Blue Sky Compliance – Fixed Income

News surrounding the financial markets is often equity-focused, as the volatility and name recognition of stocks make for more interesting headlines.  However, today’s market professionals understand that fixed income markets dwarf equity markets in terms of size and importance. 

This paradigm is further evidenced when looking at OTC Market Group’s Blue Sky Compliance Data.  As Blue Sky rules for secondary trading apply to all securities not listed on a national exchange, our product covers key OTC fixed income products: Corporate Bonds and Equity Linked Notes along with the complete universe of OTC equities.  Within the Blue Sky Compliance Data set there are ~16K OTC equity securities and ~104K Corporate Bonds and Equity Linked Notes.

The breadth of the Corporate fixed income market underscores the importance of a comprehensive Blue Sky data set for compliance professionals.  The sheer size of the market makes manual monitoring extremely difficult and subject to human error.

To gain a better understanding of the fixed income market composition, and how that affects Blue Sky compliance data for secondary trading, it’s important to look at fundamental data components.

Market-wide

As noted above, the OTC Corporate Bond market is quite significant and has been expanding with issuance levels rising due to the low interest rate environment:

  • OTC Corporate Bonds & Equity Linked Notes: 104,821
    • Mean Number of Compliant Jurisdictions: 26

Grade

A key fixed income specific exemption currently made available by the majority of states is around the grade/rating of the security.  Securities deemed to be ‘Investment Grade’ are granted an exemption while ‘High Yield’ securities must avail themselves of other options.

From a Blue Sky perspective, this creates a clear line in terms of compliance between the two groups:

  • Investment Grade Securities: 26,304
    • Mean Compliant Jurisdictions: 43
  • High Yield Securities: 78,517
    • Mean Compliant Jurisdictions: 20

Due to this distinction, many compliance groups will limit solicitation/recommendations on high yield securities; however, as advisors and investors chase returns, the demand for high yield securities is increasing.

Security Type

The relatively low yields of standard Corporate bonds have driven demand for more hybrid products which can capture the upside of equity markets while providing the capital protection of fixed income.  This has manifested itself in an increase in the number of Equity Linked Notes over the past few years.  From a Blue Sky perspective, these securities tend to have a lower number of exemptions available due to their structure and respective rating/investment grade.

  • Corporate Bonds: 91,543
    • Mean Compliant Jurisdictions: 27
  • Equity Linked Notes: 13,278
    • Mean Compliant Jurisdictions: 17

There are of course many additional ways to classify and categorize the Corporate fixed income market, including: Convertible status, Coupon/Yield and Non-Profit status.  The following is an example of Blue Sky status for a Non-Profit corporate bond as it appears in Canari:

Conclusion

With more than 100K Corporate Bonds and Equity Linked Notes, compliance groups must focus on data- driven solutions in order to properly evaluate fixed income blue sky compliance, lest they risk being overwhelmed, or worse – unaware.

For more information on the analyses presented, or on OTC Market Group’s Blue Sky Compliance data product, please email marketdata@otcmarkets.com.

*Data as of Friday, January 22, 2021

Matthew Fuchs, EVP of Market Data, leads the product development, distribution and sales of market data at OTC Markets Group. Prior to joining OTC Markets Group, he served in a number of financial technology roles at the National Research Exchange, Bearing Point and Arthur Andersen. Matt received a BA from Columbia University

%d bloggers like this: