The UK’s Financial Conduct Authority (FCA) has thrown its support behind all-to-all solutions as a way to improve liquidity in the fixed income market.
Speaking at the FIX EMEA Trading Conference in London today, Edwin Schooling Latter, head of market infrastructure and policy at the FCA, said the regulator was “concerned about the potential impact of illiquidity when interest rates begin to rise.”
Regulators fear that a lack of liquidity, particularly in the secondary market for corporate bonds, could result in price falls far beyond those dictated by market fundamentals if large numbers of investors sought an exit from the market at once, something that could be triggered by rising interest rates or changes to government quantitative easing plans.
The FCA is also worried about a mismatch in primary issuance, which is buoyant, and secondary market trading.
In its clearest endorsement of new industry initiatives in the sector yet, Schooling Latter said: “It is logical and desirable to support all-to-all initiatives based on new technologies as one way to provide liquidity. However, we do not think the entire market will move towards trading on platforms and we want dealers and issuers to also consider what they can do.”
He also said it was important to look at why the UK market, in comparison to the US and other countries, had extremely low levels of retail fixed income investors. The share of assets held in equities among UK households is five times higher than that in fixed income.
“This is despite corporate bonds offering more predictable returns and lower levels of risk, provided issuers aren’t using overly complex covenants in their issues,” he added.
He said the FCA wants feedback on both vested interests in the market that could be distorting liquidity but also on how regulation might be contributing to a lack of liquidity in the secondary market. However, the FCA and Bank of England have ruled out any changes to prudential regulations, which they say are intended to reduce risks in the system.