Buy-side must work harder to access bond liquidity, says ICMA

ICMA board member, Joanna Cound, explores how the buy-side should adapt to changing market structure in group’s quarterly report.

The International Capital Market Association (ICMA) has stated the buy-side must work harder and leverage technology to access liquidity in fixed income, according to the group’s recently published quarterly report.

Joanna Cound, head of public policy EMEA at Blackrock and a member of the ICMA board, explored how asset managers should adapt to a changing market structure.

She explained fixed income is in the process of evolving into a hybrid principal-agent market, “where banks continue to play a role in facilitating trades but market making is curtailed from pre-crisis norms - meaning the execution risk in trading increasingly falls to end investors.”

To access liquidity for end investors, the buy-side must work harder and find more ‘efficient ways’ of executing trades, she said.

Cound added leveraging technology and new trading analytics can enable asset managers to act as price makers rather than price takers, “hence building portfolios that are liquidity efficient even before trading commences.”

The bond market has seen a decrease in ratio turnover, despite an increase in market size and overall turnover against a backdrop of bond issuance, as issuers take advantage of low interest rates globally.

Cound explained this has led to market participants believing liquidity in fixed income markets has suffered, something regulators have taken a greater interest in over the last year.

In December, panellists at the 2016 Global Capital Markets Conference in London said future stress events could have far-reaching consequences for the bond market.

James Wallin, senior vice president of fixed income at Alliance Bernstein, explained: “The depth of the bond market is not there anymore and we’ve seen mini-stress since the crisis and we should not feel good about what we’ve seen.”

“We need to replace that pool of liquidity that we lost and we have not solved this problem. With the absence of a safety valve or some kind of relief, a huge stress event could have dire consequences.”