Buy-side firms are showing interest in trading fixed-income securities as part of client commission arrangements (CCAs) in order to pay for independent research, according to Jim Morrow, COO of Capital Institutional Services (CAPIS), a mid-tier institutional agency broker.
"We're being approached by clients that need to purchase research" and are looking to leverage fixed-income commission dollars, says Morrow, who adds that clients are looking to boost the funds available in CCAs to pay for research as commission dollars from trading equities decline. According to Morrow, the commissions can be used to pay fixed-income research firms, fixed-income analytic firms or systems such as Bloomberg. "There could be an analyst that helps them pick bonds or structure bonds, and they need to pay that analyst's firm," he says.
Some industry observers, however, say they haven't heard of trading fixed-income securities in a CCA program because bonds are traded on a principal basis as opposed to an agency basis. In order to trade fixed income as part of a CCA, they point out, the broker would need to quantify the mark-up to generate a commission credit.
In 1990, the SEC issued a clarification stating that in order to use soft dollars, there must be a transparent commission associated with the trade, explains Morrow. "It clarified that you could not acquire research through a mark-up or principal trade," he says. At that point, Morrow adds, CAPIS began trading fixed income on an agency basis "so the confirm will actually show a [commission]."
"Very few [brokers] do this," Morrow contends. "Probably only three or four trade fixed income in CCA programs."
Ironically, CAPIS' fixed-income business was relatively flat for the past five years because many of the pension plans are not accustomed to disclosed commissions, says Morrow. But this year CAPIS has seen an increase in demand for fixed-income trading in a CCA program, he adds. In fact, CAPIS' fixed-income trading is up about 60 percent this year through May, says Morrow.
When clients -- such as hedge funds, investment advisers or bank trust departments -- trade with CAPIS, they may call four dealers to get a price on a bond. "We ask them to make us one of their calls and just put us in competition," Morrow says. Then CAPIS will call five, 10 or 15 dealers to get a better price, he adds. "You're not paying a mark-up to do a fixed-income trade with us," Morrow insists. "Clients that didn't utilize CCAs in fixed income are asking the firm about doing this business."
For more on the expansion of CCAs into new asset classes and international equities, see "Client Commission Agreements Go Global and Multi-Asset-Class."