'Unprecedented transformation' of broker-dealer model spells liquidity threat for bonds

Growing regulatory pressures

Corporate bond markets can no longer rely on the broker-dealer model to provide liquidity, as it is becoming more difficult for them to hold fixed income positions for long periods of time in light of stricter regulatory requirements, according to Andy Hill, senior director at the International Capital Market Association (ICMA).

Hill said the bond market is going through an "unprecedented transformation", which is affecting the broker-dealer community, while new regulation - including MiFID II - weighs on the asset class. "The broker-dealer community is having to think differently about how they provide liquidity; they cannot warehouse positions, as there is less capital they can apply to trades, less ability to hedge, and it is more expensive to fund. We cannot rely on the broker-dealer model in the same way to provide the liquidity we need," he said. While broker-dealers had been able to hold positions for ...