Corporate bond markets need more transparency – not less
Regulators should do more to promote pre- and post-trade transparency in corporate bonds
Reliable data is essential for electronic markets. In corporate bonds, it is hard to come by.
The prices dealers quote on electronic venues such as Tradeweb and MarketAxess are indicative and only valid for small-size tickets. The real market for institutional block trades tends to be far from the screen price. The lack of dependable data makes it difficult to agree prices and execute orders quickly, especially during times of market stress.
This was evident during the Covid-19 sell-off in March. As investors rushed to liquidate positions and raise cash, electronic trading appeared to break down. The proportion of bonds traded on the two main electronic platforms fell to 28% in March, from 33% at the end of 2019. At the peak of the volatility, traders reverted to negotiating deals on the phone or via electronic messaging, rather than executing on a platform.
The share of US bonds traded electronically on Tradeweb and MarketAxess has rebounded strongly since then, reaching an all-time high of 35% in August. This suggests traders generally prefer to execute electronically when markets are stable. Improving the quality of screen prices might help avoid another retreat from electronic trading in the next crisis.
Regulators don’t seem to have grasped the problem. In the US, most bond transactions must be reported to the Trade Reporting and Compliance Engine within 15 minutes of execution. In 2018, an advisory group convened by the US Securities and Exchange Commission recommended delaying this to 48-hours for the largest block trades. The US Financial Industry Regulatory Authority took up the proposal last year, arguing that it might make dealers more willing to do these transactions. The plan was put on hold after meeting opposition from several buy-side firms, including Vanguard.
Post-trade transparency is even worse in Europe. Transactions in bonds deemed to be liquid by the European Securities and Markets Authority are subject to a 15-minute reporting requirement. A recent Esma report revealed that only 0.21% of bonds met that test in 2018. The vast majority of trades are reported with a delay, which can be as long as four weeks in some countries.
Esma is reviewing the reporting requirements, but some regulators seem reluctant to push for greater transparency for fear that it may harm market liquidity.
Faced with regulatory reticence, some buy-side firms are trying to tackle the problem themselves. Traders at Pictet Asset Management compared the screen prices advertised by dealers to traded prices. After finding wide differences, they confronted dealers about the problem. “Once they realised we were watching and we were showing them this, their data improved rapidly,” says Carl James, Pictet’s global head of fixed income trading.
Members of the UK-based Investment Association’s fixed income committee have also discussed sending a joint letter to dealers calling for improvements.
These industry efforts may well yield results, and some are confident they will. But regulators should do more to help. Pre- and post-trade transparency is crucial for well-functioning markets. In corporate bonds, it is sorely lacking.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Our take
Hedge funds must race the clock to check their dealer-rule status
Working out whether a firm is caught by SEC registration requirement could take months
Filling gaps in market data with optimal transport
Julius Baer quant proposes novel way to generate accurate prices for illiquid maturities
Why Europe still awaits a private credit CLO
Tricky questions face managers that plan to launch the structure on the continent
The signs of tacit collusion in the dividend play trade
Game theory and real-world data point to a different understanding of how arbitrage in markets works
Decades of history says you can beat high inflation with quality
Factors such as momentum and value generally outperform the market irrespective of inflation, but new research suggests quality stocks are best when prices are rising rapidly
Esma faces tough task in implementing Emir 3.0
EU regulator must contend with tight timeframes and increasing workload without additional resources
Quants are using language models to map what causes what
GPT-4 does a surprisingly good job of separating causation from correlation
China stock sell-off will test securities firms’ risk managers
Regulatory measures to support stock market could add to risks facing securities sector
Most read
- Top 10 operational risks for 2024
- Top 10 op risks: third parties stoke cyber risk
- Japanese megabanks shun internal models as FRTB bites