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News January 21, 2008 Issue

SIFMA Publishes Best Ex Guidance for Fixed Income Managers

Finally, fixed income managers have best execution guidance to call their own.

Last week, SIFMA’s Asset Management Group released its "Best Execution Guidelines for Fixed-Income Securities." The 25-page paper was intended to "fill the void in best execution guidance in the context of fixed-income securities," according to the group.

Perhaps the most notable aspect of the paper is an informative discussion of the best ex challenges unique to fixed income managers. For example, unlike equity trades, where there is ample pre- and post-trade data, advisers generally are not able to compare a particular fixed income transaction to a meaningful number of other transactions in the same security. Instead of posting widely-disseminated quotes, fixed income dealers tend to individually negotiate bilateral agreements. And while some post-trade data is available on the TRACE system, that data is generally limited to corporate bonds and, in any event, provides only historic data, rather than active bids or offers. The report also noted that fixed income securities tend to be more illiquid than equities, and holdings may be concentrated at certain market participants.

Having discussed the challenges, the report turns to guidelines. As it turns out, much of the actual guidance repeats the conventional best ex wisdom from the equity world, albeit with less of an emphasis on market data. However, the paper is well-written and comprehensive, and provides a number of specific tips from real-life fixed income shops.

The gist of the eight guidelines are as follows:

  • Firms should develop a best ex policy and procedures tailored to the firm’s operations and the types of fixed income securities in which it trades.
  • Firms should establish a best ex committee.
  • Firms should determine the extent to which it will review quantitative and qualitative pre-trade and post-trade information, keeping in mind the limits of this data for fixed income trades.
  • Firms should identify specific quantitative and qualitative criteria for selecting and evaluating counterparties.
  • Firms should consider and incorporate technological resources into their best ex process.
  • Firms should identify and address conflicts of interest.
  • Firms should use transaction reports to evaluate best ex, keeping in mind the limits of such data.
  • Firms should use post-trade market data to evaluate best ex, again, with the limits of that data in mind.

The report suggested three areas warranting additional study: best ex in the context of derivatives, international trading, and fixed income trades for ERISA clients.