ICMA calls for capital relief to encourage bond market making

ICMA stresses importance of market making in illiquid bond markets and urges capital relief to encourage the model.

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.