Monday, September , 2016 Stamford, CT USA — Regulators working to ensure the safety of investors must not lose sight of the central role that the fixed-income market plays in the global economy.
Weighing this balance between regulatory protection and market efficiency requires a deep understanding of how the market is constructed and how it operates. To help all market participants gain better insights into these critical topics, Greenwich Associates has published a new report, Understanding the U.S. Fixed-Income Market.
The U.S. fixed-income market is made up of an increasingly diverse set of market participants, trading venues, technologies, regulations, and incentives. That complex marketplace is governed by a regulatory framework that was strengthened significantly after the global financial crisis with the passage of Dodd-Frank and the establishment of new capital rules for banks, prudential regulation standards and other new rules.
As banks revamped their business models in response to these regulations—some of which created real disincentives to bank participation—the U.S. fixed-income market lost liquidity. Forty-one percent of the institutional fixed-income investors participating in a recent Greenwich Associates study say they face “extreme difficulty” executing trades bigger than $15 million. At the same time, these shifts have fueled market innovation, particularly in the form of rapid growth in e-trading. The share of notional fixed-income volume executed “on screen” has increased to 36% today from 18% in 2011.
“Regulators and market participants must share the same goal: To find the right mix of appropriate regulation and market innovation that ensures investor protection and market integrity, without impeding the market’s ability to serve its essential function,” says Kevin McPartland, Head of Research for Market Structure and Technology at Greenwich Associates, and author of the new report.
Drawing from the results of interviews with nearly 4000 fixed-income market participants including corporations, pension funds and asset managers, the new Greenwich Report defines and explains the history, products, trading processes and regulatory framework that make up the increasingly diverse U.S. fixed-income market. The report also examines fixed-income trading venues and processes, including a definition and analysis of market liquidity, and a close look at both existing electronic trading platforms and emerging venues including all-to-all trading.
“The demands of an ever-expanding base of borrowers, lenders and investors have driven growth and diversity in the fixed-income market,” Kevin McPartland says. “A firm understanding of how the market began, how it has evolved, the various ways it fuels the real economy, and how it is overseen is critical to helping guide it forward.”