Banks stick to hybrid model for fixed income

Study predicts banks will continue adopting agency-principal hybrid trading model to cope with the regulatory effects on fixed income liquidity.

Regulatory restrictions on banks will lead to more creating an agency-principal hybrid business model to allow brokers access to fixed income liquidity, according to a recent study.

As the buy-side seek to diversify the different types of liquidity pools they can access, GreySpark has predicted banks and non-bank liquidity providers could compete as market-makers.   

The study found “some banks are adopting so-called hybrid agency-principal business models for bonds and swaps trading that allow the banks to more efficiently provision for broker client access to fixed income liquidity.”

Increasing regulatory pressures across the global bond market have led to a transformation in methods of bond trading following a “shortage in government and corporate bond liquidity.”

Russell Dinnage, lead consultant at Greyspark, explained the new methods created to increase the velocity at which bonds can be traded off a bank’s balance sheet are already “showing early signs of success.”

He added: “The fixed income marketplace in 2016 is increasingly challenged by global regulatory pressures that are decreasing the profit that a bank can derive from government or corporate bonds trading.”

GreySpark has also predicted the corporate bond market will “spawn a larger and deeper retail market as a means of allowing buy-side firms an independent forum for transparent pricing, enabling more so-called client-to-client interactions”

Corporate credit and government bond exchanges are seeking to “diversify the range of different types of liquidity pools and buy-side and sell-side bond trading models that they cater to.”

Dinnage explained the market is “attempting to continue to seek profitability from a market structure that is increasingly not fit-for-purpose”

He concluded: “A range of new types of instruments may emerge in the future that are designed to reinvigorate the securitisation industry, which would change the face of the fixed income market forever.”