A report by BNY Mellon and Pershing, the provider of clearing, broker and trade services for financial institutions, advisors and asset managers, has found that the fixed income business is in a state of transition.

The report states that the corporate bond market in the US has almost doubled to $4.5 trillion since the start of the financial crisis in 2008, yet banks today hold just $50 billion of bonds compared with $300 billion pre-crisis.

Banks withdrawing from fixed income

With decreased revenues and decreasing liquidity, it's a market from which many banks are withdrawing. Basel III’s stringent capital adequacy ratios are having an impact, while new electronic platforms are increasing their presence. Since 2008, in fact, the boutique broker-dealer has been gaining ground and winning business from the big banks, which traditionally controlled liquidity in the market.

Smaller dealers are able to provide a more personalised service, although investment banks have not gone away and, as liquidity dries up as is currently the case, the banks are waiting to re-enter the market.

Challenge of MiFID II

However, complying with impending regulations, such as the Markets in Financial Instruments Directive (MiFID) II, will be a challenge that all participants have to overcome. Platforms will need to ensure robust pre and post trade systems are in place to meet (MiFID) II requirements.

This is the picture painted by the report titled European Fixed Income–Advent of the Platforms. 

Smaller players will carve out a role

Scott Coey, head of broker-dealer services EMEA at BNY Mellon, said: “With competition from new entrants, the large players are reconfiguring their models. Smaller players with niche areas of expertise will continue to carve out a role and fill a gap for asset managers who feel they are being neglected by the bigger banks.”