Oyster Stew - A Broth of Financial Services Commentary and Insights
Bond Dealer's Association Podcast: Listening Sample
Sep 18, 2023
Oyster Consulting
Oyster’s Capital Markets experts were recently featured on the Bond Dealer Association’s podcast, “Bonding Time,” discussing issues affecting the U.S. fixed income markets.
The podcast, hosted by Michael Decker of BDA, covers:
Fair Pricing for Fixed Income products and compliance with Rule 2121, and MSRB Rule G30
Oyster’s Capital Markets experts were recently featured on the Bond Dealer Association’s podcast, “Bonding Time,” discussing issues affecting the U.S. fixed income markets.
The podcast, hosted by Michael Decker of BDA, covers:
Fair Pricing for Fixed Income products and compliance with Rule 2121, and MSRB Rule G30
Hello and welcome to another edition of Bonding Time BDAs podcast series focused on US fixed income , market structure, and related issues. I'm Michael Decker, b d a , senior Vice President for Public Policy and Research. Today we're joined by a team from Oyster Consulting. Oyster is A B D A associate member, and we're grateful for their support of BDAs activities. The three team members joining us today are all directors at Oyster. Casey Doherty is former Chief operating Officer, chief Compliance Officer and Chief Legal Officer. He spent much of his career at K M S financial services in Seattle and came to Oyster from M Holding securities. Before Jeff Gerhardt joined Oyster, he had a long career at Bank of New York Mellon, culminating as managing director and markets and securities finance. Jose Fernandez came to oyster from bb and t where he culminated a long tenure as head of FX and Director of Capital Markets operations . Another 2023 exam focus for FINRA is best execution. What should firms be prepared for here?
Speaker 2:
Yeah , I'll take this one. In looking at best execution, this is not unlike this last item, the fixed income and , uh, p m p , it's, it's not a so-called new item on FINRA's exam priorities for 2023 FINRA's best execution obligations are memorialized in FINRA rule 53 10 . And that rule requires, it also has the principle that you need to put your client's interest first. And where you have the ability to direct orders to different markets, you need to have a regular and rigorous process. And I need to emphasize regular and rigorous to assure that your clients receive the most favorable price possible for their transaction given the market conditions. Now , I know that that sounds simple. Hey, it's, it's regular and rigorous . Hey , not a big deal. Hey , it's anything but simple in practice. Sometimes it isn't clear in advance what the best markets are. And as we know, significant revenues for firms can be achieved in a compliant way through order routing. So importantly, FINRA does not, or does call out fixed income in particular as part of its examination priorities. In regard to best executions here with the following statement, and again, I wanna quote, if , if your firm engages in fixed income and options trading , has it established targeted policies and procedures to address its best execution obligations for these products? Does your firm consider differences among security types within these products, such as the different characteristics and liquidity of US treasury securities compared to other fixed income securities? And then FINRA also calls attention to the idea of considering and addressing potential conflicts of interest related to order routing orders to affiliated broker dealers, affiliated ATSs , or market centers that provide routing inducements , uh, such as payment from order flow from wholesale market makers and exchange liquidity rebates. So I think of this in , in sort of best practices. FINRA doesn't really say , Hey , here's the safe harbor. So I really wanna ask Jose and Jeff, what have you seen? What are some of these best practices that firms may consider putting in place here?
Speaker 3:
Jose, you want me to jump in on that one first?
Speaker 4:
I can jump in. So, yeah , I think, you know, as far as best practices concerned , best X and I think the one thing to note here is that you're starting to see a lot of those equity terms, right, being utilized as it pertains to best X . The secs obviously come out with their version, which is a little bit more , uh, you know, detailed as far as the requirements around it. But at the end of the day, you're starting to see you terms like payment for order flow , right? You're starting to hear these equity type , um, terms utilized more and more. So I think what what a firm can basically do is kind of start looking at some of the controls or some of the processes or some of the things that they have in place for equity order , uh, flow, as well as, you know, how they determine , uh, where orders get routed to the rationale for those decisions, addressing many deficiencies, right? From the standpoint of how would you do it in the equity order? Because I think that's where it's leading to. So I think, again, as Casey noted, regular and rigorous reviews, right? You can never review this too many times, but if you think about payment for order flow, you think about the different markets that are out there, right? All the different ATSs, right? Are you actually looking at everything that's out there under your policies and procedures, outline those different sources of data and provide , uh, information as far as different product types, right? So , uh, you evaluate a best execution on security, a little bit different than you would a mortgage backed security, right? And so all of those things being accounted for, but writing decisions, execution of equality , reviews, different order types, trading conducted, brilliant , both regular and extended trading hours as you brought some of those extended trading hours for certain products. Um, as you think about the international markets, right? And even fractional share, right? These are all things that again, typically are associated with equities and they're , you're starting to see them kind of bleed into the fixed income markets. Jeff , anything else you wanna add there?
Speaker 3:
Yeah, I was just thinking from the best practice perspective, best X isn't new . It's been here for equities and fixed income . But , but one thing that I know we could have done better when I was actually sitting on some of these committees was, was gathering metrics around the performance. Um, you have to be using a system nowadays to, to, to be generating exception reports and following up on it. Um, you need to make sure that desk owns it, that the head of trading owns it . It's not a compliance function, it's not a middle office function. The desk has to own it. But when you're using these systems, one thing to do is just get some metrics around it. You know, which markets are they accessing? Where are you having more flags or more exceptions posting? Um, is it a trader specific issue? Is it , uh, one of the ECNs? You're using something of that nature. If , if you're gonna look at best practices and potentially prepare for where the SE s e C wants to take this, I think that would be a good thing to do. It's been here for a long time by now. Everybody should have the , the quarterly committee reviews and the systems in place. It's just time to take it to the next level. So that's my 2 cents.