April 17, 2009 / 3:47 PM / in 9 years

New rules proposed on Canadian bond pricing

TORONTO (Reuters) - Canadian bond dealers will be required to tell small investors whether commissions and other charges on bond transactions are included in the price under new rules proposed by a securities industry watchdog.

The proposed regulations, published on Friday, are designed to make over-the-counter (OTC) markets more transparent, with key controls on pricing that could make bonds cheaper for investors.

The rules would require dealers disclose yield-to-maturity for fixed income securities, and to be able to justify bond pricing and show reasonable efforts to ensure a price reflects prevailing market conditions.

“The general purpose of these proposed amendments is to enhance the fairness of pricing and transparency,” the Investment Industry Regulatory Organization of Canada (IIROC), a national self-regulatory group, said in a statement.

“A principles-based rule is proposed that will require dealer members to provide or procure fair and reasonable prices for OTC securities ... the proposed rule will cover transactions for both retail and institutional clients.”

Canada’s bond market is dominated by the investment dealing arms of the major banks, such as Royal Bank of Canada and Toronto-Dominion Bank.

Many Canadian investors do not know how much commission they are paying to buy and sell bonds because the amount is often embedded in the price.

Retail investors are particularly exposed because they do not have the same access to security pricing in over-the-counter trade as they do in listed securities markets.

They are also less equipped than institutional investors to understand whether a given fixed income security is fairly priced and of appropriate risk.

“To people who know the bond market, they know what price makes sense and what price doesn‘t, but that comes from experience in the business,” said Jaime Carrasco, an investment advisor at Blackmont Capital in Toronto.

“The bottom line is this is another step to becoming more transparent, because the bond market has always been more controlled by certain players in terms of the pricing and the visibility.”


Some market watchers have speculated increased transparency will force investment dealers to become more competitive on pricing, directly affecting profits.

IIROC said the new proposed regulations were developed in consultation with advisory committees, and while requirements on fair pricing and yield disclosure were supported, concerns were expressed about remuneration disclosure.

The organization acknowledged it may have a tough time convincing members to accept all the requirements.

“Concerns were expressed by some members of one of the committees consulted, namely the Compliance and Legal Section, regarding possible operational issues associated with the disclosure requirements, particularly the remuneration disclosure statement,” it said in a statement.

The rules, posted to the IIROC Website (www.iiroc.ca), will be subject to public comment for a period of 90 days.

Once that consultation period is closed, changes may or may not be made before a final version goes to the Canadian Securities Administrators for approval. If changes are substantive, a new 90-day public comment period can be called.

Editing by Jeffrey Hodgson

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