Featured Product

    IOSCO Report Examines Liquidity in Corporate Bond Markets

    June 21, 2019

    IOSCO published a report that examines the factors affecting liquidity, under stressed conditions, in the secondary corporate bond markets. The report notes that changes in the structure of secondary corporate bond markets have altered the way that liquidity is provided in these markets. These changes result from things such as post-crisis regulations that have reduced the capacity of intermediaries to provide liquidity in secondary corporate bond markets, greater risk aversion on part of intermediaries, gradual introduction of electronic trading, and significant growth in the size of these markets resulting from central banks’ quantitative easing policies and low rates of return on other financial assets.

    The report is prepared by an IOSCO committee on emerging risks. The findings of this report are drawn from a review of the literature on liquidity in corporate bond markets under normal and stressed conditions, an examination of past episodes of stress in corporate bond markets, and discussions with a broad range of industry stakeholders. The key findings of the report include:

    • The structure of corporate bond markets has evolved since the financial crisis, driven primarily by changes in the behavior of market intermediaries and in the supply of and demand for corporate bonds.
    • A reduction in the capacity and desire of dealers to participate in corporate bond markets as principals could mean that future movements in bond prices in times of stress will be more acute than before.
    • Several characteristics of corporate bond markets should reduce the risk that strong price movements in bond markets will generate broader economic stress. These include effective liquidity management by issuers of corporate debt, reduced leverage and fewer leveraged players in the market than before the financial crisis, and the low frequency with which many corporations enter primary bond markets for financing.
    • The willingness, resources, and ability of market participants to provide sufficient demand-side liquidity to help stabilize markets will be critical factors in determining how corporate bond markets operate under stress.
    • Mutual funds are unlikely to be a source of either considerable selling or price volatility under stress, particularly those funds with managers who have instituted strong liquidity management processes, including plans for operating under stressed conditions.

    Overall, significant structural changes that have taken place in corporate bond markets since the 2008 financial crisis and the ensuing financial reforms have likely reduced the ability of traditional liquidity suppliers to lean against the wind. Intermediaries reduced their supply of liquidity and increased the number of agency-based transactions they conduct for their clients relative to the principal-based transactions, in both normal times and times of stress. On the positive side, asset managers, including managers of mutual funds, appear to recognize the problem and believe they have liquidity risk management arrangements that should allow them to handle an increase in redemption requests from their clients, without having to conduct ‘fire sales’ of their corporate bond assets.

     

    Related Links

    Keywords: International, Banking, Securities, Post-Crisis Regulation, Corporate Bonds, Market Liquidity, Liquidity Risk, IOSCO

    Featured Experts
    Related Articles
    News

    BIS Quarterly Review Discusses Developments in Fintech and ESG Space

    BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.

    September 20, 2021 WebPage Regulatory News
    News

    BCBS to Consult on Supervisory Practices for Climate Risks by Year-End

    The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards

    September 20, 2021 WebPage Regulatory News
    News

    OCC Identifies Operational Risk Deficiencies in MUFG Union Bank

    The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.

    September 20, 2021 WebPage Regulatory News
    News

    EC Rule on Contractual Recognition of Write Down and Conversion Powers

    The European Commission (EC) published the Delegated Regulation 2021/1527 with regard to the regulatory technical standards for the contractual recognition of write down and conversion powers.

    September 17, 2021 WebPage Regulatory News
    News

    ECB to Consider Climate Risks When Reviewing Collateral Framework

    In a response to the questions posed by a member of the European Parliament, the President Christine Lagarde highlighted the commitment of the European Central Bank (ECB) to an ambitious climate-related action plan along with a roadmap, which was published in July 2021.

    September 17, 2021 WebPage Regulatory News
    News

    SRB Provides Update on Approach to Prior Permissions Regime

    The Single Resolution Board (SRB) published a Communication on the application of regulatory technical standard provisions on prior permission for reducing eligible liabilities instruments as of January 01, 2022.

    September 16, 2021 WebPage Regulatory News
    News

    APRA Issues Further Guidance on Application of Securitization Standard

    The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to provide guidance to authorized deposit-taking institutions on the interpretation of APS 120, the prudential standard on securitization.

    September 16, 2021 WebPage Regulatory News
    News

    ACPR Publishes Corrective Version of RUBA Taxonomy

    The French Prudential Control and Resolution Authority (ACPR) published the corrective version of the RUBA taxonomy Version 1.0.1, which will come into force from the decree of January 31, 2022.

    September 15, 2021 WebPage Regulatory News
    News

    Nordea Bank and EIB Sign Agreement to Fund Green Projects in Nordics

    The European Commission (EC) announced that Nordea Bank has signed a guarantee agreement with the European Investment Bank (EIB) Group to support the sustainable transformation of businesses in the Nordics.

    September 15, 2021 WebPage Regulatory News
    News

    APRA Publishes FAQs on Capital Treatment of Overseas Subsidiaries

    The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to clarify the regulatory capital treatment of investments in the overseas deposit-taking and insurance subsidiaries.

    September 15, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7487