The National Association of Securities Dealers yesterday submitted plans for a junk bonds surveillance and quotation system to the Securities and Exchange Commission yesterday, but traders continue to question its effectiveness.
"The area where people are most concerned isn't going to be monitored," one trader said, referring to the distressed sector.
While most market abuses occur in that area, NASD's proposed system would focus at least initially on the 30 to 50 most active issues, the trader said. The association must increase the number of listings to be effective, the trader added.
Overall, however, the trader said he believed NASD's system would benefit the market and could lead to insider trading rules for the fixed-income market.
In a release announcing the submission of the plan to the SEC, NASD President Josehp R. Hardiman said the initiative "will enhance the ability of the NASD to surveil effectively activity in the high-yield debt market by requiring reporting of all transactions daily.
"Real-time quotations for the top 30 to 50 high-yield bonds could also improve liquidity for these securities," he added.
One trader was somewhat skeptical about the system, which is called the Fixed Income Pricing System, or FIPS.
"It won't work," he said, adding that the SEC will never be able to adequately monitor a negotiated market like the high-yield market in such a manner.
Bill Broka, vice president of trading and market services at NASD acknowledged yesterday that many traders are not thrilled with the idea because it changes the way they do business.
The NASD release says seeds for the new system were sown last year when the SEC asked self-regulatory organizations like NASD to develop a computer surveillance system for junk bonds. Over the past 16 months, NASD has worked with representatives from major brokers and dealers in the junk market to develop the network.
FIPS would provide real-time quotations for the top 30 to 50 high-yield issues. The system would also report hourly the high and low trading ranges and volume of transactions for the most actively traded high-yield bonds.
According to NASD's Broka not everyone who occasionally trades a listed issue would have to subscribe to the system. However, those who are constantly in the market with a listed issue would be determined to be dealers and must subscribe. Under the system, NASD members would have to report transactions in the listed securities within five minutes of a trade and report all high-yield transaction by day's end, he said.
The proposed system will be reviewed by the SEC and could be implemented early next year.
In other news yesterday, a judge sentenced 53-year-old Patricia Ostrander to two months in prison and fined her $100,000. The sentence follows her July conviction on an indictment charging her with accepting an unlawful gratuity from Drexel Burnham Lambert and failing to report it to her employer, Fidelity Management Research Co. in Boston.
Meanwhile, the Resolution Trust Corporation has trimmed its junk bond inventory to $211 million face value after concluding two sales drives begun June 1.
The agency's remaining junk inventory consists mainly of illiquid private placements and other bonds that cannot be sold currently because of legal restrictions or other entanglements.
The agency sold about $1.1 billion face amount of bonds through its high-yield Securities Sales Program, which ended Oct. 31. The RTC split its program into two sections, the "Bonds of Summer" dale, which began June 1 and the "Packged Sales" program, which began Sept. 15. Proceeds from the sales totaled about $504 million.
Congress established the RTC in August 1989 to "contain, manage, and sell" failed thrifts through managing and selling the institution's assets. Since 1989, the RTC has recovered about 65% of the total face value of the junk bonds it has sold.
In secondary trading yesterday, high-yields bonds ended unchanged to slightly better. Investment-grade bonds tracked Treasuries, moving 1/2 to 3/4 point higher.
TW Services Inc. issued $300 million of 10.875% senior notes due 2002 at par. The bonds are callable after five years at 105.4375 moving to par in 1999. Moody's Investors Service rates the offering B1, while Standard & Poor's Corp. rates it B-plus. Morgan Stanley & Co. lead managed the offering.
Digital Equipment late Monday issued $250 million of 7% notes due 1997. The noncallable notes were priced at 99.626 to yield 7.09% or 102 basis points over comparable Treasuries. Moody's rates the offering A2, while Standard & Poor's rates it A-plus. First Boston Corp. lead managed the offering.
Federal Home Loan Mortgage Corp. issued $100 million of 6.180% notes due 1997 at par. The noncallable notes were priced to yield 15 basis points over comparable Treasuries. Merrill Lynch & Co. managed the offering.
Multicare Companies Inc. issued $100 million of 12.50% senior subordinated notes due 2002. Noncallable for five years, the notes were priced at 97.244 to yield 13%. Moody's rates the offering B3, while Standard & Poor's rates it B-minus. Donaldson, Lufkin & Jenrette Securities lead-managed the offering.
Federal Home Loan Mortgage Corp. issued $100 million of 7.125% debentures due 2002. The noncallable debentures were priced at 99.647 yield 7.175% or 23 basis points over comparable Treasuries. Lehman Brothers managed the offering.
Norwest Financial issued $100 million of 6.50% notes due 200. The noncallable notes were priced at 99.705 to yield 6.57% or 54 basis points over comparable Treasuries. Moody's rate the offering A3a3, while Standard & Poors rates its A-plus. Merrill Lynch lead managed the transaction.
RICO Indictment Announced
Gary Alan Singer, former co-chairman of the Cooper Companies Inc.'s board of directors, was charged in an indictment yesterday in Manhattan Federal Court with violations of the federal Racketeer Influenced and Corrupt Organizations Act money laundering, mail, and wire fraud statutes, according to the U.S. Attorney for the Southern District of New York.
The indictment also charges Cooper Companies with violating federal criminal law, including the mail and wire fraud statutes.
Singer was co-chairman of Cooper Companies, which was engaged in the healthcare businesses, from 1998 until he took a voluntary leave of absence in May 1991, according to a press release from the U.S. Attorney.
"The charges relate to an extensive scheme on the part of Singer and others to "frontrun" speculative high-yield bond purchases by the Keystone Custodian Funds Inc., a group of mutual funds, the release says.
Such securities are commonly referred to as "junk bonds," the release says.