Concerns are growing that secondary markets for European bonds have become critically impaired and are no longer able to function effectively, according to a study from the International Capital Market Association (ICMA).
This has been widely attributed to the unintended consequences of banking regulation and “extraordinary monetary policy”, said ICMA.
Broader concerns about increased market volatility, frozen capital markets, risks to economic growth and another financial crisis were also raised by the survey.
Intermediaries, chiefly banks and broker-dealers, are responding to these concerns by changing their models, according to ICMA.
“Liquid and efficient capital markets support economic activity, growth, and jobs,” commented Martin Scheck, ICMA chief executive.
“It is the responsibility of market providers, investors, issuers and regulators to ensure that this vital function is not compromised’’.
As a result of more active capital allocation within the banks, the survey also noted a shift to holding smaller quantities of bonds in inventory, but seeking to increase turnover through “smarter, more active trading” on an agency basis.
In terms of regulation, ICMA’s survey found that there is a high level of concern from both intermediaries and investors, particularly the Markets in Financial Instruments Directive II.
While many see improved transparency as a good thing, there is a worry that too much transparency could cause market liquidity to deteriorate further.
