The trade associations – namely, the Association for Financial Markets in Europe (AFME), BVI (German Investment Funds Association), Bundesverband der Wertpapierfirmen (bwf), the European Fund and Asset Management Association (EFAMA) and the International Capital Markets Association (ICMA) – have released a joint statement on behalf of their members active in the EU bond markets, including the sell-side, buy-side, and financial market infrastructures.

The associations noted that distinguishing between investment grade (IG) and high-yield (HY) corporate bonds is a key component to tap into greater transparency in more liquid bonds, while ensuring protection for those bonds.

Particularly, as overly prompt dissemination of trade information could lead to a negative impact on market liquidity.

“Having a distinction between IG/HY corporate bonds allows for more tailored transparency levels for instruments with different price volatility profiles,” the trade associations said in their joint statement.

The associations highlighted sophisticated bond markets outside of the EU for calibrating transparency for corporate bonds according to the credit rating of the issuer, adding that “not adopting a similar methodology would put EU corporate bond markets at a disadvantage globally.”

As a result, policy makers have been urged to ensure that the European Union will maintain its competitiveness in the global fixed income markets, alongside preserving and potentially expanding existing liquidity in EU bond markets, which in turn will continue to ensure issuers have an effective way to finance their investment needs.

“It is clear that there are precedents for using credit ratings, not just across jurisdictions but also under other EU regulations,” added the trade associations.

Credit ratings, which has been a criterion used by TRACE in the US for years, as well as the more recent UK adoption of credit ratings through the FCA, were noted by AFME as an approach that can “provide sufficient reassurance for regulators in the EU as well […] and can help achieve the goal of competitiveness of EU capital markets with other leading global financial centres.”

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Despite worries in the lead up to the monumental shift, many have managed to adapt their workflows to evade issues across the ETF market, securities lending and FX alike, while adapting to affirmation and central trade matching platforms to achieve straight through processing.

However, while many buy-side have hailed the migration as considerably smooth, there are some unexpected patterns emerging in how expensive it is to trade on certain days thanks to misalignment with other regions that have not shortened their settlement cycles, and this is leading to a lack of liquidity.

Presenting the Thursday conundrum.

Given that the settlement cycle is now shorter in the US trading volumes on a Thursday have dropped off significantly thanks to funding requirements that require brokers to fund a position for an additional three days on Friday, Saturday and Sunday given the slightly longer settlement cycle in Europe, the UK, and most of Asia Pacific.

The issue has been flagged by participants in various arenas, most recently on stage at the inaugural CMX conference held by the Finance Hive last week. When quizzed on their views of how the market was handling the transition to T+1, the issue around trading on a Thursday was raised several times by buy-side speakers.

Thursday volumes were noted as “muted” thanks to what some were claiming was an extra five basis point charge on trading for orders made on that day thanks to broker funding requirements over the weekend.

Jim Goldie

“The impact on a Thursday is that brokers need to fund for another three days. Additional funding over the weekend will manifest itself through wider spreads. A few bps matter,” said Jim Goldie, EMEA head of capital markets, ETFs and indexed strategies, Invesco.

“Brokers are pricing two different levels, one for T+1 settlement and one more expensive option for T+2 settlement. We’re in a suboptimal place with global misalignment. Depending on the day of the week or the settlement cycle used it’ll be more expensive to trade.”

“It’s not just Thursdays but the day prior too thanks to the funding issue. From a basket perspective, banks have been willing to do extended settlements but they charge for that. Somewhere in the system someone is picking up the tab. These are the complexities that go away with alignment.”

Highlighted by many is the fact that the industry is yet to go through a public holiday falling a Monday or impacting the end of a week in a post-T+1 environment and this will likely exacerbate many of the patterns we are seeing emerge.

“We’re in a wait and see phase. There is the Friday the 5 [July] issue but we’ll have to wait until September for a three-day weekend. There’s a hyperfocus now but what does business as usual look like? Will the SEC [US Securities and Exchange Commission] start to implement fines?” said Callum McPherson, dealing manager at Evenlode Investment, also speaking at CMX.

Elsewhere, several banks have reportedly sent notes to clients letting them know that they intend to pull liquidity currently being provided between five and six pm on a Friday NY time given that they have seen zero executions in this window since the shift to T+1 and given that everyone is now pre-funded.

Europe and the UK must move together

With the UK and Europe on a misaligned settlement cycle to the US, some have urged the UK to move on with its own shortened settlement cycle plans now that it is no longer part of the EU.

Callum McPherson

However, as noted by buy-side speakers at CMX, this would leave UK traders at the mercy of the same misalignment-related issues as seen currently between the pan-European markets and the US.

“The UK should move in step with the EU,” said Huw Gronow, head of dealing and implementation, Newton Investment Management.

This was corroborated by Goldie: “If the UK followed strict timelines it could be there by 2026. UK market structure isn’t that complicated. But the UK Government and regulator listened to the industry. We would see the same pain points in Europe. The UK and Europe need to move together otherwise it’s just more misalignment.”

The UK put together a taskforce in 2022, releasing its first report in March of this year that confirmed that the UK should move to T+1 no later than December 2027. Its final report will be published at the end of this year.

Meanwhile in Europe, the European Securities and Markets Authority (ESMA) is set to publish its own report at the end of this year, latest in January 2025, Nina Suhaib-Wolf, director market practice and regulatory policy at ICMA confirmed.

She added that there would be a public hearing on the subject on 10 July and that it had become a question of “how not if” in Europe.

Real time settlement

When asked about the benefits of real time settlement, speakers on stage at CMX were unanimous that both the UK and European markets should focus on the move to T+1 before beginning to tackle a move to T0.

Nina Suhaib-Wolf

“It isn’t something we have time to talk about. We’ve been preparing for T+1. T0 would remove a lot of legacy systems and the custodian function. The regulatory environment would need to change. We’ll get there after alignment on T+1,” said Goldie.

“If building the system from scratch now it would be like the digital asset system with instantaneous settlement. The final step will need to be blockchain related,” added McPherson. “The advantage of real time settlement would be that the investor gets their investment back the same day.”

So long as Europe and the UK maintain a misaligned settlement structure to the US, snags in the workflows of the industry will continue to show themselves. Many institutions have done well to accommodate the change – it’s smooth but it’s not optimal. The industry is also yet to experience a major liquidity event under the new regime and this will surely put it to the test and reveal any major cracks left unidentified.

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The study found that traders were forced to revert back to voice trading during the period as the market became too volatile and illiquid for dealers and liquidity providers to risk offering prices across electronic platforms. Some banks even shut down their algo trading completely at the time, while others opted to continue auto-quoting prices. 

Prices found on platforms were also unlikely to be executable, buy-side respondents told ICMA, and in some cases electronic request for quotes (RFQs) did not return quotes. As the volatility tightened its grip on markets during the crisis, bid offer spreads widened dramatically and banks providing principal liquidity began to retreat.

While the pandemic and lockdown sparked the market volatility which would cause electronic trading in bond markets to stumble, one head of trading for an asset manager based in Europe, who spoke to The TRADE on condition of anonymity, explained that the liquidity challenges are in fact inherent in fixed income trading.

“That is the nature of the market,” the buy-side head of trading says. “Fixed income markets in Europe are dominated by market makers and large banks, and essentially the liquidity is in their hands. The market participants pricing the business have to price it from their books, it’s kind of like trading with a risk desk.

“When we trade electronically we have many indicators but as markets get turbulent, bid offers widen significantly on the screens. It’s our role to then pick up the phone, not to give up on the electronic platform, but to check the pricing and see if we can get improvements on that price. That’s the nature of the trading business – all of us need to think more about picking up the phone and improving prices.”

ICMA’s study found that while many banks were able to continue providing liquidity and making markets, overall dealer capacity shrunk at the height of the volatility when it was most needed. Stricter capital rules and smaller balance sheets would have impacted dealer capacity, although ICMA also noted that internal bank policies aimed at reducing market making activities, and less experienced desks experiencing the surge in volatility could have played a part in the trend.

Speaking to The TRADE about the ICMA study, Mark Goodman, head of platforms at UBS and president of UBS MTF, says that it was reliance on a single method of generating liquidity in the market, mainly principal, that broke down at the height of the volatility.

“It was very difficult to operate in that environment, and the balance sheet restraints and risk limitations on banks means that if you were fully reliant on that source of liquidity, then it’s true you were probably not seeing firm prices on the electronic platforms,” Goodman says. “Instead, you needed to pick up the phone and speak with multiple dealers to get your trade done. It’s not that the technology didn’t work, we would argue that it’s actually you need more diversity in the market, rather than a simple client-to-dealer model.”

Goodman added that UBS saw 250 more firms dealing on the Bond Port trading platform since February, and buy-side participation soared 152% as traders sought to navigate the challenging liquidity landscape. In March and April, Bond Port was also top three in terms of volume executed in US dollar corporates.

“What we saw was clients looking for new ways to get their trades done, and that was clear in the numbers we saw on Bond Port. It wasn’t the case the buy-side was not able to find liquidity because algorithms and technology stopped working, the buy-side is not able to find liquidity period. That’s why traders are looking more to channels like Bond Port to get their trades done.

“Similar platforms and our own show what is important during these stress periods. It is not whether brokers have invested in algos, or whether algos work or not, it’s that brokers are, from a historical standpoint, relatively restricted on the balance sheet.”

ICMA’s report found that e-trading volumes reduced dramatically during the period compared to voice, but many bond trading venues reported record volumes at certain points during the crisis. At Liquidnet, average trading volume on its fixed income platform jumped by around 130% in March to April compared to January to February. During the same period, buy-side daily liquidity increased roughly 60%, and the number of daily buy-side blocks grew 25% to more than 650. 

“During the higher market volatility conditions of March and April, we saw a spike in volume, liquidity, and number of blocks at Liquidnet,” says Constantinos Antoniades, global head of fixed income at Liquidnet. “As market conditions deteriorated and bid/offer spreads widened, finding natural liquidity from buy-side counterparties, anonymously, and inside the bid/offer spread became advantageous and resulted in large transaction cost savings and in many cases access to block liquidity not accessible elsewhere. Our customers were able to leverage our deep liquidity and network for their liquidity needs, at a time where they need such liquidity the most.” 

Senior buy-siders agree that venues such as Liquidnet and MarketAxess proved significant in plugging the liquidity gap left by the banks. However, the buy-side European trading head adds that while the gap was noticeable, some investment banks held strong throughout the crisis and had strong interaction with the buy-side in terms of liquidity provision. 

“MarketAxess and Liquidnet offer an alternative method of providing liquidity,” the trader says. “It was interesting to see we were able to trade RFQ with the broker of MarketAxess on the platform, MarketAxess Capital Ltd., because they represent anonymous liquidity from different buy-side traders.

“We actually traded more that way during the period. The anonymous trading enables all-to-all buy-side trading, which plugged the gap left by some of the large investment banks that were not quoting as competitively as they used to. We’ve seen some banks with less appetite for risk and quoting business, but others kept strong.”

Rick McVey, CEO of MarketAxess, told analysts on the firm’s first quarter 2020 earnings call that the Open Trading system, an all-to-all platform that allows buy- and sell-side firms to connect anonymously through a central network, saw a record 900 firms provide liquidity during the period, with a majority of 700 being asset managers. Open Trading average daily volume surged 53% year-on-year in the first three months of 2020 to a record $3.4 billion.

“We did see asset managers taking advantage of opportunities when there was heavy selling in the market, and we saw dealers taking advantage of using the platform to take liquidity when they needed to reduce risk. We think that this as an important quarter in terms of the advancement of all-to-all trading.”

ICMA’s report also outlined the protocols that proved more popular with traders as it became more difficult to find three or more quotes, which is often required under internal best execution policies, including the all-to-all RFQ functionality, trading in dark pools and portfolio, or program, trading.

A separate report from Greenwich Associates stated that anecdotally, some investors have found portfolio trading a useful way to adjust their portfolios during the crisis, because they can mix bonds that are easier to trade with ones that are more difficult to execute.

Speaking to The TRADE in March, fixed income platform Tradeweb also revealed it had seen a steady increase in the number of clients adopting portfolio trading globally to increase certainty of execution on the whole basket. The number of daily line items executed via portfolio trading at Tradeweb surge more than 100% in March compared to the first two months of the year.

However, the research from Greenwich Associates suggests that despite advances in technology, portfolio trading remains a largely manual process, and a large portfolio trade could increase risks around mandatory buy-ins under the Central Securities Depository Regulation (CSDR) should a single trade fail. More than half of European buy-side traders respondents told Greenwich that the CSDR rules would harm liquidity in fixed income markets.

Multiple buy-side trade associations and industry groups have warned regulators of the potentially detrimental impact of the rules, particularly the mandatory buy-in regime for failed trades. Recently the UK confirmed it would not adopt CSDR, including the buy-in regime, but UK-based firms will still have to adhere to the buy-in regime for all European transactions that are settled with European central securities depositories.

ICMA has been outspoken about concerns with the buy-in regime under CSDR, urging regulators that the move will have a detrimental impact on bond liquidity. Its report also noted a spike in settlement fails at the peak of the volatility.

“When engaging with large portfolio trades in volatile markets, you must pick up the phone every time and check the pricing with the broker,” the buy-side trading head says. “It’s not sufficient to do that on a platform – you need to have a conversation and from that we may remove some lines that the broker has flagged as potentially failing. If I believe the price is higher than the historical bid offer I have in my transaction cost analysis (TCA), I might challenge the broker.

“That’s particularly interesting because when you do that, you mitigate the risk of settlement failure. I think portfolio trading can help the fixed income industry tackle the settlement issue. From my perspective, it’s a strong incentive to flag the line that could cause potential problems. There are large investment banks that decided in their pre-trade module to add columns that indicate the probability of settlement failure, whether that probability is high or low. That is really useful. It helps us fine-tune, change or amend the list that will finally be traded.”

Summarising ICMA’s report, Martin Scheck, ICMA chief executive, said the crisis has provided a clear reminder that despite increasing electronification of trading over the last few years, the role of market-makers in creating liquidity remains at the core of the secondary markets. Reducing the ability of market-makers to provide this will inevitably impact market liquidity and efficiency, especially in times of market stress.

The post What happened to e-trading in fixed income? appeared first on The TRADE.

Traders were forced to revert back to voice trading during the period as the market became too volatile and illiquid for dealers and liquidity providers to risk offering prices across electronic platforms, ICMA said.

Some banks even moved to shut down their algo trading completely at the time, while others opted to continue auto-quoting prices, although with much wider bid-offer spreads. However, buy-side respondents told ICMA that prices found on platforms were unlikely to be executable, and electronic request for quotes (RFQs) did not return quotes.

E-trading volumes reduced dramatically compared to voice, but many bond trading venues reported record volumes at certain points during the crisis. At the same time, other protocols proved more popular with traders as it became more difficult to find three or more quotes, which is often required under internal best execution policies.

All-to-all RFQ functionality, trading in dark pools and portfolio trading were all highlighted as being more popular at the peak of the crisis, alongside ‘processed trades’ which are typically negotiated over the telephone or chat systems before being posted on a platform for settlement and reporting.

ICMA’s study found that while most banks were able to continue providing liquidity and making markets, overall dealer capacity shrunk at the height of the volatility when it was most needed.

Stricter capital rules and smaller balance sheets may have impacted dealer capacity, although ICMA also noted that internal bank policies aimed at reducing market making activities, and less experienced desks experiencing the surge in volatility, could have played a part in the trend.

“The Covid-19 crisis would appear to have provided a useful opportunity to strip-back the layers of technological development of the past decade to reveal its intrinsic core: a dealer-based market, where market makers remain the primary source of executionable prices, and liquidity is reliant on their capacity to assume and recycle market risk,” the study said.

Settlement fails also surged at the peak of the volatility, prompting further concerns about the incoming CSDR mandatory buy-in regime in Europe and its impact on the market if the rules were in place during the crisis. ICMA has been outspoken about concerns with the buy-in regime under CSDR, urging regulators that the move will have a detrimental impact on bond liquidity.

“This crisis provides a clear reminder that despite increasing electronification of trading over the last few years, the role of market-makers in creating liquidity remains at the core of the secondary markets. Reducing the ability of market-makers to provide this service will inevitably impact market liquidity and efficiency, especially in times of market stress,” Martin Scheck, ICMA chief executive, commented.

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Research from the International Capital Markets Association (ICMA) found that while demand for repo increased significantly as brokers sought to gain access to cash and high-grade collateral, dealers’ capacity to intermediate that demand was constrained and limited access to many firms that needed it.

It also found that larger-sized banks increased their balances during the crisis, but many smaller banks reduced their repo footprint, in some cases dramatically.

“In the exceptionally stressed conditions experienced in February and March this year the repo market continued to perform relatively well, while showing some signs of strain in the face of greatly increased client demand,” said Gareth Allen, chair of ICMA’s European Repo and Collateral Council (ERCC).

Its sample data showed an overall increase of repo outstandings of about 8% from December 2019, but a median adjustment of -4% across the sample.

At the height of the crisis, firms were particularly challenged with meeting increased margin calls as asset prices plummeted and markets became increasingly volatile, putting huge pressures to find and post acceptable collateral.

Earlier this week, the European Central Bank (ECB) adopted temporary measures, including the acceptance of junk bonds as collateral, to mitigate the effect of the economic crisis on collateral availability due to possible rating downgrades. The measures come amid fears that a sudden wave of credit downgrades of securities and bonds as a result of the crisis would cause a shortage of acceptable collateral.

During the height of the crisis in mid-March, the New York Federal Reserve made available up to $1 trillion of loans in the repo market for a week.

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The Investment Association (IA) and the International Capital Market Association’s (ICMA’s) Asset Management and Investors Council (AMIC) representing asset managers in Europe penned a letter to the European Commission requesting a different approach to introducing the requirements, specifically the controversial mandatory buy-in provision.

Both trade groups urged the European Commission to undertake a ‘robust market impact’ assessment of the buy-in regime before it is rolled out across Europe in early 2021, and in the absence of such an assessment, they have requested cash bond markets be excluded from the buy-in regime, to allow for close evaluation of the rule’s impact on liquidity and market pricing.

“Our members feel that such a cautious approach to phasing-in the mandatory buy-in requirements, based on the careful assessment of market impacts, will ultimately be in the best interests of investor protection, market stability, and the goals of the capital markets union,” said the IA and ICMA AMIC’s letter to the European Commission.

Initiating a buy-in against a failing counterparty will become a legal obligation under the Central Securities Depository Regulation (CSDR), with limited flexibility on timing to complete the process. This allows market participants to manage settlement risk in the case of failed trades, as the buyer goes to market to source the securities from another party. The payment of the difference between the buy-in price or cash compensation must also be made by the failing trading entity. Buy-ins have typically been used with discretion as they can create unpredictable costs.

ICMA and the IA, alongside various other buy- and sell-side trade associations, have been vocal in their concerns about the buy-in regime, specifically the potentially ‘devastating’ impact on bond market liquidity and increased costs of trading.

“Liquidity is already very challenging and getting even more so,” ICMA said, summarising buy-side comments on the regime as part of a study in November. “This regulation, in its current form, is likely to mean that banks will not short bonds. This would have a devastating impact on market liquidity, function and asset managers’ ability to service their clients effectively. It is worrying that many in a front-office, markets-facing position know nothing or very little about this impending regulation.”

Earlier this month, multiple trade groups, including the IA and ICMA, also wrote to the European Securities and Markets Authority (ESMA) calling for a delay to the mandatory buy-in regime until its effects are understood more clearly. They suggested replacing the mandatory nature of the buy-in with an optional right of the receiving party to pursue a buy-in in the event of a non-delivering counterparty.

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In a joint letter to the European Securities and Markets Authority (ESMA), the collection of industry bodies called for a phased-in approach to the settlement discipline regime (SDR), as well as a deferral of mandatory buy-ins.

Buy-ins, which are typically used at discretion as they can create unpredictable costs, are used for market participants to manage settlement risk in the case of failed trades, as the buyer goes to market to source the securities from another party.

Initiating a buy-in against a failing counterparty will become a legal obligation under the Central Securities Depository Regulation (CSDR), with limited flexibility on timing to complete the process. The payment of the difference between the buy-in price or cash compensation must also be made by the failing trading entity.

The industry’s letter was co-authored by industry groups consisting of the Association for Financial Markets in Europe (AFME), the Investment Association (IA), the International Capital Market Association (ICMA), the Alternative Investment Management Association (AIMA), and the International Securities Lending Association (ISLA), among others.

While the letter supports the rules to drive greater settlement efficiency, the consensus among both buy- and sell-side firms is that the mandatory buy-in regime will have significant negative implications on both trading and liquidity across asset classes.

“It [buy-ins] will negatively impact the efficiency of European capital markets, leading to greater costs and barriers to investing in European securities,” the letter said. “Mandatory buy-ins are expected to lead to wider bid-offer spreads in the cash markets, reduce market efficiency and remove incentives to lend securities in the securities lending and repo markets, and may ultimately favour the settlement in non-EU CSDs of less liquid securities.”

To help ease the impact of the rules on market participants, the groups are urging ESMA to only introduce cash penalties on failed settled trades once market infrastructures, banks and their clients have built and test the required new messaging and technology.

They also called for a “deferral of the mandatory buy-in regime until the effects of penalties and other measures (e.g. prompt allocation/confirmation processes) to promote settlement efficiency are implemented”.

The letter added that the European Commission should undertake an in-depth impact analysis on the buy-in regime during this period, and also proposed a replacement of the mandatory nature of the buy-in with an optional right of the receiving party to allow a buy-in of a non-delivering counterparty.

“We support the imposition of a penalty regime under CSDR as an important step towards improving settlement efficiency in European capital markets. However, we continue to be concerned that the impact of a mandatory buy-in regime will have negative consequences that are damaging to market liquidity and efficiency and restrict the growth of capital markets in Europe,” the groups explained. “We respectfully request the authorities to consider a cautious, phased-in approach to ensure the successful implementation of the cash penalty regime and reconsider the mandatory nature of the buy-in.”

A study from ICMA in November last year found the majority of asset managers and pension funds surveyed expect a negative impact on bond market efficiency and liquidity as a result of the rules, when they come into force later this year.

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A majority 75% of asset managers and pension funds expect a negative impact on bond market efficiency and liquidity when the buy-in regime comes into force in 2020 under the EU Central Securities Depositories Regulation (CSDR), according to a study from the International Capital Market Association (ICMA).

Buy-ins, which are presently used at discretion as they can create unpredictable costs, are used for market participants to manage settlement risk in the case of failed trades, as the buyer goes to market to source the bonds from another party.

Initiating a buy-in against a failing counterparty will become a legal obligation under the CSDR regime, with limited flexibility on timing to complete the process. The payment of the difference between the buy-in price or cash compensation must also be made by the failing trading entity.

ICMA found that the buy-side is particularly concerned about bearing the increased costs of widening bid-ask spreads and decreased liquidity, which may come about as liquidity providers adapt to the regime. It was highlighted that offer-side pricing across fixed income could be negatively impacted as liquidity providers adapt to the regime.

Specifically, ICMA said bid-ask spreads of all bond sub-classes are expected to more than double, with covered bonds and illiquid investment grade credit seeing the biggest impact. For absolute price, the impact is most notable at the lower end of the credit spectrum, with significant increases for emerging market, high yield, and illiquid investment grade corporate bonds.

“Corporate bond markets rely heavily on liquidity providers shorting bonds that they do not own. This has always been the case. Liquidity is already very challenging and getting even more so,” ICMA said summarising buy-side comments on the regime. “This regulation, in its current form, is likely to mean that banks will not short bonds. This would have a devastating impact on market liquidity, function and asset managers ability to service their clients effectively. It is worrying that many in a front-office, markets facing position know nothing or very little about this impending regulation.”

Other comments from buy-side participants included concerns around solving disputes on the mandatory buy-in and cash compensation price, the difference in pricing between quotes depending on where trades are settled, and the ability for market makers to manage balance sheets.

The study concluded that the industry has low awareness of the new measure, which will impact bonds settled in Euroclear, Clearstream and other central securities depositories within the European Union.

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A former head of fixed income at BNP Paribas has joined the International Capital Markets Association (ICMA) as its new chairman.

Martin Egan was elected to the position this week and is replacing Spencer Lake, formerly at HSBC, in the role.

Egan has since been promoted at BNP Paribas and is currently global co-head of primary and credit markets, having been with the bank since 2001.

Prior to that, Egan worked at Credit Suisse First Boston as a director and syndicate manager for eight years and has also spent time with UBS and JP Morgan in roles linked to debt issuance.

Several firms have also been elected to the ICMA board, including Allianz global Investor, Morgan Stanley, Barclays Capital Securities and UBS.

ICMA currently has over 500 member firms from almost 60 countries and provides recommendations for the issuance, trading and settlement in fixed income markets. 

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Regulators and authorities should consider less stringent capital charges for banks and broker-dealers providing market making services for credit markets.

The International Capital Markets Association (ICMA) explained market makers provide an economically important and socially useful service, in response to the European Commission’s Capital Markets Union mid-term review.

“Given the heterogeneous and inherently illiquid nature of credit markets, the market-making model is the optimal, and perhaps the only viable, source of true market liquidity,” ICMA said.

ICMA cited its study on liquidity in corporate bond markets, which found market making cannot be replaced by the market-led initiatives recently launched to deal with the ‘potential liquidity crisis’.

The response explained banks and broker-dealers’ face multiple pressures hindering their capacity to provide market making for bond markets, but the increased cost of capital is the single biggest constraint.

“Policy makers and regulators should at the very least consider the possibility for less stringent capital charges related to this activity, including associated hedging and financing,” ICMA said.

The European Commission launched its Capital Markets Union mid-term review in January this year and urged market participants to provide feedback on the current regulatory framework.

“Now, we want to move faster and be more ambitious. This mid-term review consultation will help shape the next phase of our work to build a single market for capital in Europe,” said Valdis Dombrovskis, vice president at the Commission. 

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