Regulators, industry groups deadlocked over fixed-income concerns

IIAC President and CEO Ian Russell says that regulators aren’t being swayed by industry reports of thinning market liquidity

Regulators, industry groups deadlocked over fixed-income concerns
While President Donald Trump’s administration in the US has been moving to ease regulations for businesses and financial firms, there are many other areas where industry participants must lobby regulators to loosen restrictions. One example is the repo and corporate bond markets.

“One of the global industry’s key concerns is the erosion of liquidity in the repo markets and corporate bond markets, both in North America and Europe, and in regional markets around the globe,” said IIAC President and CEO Ian Russell in an open letter. “Discussions confirm that regulators are not convinced by the quantitative evidence and related analysis of a widespread liquidity problem in corporate bond markets.”

According to Russell, the impasse between the industry and the regulators relates to different appraisals of quantitative evidence, the impact of structural market changes like electronic trading platforms, and the illiquid nature of most bonds.

“[T]hinning liquidity in the repo and corporate bond markets could leave credit markets and institutions exposed to serious dislocations,” he said, citing external shocks that result in large adjustments in portfolio holdings and prices of fixed-income assets.

Another significant concern is the possible effect of regulations on market-makers. With returns in the fixed-income business being squeezed by pressure on trading spreads and capital costs, operations and capital deployment have been reduced. As market makers scale back, “[a]dequate liquidity now may prove inadequate in the event conditions deteriorate,” Russell said.

The Bank of International Settlements (BIS) is analysing the European repo markets, which is critical to funding for the European financial system and efficient-market-making in corporate debt securities. However, the Financial Stability Board (FSB) has not embraced proposals from the European Repo and Collateral Council of the International Capital Market Association.

Russell suggested that adjusting leverage and liquidity ratios and improving linkages across trading and clearing systems to access scarce collateral could address concerns in the repo markets.

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