Week InReview

On Bond Market Liquidity

"In corporate bond markets, trading activity and average transaction costs have generally improved or remained flat. More corporate bond issues traded after regulatory changes than in any prior sample period. In the post-regulatory period, we estimate that transaction costs have decreased (by 31 basis points (bps), to 55.4 bps round-trip) for smaller trade sizes ($20,000) and remain low for larger trade sizes relative to the precrisis period (estimated at 5.7 bps round-trip for trades of $5,000,000, compared to 5.8 bps pre-crisis)."

"Dealers in the corporate bond markets have, in aggregate, reduced their capital commitment since the 2007 peak. This is consistent with the Volcker Rule and other reforms potentially reducing the liquidity provision in corporate bonds. It is also consistent with alternative explanations, such as an enhanced ability of dealers to manage corporate bond inventory, shorter dealer intermediation chains associated with electronification of bond markets, crisis-induced changes in dealer assessment of risks and returns of traditional market making, and the effects of a low interest rate environment. These alternative explanations are not mutually exclusive or necessarily fully independent of regulatory reforms, so distinguishing between these potential explanations from the market trends data is not possible."

From a 315-page report on access to capital and market liquidity issued by the SEC's Division of Economic and Risk Analysis
Fri Aug 11, 2017
Let's recap
In case you missed it . . .
The Securities and Exchange Commission has downplayed the impact of stricter regulation in financial markets, suggesting fears of a subsequent lack of liquidity in credit trading is overblown (Aug 10)
DOL seeks further delay in fiduciary rule
Agency seeking postponement until July 2019 for key provisions; industry groups oppose requirement to put customers first (Aug 9)

Climate reports may slow Trump's push to undo Obama-era rules
New data show need to keep emissions regulations, experts say; federally  back ed scientific research 'hard to dodge' in court (Aug 9)
Impact of regulations on liquidity unclear, SEC economists say; industry has long complained about Dodd-Frank, Volcker Rule (Aug 8)

By just about any measure, trading in Treasuries has never been more tranquil. Yet beneath the surface, an explosion of bets in futures is buffeting the $14 trillion market (Aug 8)
The Cyber Cafe
Cybersecurity news every Friday.
SEC examiners find cybersecurity problems at firms
SEC staffers discovered at least one cybersecurity issue with the "vast majority" of broker-dealers, investment advisers, and funds they examined between Sept. 2015 and Jun. 2016, a new risk alert said.

BIS pushes cybersecurity collaboration
The Bank for International Settlements said there is still much work to to tackle the international nature of cyber-risk which requires a collaborative response from governments, regulators and industry and a high degree of alignment across national regulatory frameworks.

NIST releases cybersecurity definitions for the workforce
In an effort to bring consistency when describing the tasks, duties, roles, and titles of cybersecurity professionals, the National Institute of Standards and Technology released the finalized draft version of its framework.
Quantifying effects of regs
No easy task, says SEC
(Aug 8) -- A new Securities and Exchange Commission report shows staff found it difficult to calculate the impact of the Dodd-Frank Act, Basel III, and other regulations on market liquidity and access to capital for investors, consumers, and businesses. The SEC Division of Economic and Risk Analysis (DERA) report said overlapping rule implementations, macroeconomic conditions, and the possibility that market participants changed their behavior without the regulations "significantly limit our ability to analyze whether specific regulatory reforms caused any particular changes." DERA also received "mixed" evidence for the effects of regulatory changes on market liquidity.
Watt worries about Fannie-Freddie profits
Potential for misunderstanding
(Aug 10) -- Mel Watt, director of the Federal Housing Finance Agency (FHFA) said he is worried about the potential for misunderstanding over the idea of allowing Fannie Mae and Freddie Mac retain a portion of earnings in a new "mortgage market liquidity fund" as a buffer against future losses. In a response letter to a National Association of Realtors proposal, the overseer of the mortgage-finance companies said he is "very concerned" about Fannie and Freddie's lack of capital, but is "sensitive to the prospect that whatever steps FHFA could take might be misperceived as either an effort to promote recapitalization and release of the enterprises or an interference with Congress' important work to advance housing finance reform."
Binge reading disorder
Hand-curated, chosen with love.
The warnings from history that Wall Street ignored
By August 2007 the financial system was in grave danger

Quants clamor for data causing soul searching at large banks
The insatiable demand for unique market data is putting banks in a tricky situation; banks look to comb internal information for investing clues

Block traders are strong-arming the tamest bond market ever seen
By just about any measure, trading in Treasuries has never been more tranquil. Yet beneath the surface, an explosion of bets in futures is buffeting the $14 trillion market