put in place in 2002 when the size of the largest corporate bonds was much smaller.
“Markets would be well served with a fresh look at whether it is appropriately calibrated for the markets of today,” Goldman said.
Any changes to bond trading reporting rules would require a sign-off from the FINRA and also the U.S. Securities and Exchange Commission. Goldman declined to comment on whether the bank has already lobbied regulators to implement these proposed changes.
(Reporting by Anirban Sen in New York; Editing by Sam Holmes)
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