Summary:
H.R. 1400 amends the 1934 Securities Exchange Act to enhance the collection and dissemination of bond price information in order to improve price competition. The bill directs the Securities and Exchange Commission (SEC) to adopt rules to make the bond market pricing system more open. Current practice does not obligate a bond seller to disclose the price at which he or she sells bonds. The result is that dealers often sell the same bond at different prices to different people. Recent examples of this disparity in practice include two investors who purchased an identical bond at a six percent difference (a full year's worth of interest). Bill supporters believe that increased transparency will reduce this price disparity and improve prices for all bond market investors.

Specifically, the SEC must adopt rules and take other actions to protect investors and ensure that markets are fair and orderly to assure prompt, accurate, reliable, and fair collection, processing, distribution, and publication of transaction information. The transaction information must include recent sale data that refers to covered debt securities to ensure that information is available to all exchange members, brokers, dealers, and securities information processors. When designating the new rules, the SEC must consider private sector systems for collecting and distributing transaction information on corporate debt securities.

Background:
The United States bond market represents a colossal financial marketplace, where investors trade more than $300 billion of government securities and more than $15 billion in corporate securities daily. In comparison, investors trade only $25 billion in stocks daily on the New York Stock Exchange. The markets for U.S. debt securities, however, lack the transparency that similar United States equity markets possess. Transparency refers to the availability of immediate access by a potential investor to information on the current offers to trade a given number of securities at certain prices. Recently, Arthur Levitt, chairman of the Securities and Exchange Commission, testified to the Commerce Subcommittee on Finance and Hazardous materials that transparency of corporate bond prices was poor. During other testimony, a hypothetical illustration revealed the effects of limited transparency. A seller in the bond market who agrees to sell a bond at a price of $97.50 does not know whether the buyer paid the dealer $97.75 or $101. The same buyer may have purchased another block of the same bond earlier for the same price. The dealer knew that the buyer would pay $101 for the equal allotment of stock; however, the seller does not have that information. Without that knowledge, the sale of the bonds results in a large price spread that affords the dealer a disproportionately sizeable profit. Additionally, Levitt indicated that an increase in the transparency of bond markets, making them similar to U.S. equity markets such as stocks, will lead to improved bond prices for investors. He also indicated that greater transparency will assist relevant regulators in developing an audit trail to allows better detection of fraud within financial markets.

Increased transparency in the bond market provides individual investors with a means of acquiring competitive prices in the current debt market system. Bond dealers are usually the only source available for investors who wish to purchase a bond in the market. In many instances, only one dealer negotiates a particular bond issue. Thus, the bond market lacks competition between dealers. Furthermore, only dealers have access to relevant price information such as purchase and sale prices. Without such information, individual investors cannot determine the value of a particular bond at its given price. With greater price transparency, investors can compare trade prices with other investors in order to monitor the quality of execution completed by the dealer.

The bond market industry has recently made efforts to increase its transparency. In mid-January, the Bond Market Association (TBMA) announced its choice of GovPX, an institution whose aim is to gather "price information on inter-dealer broker trades on investment grade corporate bonds." The new system, where brokers voluntarily report trading data on transaction price, yield, volume, and spread within an hour of trading, makes information quickly available to the GovPX network of subscribers. Since its implementation, the use of GovPX has led to increased market liquidity and greater participation by investors.

Costs/Committee Action:
CBO estimates that enactment of H.R. 1400 will have no significant effect on the federal budget. The bill does not affect direct spending, so pay-as-you-go procedures do not apply.
The Commerce Committee reported the bill by voice vote on April 21, 1999.

House Passes Bond Price Competition Act:
The House has passed the Bond Price Competition Improvement Act, designed to improve collection and dissemination of bond price information and improve bond market price competition; the bill now goes to the Senate. Congressional Record, June 14, 1999, H4132-37, H4139-40.