Concerns about corporate bond market liquidity may be overblown as new analysis did not find convincing evidence that liquidity has dried up, as some feared, according to a new International Organization of Securities Commissions (IOSCO) report published on Friday.
The report concludes that global securities regulators “did not find substantial evidence showing that liquidity in secondary corporate bond markets has deteriorated markedly from historic norms for non-crisis periods.”
Certain metrics, such as turnover ratio, dealer inventories and block trade size, might indicate lower liquidity, but most metrics show either mixed evidence of changes in liquidity, or some evidence of improving liquidity, the report suggests.
“By examining many different metrics in aggregate, IOSCO was able to see a more complete picture of market liquidity emerge,” the report says, indicating that there’s little evidence of a major decline in liquidity.
The IOSCO report also finds that “there is no reliable evidence that regulatory reforms have caused a substantial decline in market liquidity”; and that there have been meaningful changes to the structure of corporate bond markets, including changing dealer inventory levels, increased use of electronic trading and changes in the role of participants and execution models, such as dealers shifting from a principal model to an agency model.
The report notes that regulators found it challenging to analyze the state of bond market liquidity given differences in data collection methods and the scope, quality and consistency of data across various jurisdictions. As a result, IOSCO says that it is planning a study of data reporting and public disclosure requirements in the corporate bond markets around the world.
“The purpose of the transparency mandate will be to examine in detail the transparency regimes and regulatory requirements [and to] discuss in more detail the relationship between transparency and liquidity and the decisions regulators have made to address it (volume caps, delayed dissemination, etc.),” it says.
For example, ongoing efforts to improve bond market transparency in Canada are using both dissemination delays and volume caps to address concerns about the impact of enhanced transparency on liquidity.
Comments on the IOSCO report are sought by Sept. 30.