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# The SEC Wants to Let Bond Funds Skip the Dealer Toll Booth
- URL: https://www.freemarketsreport.com/the-sec-wants-to-let-bond-funds-skip-the-dealer-toll-booth/
- Published: 2026-10-11T19:50:41.000Z
- Updated: 2026-10-11T21:13:14.000Z
- Description: The SEC proposed to let bond funds trade with sister funds again, skipping the dealer. The estimated saving is $173 million a year. The fine print on pricing and public data is where the real story sits.
- Author: Michael A. Gayed, CFA

**On Friday the SEC proposed to let bond funds trade with their own sister funds again, skipping the dealer in the middle. The headline number is $173 million a year in savings. The part I care about is quieter: the proposal names the pricing vendor as the referee, admits that the public will see less trade data, and leaves open whether the price of each cross trade ever gets printed.**[**1**](#fn-1)

## Key Highlights

- **The proposal:** The SEC proposed amendments on October 9, 2026 to Rule 17a-7, which lets a registered fund trade securities with certain affiliates. It would cover securities valued with observable (Level 2) inputs, which takes in most fixed income. Comments are due 60 days after Federal Register publication.[2](#fn-2), [3](#fn-3)
- **The savings:** The SEC estimates $173,018,571 a year in transaction-cost savings, about $89.8 million of it in corporate bonds, and calls the figure a lower bound. Stressed-market spreads from March and April 2020 would push it above $320 million.[4](#fn-4)
- **How badly it broke:** Average quarterly corporate-bond cross trades between mutual funds fell from about $6.24 billion before the 2020 valuation rule to about $0.85 billion after it, a drop of roughly 86 percent by my math.[5](#fn-5)
- **The price referee:** Funds could price a cross trade off their own next NAV or off one or more unaffiliated pricing sources, which the SEC says can include pricing services, dealer quotes and electronic trading platforms.[6](#fn-6)
- **The detail nobody is pricing:** The SEC's own analysis says cross trades produce no public trade data and could weaken price discovery. It proposes aggregate reporting only, and Commissioner Mark Uyeda asked whether trade-level reporting to TRACE or RTRS should be added.[7](#fn-7)

Let me say where I land before I earn it. I like this proposal. I also think it is half a reform, and the missing half is the one that matters most to anyone who believes in markets.

## A Rule Switched Off by Accident

Rule 17a-7 dates to 1966\. For decades, registered funds relied on it to trade both stocks and bonds with affiliates, which is exactly what it sounds like: the same manager sells a bond out of one fund and buys it into another, no dealer, no spread. In 2020 the SEC adopted a valuation rule, 2a-5, for a different purpose. That rule effectively restricted cross trading in most fixed income, even though the Commission said at the time that revisions to the cross-trading rule were under consideration.[1](#fn-1)

The compliance date was September 8, 2022\. Most bonds have been ineligible since.[8](#fn-8)

![Timeline from 1966 to October 2026: Rule 17a-7 adopted, valuation rule 2a-5 adopted in 2020, compliance date September 8 2022, ICI petition August 2025, ICE agrees to buy MarketAxess July 30 2026, SEC proposal October 9 2026](https://storage.ghost.io/c/be/1b/be1bb8f3-f534-4eb9-b00d-09ff49598e5f/content/images/size/w1000/2026/10/01_timeline.png)

A rule from 1966 lost most of its bond business to an unrelated 2020 rulemaking. Sources: SEC press release 2026-104[1](#fn-1); AltsWire[8](#fn-8); ICE press release[9](#fn-9).

The Investment Company Institute calls it a case of the SEC curtailing fixed-income cross trading "through an unrelated rulemaking".[10](#fn-10) I'd go further. This is the most common way rules hurt people. Nobody voted to ban the practice. A rule about something else did it, and savers paid the bill for four years without a single press conference.

The ICI's 2021 survey of 52 fund complexes counted more than $204 billion of fixed-income cross trades in 2020, saving funds and shareholders nearly $329 million. That was before the valuation rule landed.[8](#fn-8) Those savings did not vanish. They moved to the other side of the trade.

## What the Proposal Actually Does

Five moving parts matter.

**Eligibility.** Securities valued with Level 2 inputs come back in. Level 3 securities, the ones with significant unobservable inputs, and non-leveled assets stay out, although the SEC asks whether some Level 3 securities should be eligible.[8](#fn-8)

**Pricing.** A fund can use the value it will ascribe to the security in its next NAV computation that day. Or the adviser can set a price using one or more unaffiliated pricing sources and periodically review the reasonableness of those prices. "Indications of interest" and "accommodation quotes" do not count. If two funds cross at NAV, they must share valuation processes that produce the same price.[11](#fn-11)

**Best interest.** Before each trade, the adviser must determine the trade is in the best interest of the fund, separately for each fund on each side. A trade is not in a fund's best interest if the adviser could get a better outcome in the open market.[12](#fn-12)

**Oversight.** The chief compliance officer reviews every trade each quarter and reviews patterns annually, including the timing and price of any later sale of a bond bought in a cross trade. That is the anti-dumping check. It replaces the board's transaction-by-transaction compliance determination.[11](#fn-11)

**Reporting and timing.** Funds would report aggregate cross-trade value by asset class on Form N-PORT or N-MFP. Complexes with $10 billion or more get 12 months to comply after adoption, and smaller ones get 18.[11](#fn-11)

K&L Gates summed up the pricing change by saying data vendors are in. It also flags the real friction. Eligibility hinges on a GAAP concept, and a trader may have to decide in real time whether a bond qualifies.[3](#fn-3)

## The Money, and Who Used to Collect It

Here is the number again. $173 million a year, with corporate bonds at about 52 percent of it by my arithmetic, international fixed income next, then Treasuries.[4](#fn-4)

![Horizontal bar chart of the SEC's estimated annual savings from cross trading by asset class, led by corporate bonds at 89.8 million dollars, total 173 million dollars](https://storage.ghost.io/c/be/1b/be1bb8f3-f534-4eb9-b00d-09ff49598e5f/content/images/size/w1000/2026/10/02_savings.png)

Corporate bonds carry about half of the SEC's estimated savings. The agency calls the total a lower bound. Source: SEC Release IC-36358, Table 4[4](#fn-4).

The estimate carries real caveats, and the SEC states them. It excludes Level 2 equities, municipal bonds and BDC trades. The corporate-bond slice rests on the observed decline in cross-trading volume after the valuation rule, priced at transaction-cost spreads from a bond database. The other categories rely on an industry survey and assume the full reported volumes would return. And the release says plainly that "no direct data on actual cross-trade executions are available".[11](#fn-11)

So treat $173 million as an informed order of magnitude. I would not tattoo it on anything.

Now the other half of the ledger. A cost saved by a fund is revenue not earned by whoever stood on the other side. The SEC says internal crosses may avoid dealer labor, operational infrastructure and settlement, and it does not quantify the effect on dealers' revenue. It also notes that funds say dealers had become less willing to provide pricing information for internal crosses.[11](#fn-11)

For scale, MarketAxess, the electronic credit trading platform, reported trailing twelve-month revenue of about $870 million and operating profit of about $352 million through June 2026.[13](#fn-13) The SEC's entire savings estimate equals roughly a fifth of that revenue. I am not saying MarketAxess loses a fifth of its sales. The savings spread across every dealer and venue that touches fund flow, and nobody has disclosed what slice is theirs. I am saying the order of magnitude is big enough that an incumbent should be paying attention.

One incumbent is. We will get to that.

## Winners and Losers

**Winners:** Large multi-fund bond complexes. The SEC counts 303 registered fund families for fiscal years ending in 2025, 282 of which have two or more funds. Its analysis finds the practical opportunities are mostly in the biggest complexes, some holding 7,000 to 8,000 corporate bonds and more than 30,000 municipal bonds.[14](#fn-14) Savers in those funds win next. Atkins put it simply: "When executed appropriately, cross trades allow registered funds to avoid costs associated with open market trades and to then pass those savings on to investors".[1](#fn-1)

**Also winning:** Anyone who sells independent bond prices. The proposal needs an unaffiliated price on every vendor-priced cross trade, and the SEC lists pricing services first.

**Losers:** Dealers and platforms that live on the spread between a fund's sell and another fund's buy. And interval funds, tender-offer funds and BDCs, which hold the assets that stay out. Registered closed-end funds held about $242 billion, or roughly 38 percent, of their $637 billion in gross investments in Level 3 or non-leveled assets as of September 2025, against about 1.4 percent for mutual funds and under 0.1 percent for ETFs.[8](#fn-8)

Be careful with that list. The biggest winners are the biggest incumbents. A small manager with six funds has far fewer chances to match a sell with a buy, and the 12-month versus 18-month phase-in hands large complexes the head start. I'll take cheaper bond funds. I won't pretend the benefit is evenly shared.

## The Free-Market Read

Start with the best case against me, because it is a good one.

A cross trade is not a market trade. In a real trade, two parties with opposing interests agree on a price, and the disagreement is the quality control. In a cross trade, one manager sits on both sides. The same hand sets the price, and the same hand picks which fund gets the bargain. That is how cherry-picking and dumping happen, and Uyeda's statement names both as the misconduct the guardrails are meant to mitigate.[7](#fn-7) Someone who loves free markets should be suspicious of any trade where no one is on the other side.

I take that seriously. Here is why I still say yes.

First, the toll booth was never a market. When a fund needs to swap one bond for another, forcing it through a dealer so a spread can be collected is not price discovery. It is a tax, and the people paying it are retirees in target-date funds. The 2020 rule created that tax by accident. Undoing an accident is not deregulation for its own sake. It is repair.

Second, the safeguards are real. A pre-trade best-interest test for each fund. An outside price. A compliance officer who looks at every trade and at what happened to the bond afterward. Those are real guardrails, and each one is a person or a record someone can check.

Third, and this is where I part ways with the proposal: prices are information. Uyeda gives the example. A bond crosses at $98.00 when the prior Level 2 mark was $98.50, and that print would tell every other holder something useful. He asks whether trade-level reporting to TRACE or RTRS would help, and cites research that TRACE reporting lowered transaction costs for investors.[7](#fn-7) The SEC's own analysis admits that cross trades "generally do not generate publicly observable market data" and that less public data could hurt price discovery.[11](#fn-11)

So here is my comment letter, in one paragraph. Reopen the door. Then print every cross price to TRACE with a short delay. You get the savings and the signal. It is the single cleanest answer to the conflict-of-interest problem because it replaces trust with a public record. If you are a fund manager reading this, yes, I know you do not want that. That is the reason to want it.

This is the same SEC that proposed [six new ways around the wealth test](https://www.freemarketsreport.com/the-sec-just-proposed-six-new-ways-around-the-wealth-test/) and [detached a post-Madoff audit backstop](https://www.freemarketsreport.com/the-sec-just-detached-its-post-madoff-audit-backstop/) in the past week. The pattern is fewer mandatory intermediaries and more reliance on outside verification. I like the direction. I get nervous when the verifier is a private vendor nobody voted for. Which brings us to the idea.

## The Bear Case

I could be wrong about all of this, so here is where.

The savings may be smaller. The corporate-bond estimate depends on volumes that might not return, because funds spent four years building other workflows, and the cross trade is only available when one affiliated fund wants to sell exactly what another wants to buy. The SEC's 2,294 funds that reported reliance on Rule 17a-7 in 2025 show capacity and procedures, not actual trades.[14](#fn-14)

The conflict risk may be larger. Stress is when cross trades are most tempting and most dangerous, and the proposal says the best-interest test should weigh stressed conditions. A compliance officer is a person on a payroll, not an independent counterparty.

The final rule may differ. This is a proposal. Comments have not opened, the Federal Register date is not set, and the final text could narrow the pricing method or add trade-level reporting. And the transition period means nothing changes in practice until after adoption plus 12 to 18 months. Current conditions govern until then.[11](#fn-11)

## The Idea: ICE (Intercontinental Exchange)

Here is the name, and I'll be upfront about why it is not the obvious one.

The obvious trade is to short or avoid the dealer-side platforms that lose spread. I am not doing that. First, the SEC did not quantify the damage. Second, one of the leading credit-trading platforms is being bought for cash. On July 30, 2026, Intercontinental Exchange agreed to acquire MarketAxess for $167 a share in cash, a 33 percent premium to its July 29 close, at an enterprise value of about $5.7 billion, with closing expected in the first half of 2027.[9](#fn-9) MarketAxess closed Friday at $164.58, about 1.5 percent under the deal price by my math, so the market is treating it as a done deal.[13](#fn-13) There is no mispricing to find there.

**The ticker is ICE.** It runs exchanges, clearing houses, and a Fixed Income and Data Services segment that sells, among other things, evaluated bond pricing. ICE's own deal material says it brings reference data and evaluated pricing for over 3 million securities, and that the MarketAxess network gives it a direct channel to more than 2,100 institutional clients that consume ICE data indirectly or not at all.[15](#fn-15)

**The causal chain.** The proposal says a fund that cross trades off market must anchor the price to NAV or to unaffiliated pricing sources, with data vendors explicitly in. It requires a CCO to review every trade afterward. And the SEC is already asking whether trade-level prices should be reported publicly, which would add still more data to the system. Every one of those steps runs through data, and ICE sells data. So ICE is positioned on both sides of the same toll booth: it is buying the dealer-side platform that cross trading threatens, and it owns the pricing referee that cross trading depends on.

![Chart of ICE Fixed Income and Data Services quarterly revenue from 586 million dollars in Q3 2024 to 645 million in Q2 2026, with operating margin rising from 35.8 percent to 41.6 percent](https://storage.ghost.io/c/be/1b/be1bb8f3-f534-4eb9-b00d-09ff49598e5f/content/images/size/w1000/2026/10/03_ice_fids.png)

ICE's Fixed Income and Data Services segment grew revenue about 10 percent across the eight quarters shown while operating margin moved from 35.8 percent to 41.6 percent. Source: Perplexity Finance segment data[16](#fn-16); margin computed by The Free Markets Report.

**The data point.** Fixed Income and Data Services revenue was $645 million in the June 2026 quarter, up from $597 million a year earlier (about 8 percent) and $586 million in the September 2024 quarter. Operating income was $268 million, a margin of about 41.6 percent by my calculation. That segment is roughly 18 percent of ICE's three-segment revenue for the quarter, so I'm not pretending this rule moves the whole company.[16](#fn-16)

**The valuation.** ICE closed Friday at $156.19, about 11 percent below its 52-week high of $176.05, with a market cap near $87.7 billion and a trailing P/E of about 22\. On consensus estimates of $8.17 for 2026 and $8.88 for 2027, that is about 19 times and 17.6 times.[17](#fn-17)

**What the market may be missing.** Most people will read the MarketAxess deal as ICE buying growth in trading. I read it as ICE buying a hedge. If cross trading grows, some of the volume that would have flowed through the platform stays inside fund complexes, and the part that needs a price flows to the pricing business. If cross trading does not grow, the platform keeps its volume. ICE gets paid on either branch. I cannot show you how much of that is revenue, because no one discloses what a vendor earns per cross trade. This thesis is about shape, not size.

**Risks.** The rule is a proposal. The MarketAxess deal needs shareholder and regulatory approval and is financed entirely with new debt.[15](#fn-15) Other pricing vendors compete for the same cross-trade pricing. The final rule could favor NAV pricing and sideline vendors. And an exchange owner that also owns the main credit platform and the price referee is a consolidation story I would want antitrust reviewers to read closely. Pro-market does not mean pro-incumbent, and I would say that even if I owned the stock.

**What proves me wrong.** A final rule that restricts vendor prices. Fixed Income and Data Services revenue growth falling below the year-ago pace for two straight quarters. Or the MarketAxess deal breaking.

This is analysis, not a recommendation, and it is not a price target. Do your own work.

## What to Watch

Federal Register publication, which starts the 60-day comment clock. Whether the SEC's comment file fills up with requests for trade-level reporting. Whether any large bond complex says in public how much volume it would cross. And ICE's third-quarter report, where you should read the Fixed Income and Data Services line before the headline numbers.[18](#fn-18)

The market got a rule accidentally switched off, and the repair is coming. Whether it comes with a public price tape is the part I am watching.

## Sources

1. [SEC press release 2026-104](https://www.sec.gov/newsroom/press-releases/2026-104-sec-proposes-expanding-securities-eligible-cross-trading-registered-funds?ref=freemarketsreport.com) (sec.gov)
2. [SEC rule page, S7-2026-36](https://www.sec.gov/rules-regulations/2026/10/s7-2026-36?ref=freemarketsreport.com) (sec.gov)
3. [K&L Gates](https://natlawreview.com/article/united-states-time-get-cross?ref=freemarketsreport.com) (natlawreview.com)
4. [SEC Release IC-36358, Table 4](https://www.sec.gov/files/rules/proposed/2026/ic-36358.pdf?ref=freemarketsreport.com) (sec.gov)
5. [SEC Release IC-36358, Section III.C.1.a](https://www.sec.gov/files/rules/proposed/2026/ic-36358.pdf?ref=freemarketsreport.com) (sec.gov)
6. [SEC Release IC-36358, Section II.B.2](https://www.sec.gov/files/rules/proposed/2026/ic-36358.pdf?ref=freemarketsreport.com) (sec.gov)
7. [Uyeda statement](https://www.sec.gov/newsroom/speeches-statements/uyeda-100926-statement-proposed-amendments-cross-trading-rules?ref=freemarketsreport.com) (sec.gov)
8. [AltsWire](https://altswire.com/sec-cross-trading-plan-excludes-level-3-assets-held-by-interval-funds-bdcs/?ref=freemarketsreport.com) (altswire.com)
9. [ICE press release](https://ir.theice.com/press/news-details/2026/Intercontinental-Exchange-to-Acquire-MarketAxess-Creating-a-Premier-Fixed-Income-Marketplace/default.aspx?ref=freemarketsreport.com) (ir.theice.com)
10. [ICI](https://www.ici.org/ici-viewpoints/crosstrading-reform-unlocking-savings-and-efficiency-for-funds-and-investors?ref=freemarketsreport.com) (ici.org)
11. [SEC Release IC-36358](https://www.sec.gov/files/rules/proposed/2026/ic-36358.pdf?ref=freemarketsreport.com) (sec.gov)
12. [SEC Release IC-36358, Section II.D](https://www.sec.gov/files/rules/proposed/2026/ic-36358.pdf?ref=freemarketsreport.com) (sec.gov)
13. [Perplexity Finance](https://www.perplexity.ai/finance/MKTX?ref=freemarketsreport.com) (perplexity.ai)
14. [SEC Release IC-36358, Section III.B.2](https://www.sec.gov/files/rules/proposed/2026/ic-36358.pdf?ref=freemarketsreport.com) (sec.gov)
15. [Investing.com](https://uk.investing.com/news/company-news/ice-q2-2026-slides-record-results-57b-marketaxess-deal-unveiled-93CH-4800092?ref=freemarketsreport.com) (uk.investing.com)
16. [Perplexity Finance segment data](https://www.perplexity.ai/finance/ICE/financials?ref=freemarketsreport.com) (perplexity.ai)
17. [Perplexity Finance](https://www.perplexity.ai/finance/ICE?ref=freemarketsreport.com) (perplexity.ai)
18. [SEC rule page](https://www.sec.gov/rules-regulations/2026/10/s7-2026-36?ref=freemarketsreport.com) (sec.gov)

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