How US regulation can support evolving fixed income market structure

The following piece is a compilation of takeaways from our team based on discussions at the recent US FILS conference, where regulatory change and shifting market dynamics were leading topics.

Highlights

• Multi-protocol electronic trading is reshaping execution choice and reinforcing the need for a modern best execution framework.

• Richer data and streaming prices are enabling greater buy-side participation in price formation, challenging rules designed for traditional liquidity providers.

• Public and private credit convergence is driving demand for consistent pricing, valuation and disclosure frameworks.

• Derivatives, tokenization and AI are testing regulatory boundaries and reinforcing the need for strong investor protection.

• Targeted regulatory updates can reduce friction and improve efficiency while preserving market integrity.

Technology and structural innovation have expanded what is possible in fixed income for the buy-side. Electronic trading, richer data and greater visibility are enabling asset managers, institutional investors and hedge funds to transform from price-taking, buy-and-hold investors into proactive liquidity providers.

With daily fixed income trading volumes roughly twice those of equities, performance is consequential, and regulation is taking a more active part in the conversation. US policymakers are examining a wide range of issues, from Treasury clearing and private credit to transparency requirements and emerging technologies. The regulatory task is to stay at pace with evolution, focusing on targeted interventions that remove friction and improve outcomes where it matters most.

The question for the buy side is: where can regulation evolve to support more efficient, transparent and resilient fixed income markets?

In support of the price-making investor

The buy side has historically played the role of price taker rather than price maker in fixed income. Institutional investors today use limit orders in approximately 70% of equity trading activity, actively contributing prices. In fixed income, however, that figure remains below 5%, indicating minimal price making.

To help bring more buy-side firms directly into the pricing process, both the US Treasury and the SEC have encouraged all-to-all protocols that broaden participation in liquidity provision, particularly in less liquid conditions. Continued support for these models will be important as the market evolves.

At MarketAxess, in addition to the use of our Open Trading all-to-all protocol, we are seeing some sizeable institutional investors use our pricing tools and data to express prices directly. A key driver behind this trend is that price is becoming data. Real-time feeds and continuous data consumption are now common in credit, providing an infrastructure to assess value, evaluate liquidity, and contribute prices. Investors who can see conditions more clearly are better positioned to participate in it more actively.

Best execution frameworks need to reflect a multi-protocol environment

Today's fixed income landscape spans portfolio trading, RFQ, all-to-all trading and single-dealer workflows, each playing a distinct role in liquidity access. That breadth of choice is changing how buy-side firms pursue and demonstrate best execution as part of their overarching fiduciary duties. Existing regulatory frameworks were built around a dealer-centric RFQ model, where outcomes were assessed through a relatively narrow set of price comparisons and dealer interactions. In a multi-protocol environment, execution quality is shaped by streaming prices, trade analytics, and highly distributed liquidity sources.

As market data becomes more embedded in execution workflows, best execution is becoming more measurable and more data-driven. This creates an opportunity to revisit how execution quality is assessed and evidenced, so that regulatory standards better reflect the tools, data and execution protocols available to buy-side traders today.

Affiliate cross rule modernization could reduce unnecessary costs

Affiliate cross rules are a clear example of where legacy structure no longer matches reality.

Many asset managers operate multiple funds with different investment mandates. When a bond is downgraded from investment grade to high yield, current requirements force those transactions out into the open market, even though they could simply be moved to another fund within the same complex. This can increase trading costs and operational complexity, with firms effectively paying the spread twice despite the availability of pricing data and valuation tools that could support fair internal crosses.

Affiliate cross modernization is a high-impact, targeted change that could materially reduce transaction costs while using the transparency and pricing infrastructure that already exists.

Public and private credit convergence

Private credit has grown into a major asset class, with many buy-side trading desks now managing both public and private credit exposures. The two segments are converging through investment vehicles such as ETFs and closed-end funds that incorporate private assets alongside publicly traded securities.

Industry participants and regulators are focused on developing appropriate frameworks for pricing private assets, determining valuation frequency and disclosing holdings in ways that protect investors while supporting broader access to private assets.

The municipal bond sector offers a useful parallel. Although many municipal securities trade infrequently and can be difficult to value, we have developed robust pricing methodologies that support trading and investment activity. Similar advances in data, pricing models, public-market proxies and arbitrage relationships could help address transparency and valuation challenges in private credit.

For regulators, the opportunity is to enable consistent disclosure and scalable pricing frameworks that support integration across public and private markets without constraining product development.

Defining regulatory boundaries for new product innovations

Recent developments in derivatives, such as the approval of bitcoin perpetual futures, have intensified discussion around how far these structures could extend into broader capital markets, including fixed income.

Fixed income is fundamentally different from crypto in its role as core instruments for savings, funding and portfolio construction. Extending similar instruments into securities-linked products would raise important questions about leverage, suitability and retail participation.

The core issue is retail exposure. Highly leveraged, continuously funded products sit uncomfortably close to gambling-style behavior when combined with 24/7 access and seamless distribution. That creates a clear regulatory fault line around suitability and investor protection.

Regulation should ensure that innovation in product design does not move ahead of the protections that underpin investor confidence and market integrity.

AI is accelerating innovation while testing existing regulatory frameworks

AI is being embedded across fixed income trading and investment workflows, enabling new opportunities for automation, analysis and decision support. Regulators are becoming more comfortable with certain applications where firms can clearly explain how the technology operates and how outcomes are governed.

With the use of AI moving closer to investment recommendations and client-facing activities, questions are emerging around accountability and fiduciary responsibility. Regulators and industry participants alike should assess how established standards of care and oversight apply.

Firms adopting AI must ensure sensitive, proprietary and material non-public information is appropriately protected. The tools may be evolving, but expectations around data protection, confidentiality and responsible use should continue to apply.

Looking ahead

As fixed income evolves, regulation has to stay focused on what actually moves outcomes. The most effective regulatory updates are targeted and practical: modernized best execution standards, sensible reforms to the affiliate cross rule and continued support for buy-side participation in price formation. The goal is to keep friction out of the parts of the system where it no longer serves a purpose, and stay firm where investor protection depends on it.