Although corporate bond markets have changed significantly in recent years, there’s no real evidence of a fundamental decline in bond liquidity, according to a new report from the International Organization of Securities Commissions (IOSCO) published on Tuesday.
Concerns about a possible deterioration in bond market liquidity have grown within the securities industry within the past couple of years, but the IOSCO report appears to debunk that fear, concluding that a “data-driven” analysis of corporate bond markets between 2004 and 2015 found “no substantial evidence showing that liquidity in the secondary corporate bond markets … has deteriorated markedly from historic norms for non-crisis periods.”
The IOSCO report acknowledges that the structure of corporate bond markets has shifted significantly in recent years due to several factors, including the development of new technology, the growth of electronic trading and changes in execution models and dealer inventory levels.
These markets remain fragmented among national and regional over-the-counter (OTC) markets, the report also finds, and it was difficult to collect useful data on bond trading “because most bonds are traded through decentralized, dealer-intermediated OTC markets.”
Despite these challenges, IOSCO was able to develop a comprehensive picture of bond market liquidity through an analysis of liquidity metrics, survey results from industry and regulators, roundtables with industry, and a review of academic, government and other research articles.
“While some of the relevant metrics (turnover ratio, dealer inventories, and block trade size) might indicate potential signs of lower liquidity, most metrics reviewed show mixed evidence of changes in liquidity (bifurcation of trading, average trade size, and average number of counterparties or market makers) or some evidence of improving liquidity (trading volume, bid-ask spreads, and price-impact measures),” the report concludes.
In the wake of this research, IOSCO has mandated a committee to review regulatory reporting and transparency in the corporate bond markets to examine “the relationship between transparency and liquidity and the decisions regulators have made to address it (volume caps, delayed dissemination, etc.).”
The IOSCO report adds that “the new mandate is also expected to be an opportunity for regulators to study current data reporting requirements regarding the corporate bond markets and the goal of collecting data that is comparable and useful on a cross-border basis, including for purposes of liquidity assessment.”
In Canada, regulators are in the process of implementing measures to enhance bond market transparency. As of July 1, the Investment Industry Regulatory Organization of Canada (IIROC) will be publicly reporting corporate bond trading data from all IIROC-licensed firms, subject to measures, such as volume caps and reporting delays, intended to address the industry’s concerns about the possible negative impact on liquidity.
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