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Tackling illiquidity in corporate bond markets

Trading innovations and developments in corporate bond markets were discussed during an event on financial innovation, held by the European Securities and Markets Authority (ESMA) on 16 December. The theme of the event was 'Innovation in a Capital Market Union: harnessing innovation to improve access to finance and spur investment'.

Corporate bond markets are a key funding source for companies but, like many areas of finance and banking, they are facing yet more regulatory change. Liquidity in corporate bond markets has also come under increasing strain in recent years. However, following the financial crisis, buyers have struggled increasingly to find sellers when they need them and vice versa, which has led to growing concerns over illiquidity. At the ESMA event, a panel of experts discussed the challenges the markets are facing and the spate of recent innovations that aim to help close the liquidity gap.

Debt in the corporate bond markets has risen from €0.8 trillion to €1.1trillion between 2010 and 2015. This has led to the growth of buy-side players coupled with a significant reduction in trading. According to the panel discussions, banks, buy-side firms and technology providers are looking at innovative ways to bring together potential buyers and sellers, in order to re-introduce liquidity into the markets. The following three initiatives to develop new trading technologies and electronic platforms were discussed by the panel:

  • cutting out or reducing the role of the middleman, i.e. the bank, between the buyer and seller, given that the buy-side holds up to 99% of inventory, according to some market estimates;
  • different trading protocols, for example, looking at trading methods used for equities, in a market that is driven by voice trading; and
  • improving the quality and breadth of pre-trade information made available to investors to help connect buyers and sellers.

Speakers at the event included Jean-Paul Servais, president of the Belgium FSMA and chair of ESMA’s financial innovation standing committee, Adrian Blundell-Wignall, special advisor at the OECD, as well as 20 expert panellists from both the industry and regulatory authorities.

Other topics discussed at the event were crowdfunding, distributed ledger technology and leveraged loan funds.

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