Financial markets’ participants have suggested regulators turn their attentions to the way bonds are governed in Europe and the US to improve transparency and efficiency in the way these instruments are traded in Australia.
The calls come in the wake of reported discrepancies around the disclosures big four bank ANZ made in the value of government bonds it traded in 2023. ANZ has disclosed to the market the Australian Securities and Investments Commission (ASIC) is looking into the bank’s execution of 10-year Treasury bonds by the Australian Office of Financial Management (AOFM). In a statement released in July this year, ANZ said it is cooperating with ASIC’s investigation.
In August last year, ANZ told AOFM it had submitted incorrect monthly secondary bond turnover data for the 2022/2023 financial year. The bank attributed the mistake to process and data extraction errors.
In a statement the bank said, “ANZ acknowledges this is an unacceptable failure. It is also investigating whether it should have reported this issue to ASIC earlier than it did and will engage with ASIC further on this matter.”
ANZ has said its internal audit team is reviewing governance and control frameworks and it is improving its data governance.
In light of ASIC’s investigation into ANZ’s reported disclosure mistakes around its bond trading, experts are suggesting ASIC explore introducing rules that govern bond trading in other markets. These include Europe’s Markets in Financial Instruments Directive II (MiFID II) and the US’s Trade Reporting and Compliance Engine (TRACE).
While these systems are not directly applicable to the Australian bond market, their underlying principles and mechanisms could be adapted or used as a model to enhance transparency in the local context.
This includes real time reporting and pre-trade transparency, requiring the publication of bid and offer quotes for certain types of bonds, which is a feature of MiFID II. Adopting a similar approach in Australia may help investors make more informed decisions by having access to the best available prices.
Additionally, standardising the format and content of trade reports, as done under TRACE, may make it easier to compare and analyse trade data across different platforms and market participants.
Implementing best execution policies in Australia, which happens under MiFID II, may encourage market participants to seek the best terms for their trades, which could lead to more efficient bond pricing.
It's important to note implementing any of these modifications would likely require legislative change and the cooperation of the Australian financial industry.
Paul W. Chin, head of investment strategy and sustainability at high grade-government bond manager Jamieson Coote Bonds, notes the Australian bond market is already subject to a well-defined and regulated framework.
“The reality is there needs to be balance in regulation and commercialism for markets to properly function. Imbalance on either end leads to poor outcomes,” he says.
Chin says, bearing in mind the full facts are still being uncovered, the ANZ bond episode underscores the importance of culture.
“Leadership shapes and defines culture, establishing what is deemed acceptable and not. The behaviours endorsed by leaders cascade down, as employees mirror the cultural norms set by those in leadership positions,” he says.
According to Chin, the situation demonstrates the importance of upholding rigorous compliance and risk management systems. He says it points to the need to maintain ethical standards to enhance reputation and trust and reduce the risks of fines, litigation and reputational damage.
“Ultimately, it seems like the regulatory bar for banks, insurers and superannuation plans is lifting especially with the implementation of the Financial Accountability Regime, which is designed to raise the responsibility and accountability of directors and senior executives. Being on top of these growing and evolving risks looks to be an ongoing challenge and moving feast,” he says.
Chin says considering how private credit markets have evolved since the aftermath of the global financial crisis there is arguably a void in regulatory oversight in fixed income.
“When evaluating investment opportunities in private credit, investors face immense challenges in making accurate comparisons. The variability across sectors, borrower size and quality and credit standards that any private credit manager has in lending to borrowers is indeed wide and requires extensive ongoing due diligence,” says Chin.
“Without central oversight in handing investment information asymmetries, the saying caveat emptor becomes even more germane. Ultimately, greater regulator power can only be a positive for investors by raising transparency and standards.
"At this stage, we observe many investors have been seduced by the promise of highly-attractive returns from private credit vehicles without properly understanding risks. Having higher regulatory oversight and involvement, versus self-regulation, would ultimately lead to higher confidence and greater financial outcomes for investors."
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