Quote of the Week

"I spent last Friday at the Notre Dame conference on current topics in financial regulation, at which there was a certain amount of worrying about bond market liquidity. For instance, Jens Dick-Nielsen presented a paper on 'the cost of immediacy for corporate bonds,' and Stacey Jacobsen presented one on 'capital commitment and illiquidity in corporate bonds, both of which try to answer the question: If bond market liquidity has gotten so bad, why doesn't it show up in any statistics about bid-ask spreads, price impact, etc.? 

One short answer is that it does show up if you know where to look: in measures of how much capital dealers will commit to trades, and of how much funds pay to access immediacy around index-drop events. 

Also Itay Goldstein presented on 'investor flows and fragility in corporate bond funds,' because if you are worried about bond  market liquidity, worries about runs on bond mutual funds can't be far behind."

Matt Levine
Bloomberg View

Friday, October 7, 2016
Let's recap
In case you missed it . . .
Smaller swap-dealing firms were granted a one-year reprieve from oversight, with the U.S. market regulator delaying a planned expansion of the dealers who must register with the federal government (Oct 13)

Ratio of nonfinancial business debt to gross domestic product rose in 2Q2016 back to levels only seen during the 2008-09 recession (Oct 13)
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Without much fanfare, there's been a trillion-dollar upheaval in a favored corner of America's financial system (Oct 12)

CFTC Chairman Massad says he's committed to data preservation; industry has fought measure requiring access to algorithms (Oct 11)

Buy-side must make changes now for MiFID II end-investor rules
Buy-side firms have been urged to begin making changes now to ensure compliance with MiFID II requirements aimed at protecting end-investors (Oct 10)
SEC approves fund liquidity rules
Enhanced risk management for mutual funds & ETFs
(Oct 13)  The Securities and Exchange Commission voted  3-0 to approve rules that would require mutual funds to enhance disclosures on their liquidity and redemption practices to boost risk management.
  • Money market funds would be excluded from all requirements of the liquidity risk management rules, and ETFs qualifying as "in-kind" would be excluded from certain requirements
  • Rules also would let certain mutual funds adopt "swing pricing" to limit redemptions in times of economic stress
  • Most funds would have to comply with risk-management rules by Dec. 1, 2018
  • Swing-pricing rules would take effect 2 years after final amendments are adopted
Culture in banking industry must improve
NY Fed's Dudley
(Oct 13)  "Reforming the culture of banking is necessary to support the long-term health of our financial system," New York Fed President William Dudley  wrote in a blog post . Some highlights:
  • "Without good culture shaped by appropriate incentives, we can't have the consistent good conduct we should expect and deserve."
  • "We cannot continue on the present course. We know this, the public knows this and so do many in the industry."
  • "Continuing instances of misconduct highlight the need for attention to this issue and raise the question of whether the largest firms are 'too big to manage.'"
No country dominates Basel Committee
Says the regulator's secretary general
(Oct 12)  There is no dominant force on the Basel Committee for Banking Supervision, says the regulator's secretary general, William Coen.  "It's not the U.S., and it's not Europe, either," he told European Union lawmakers in Brussels.
  • "We've got 30 member jurisdictions represented on the Basel Committee - nine EU member states, the ECB, the SSM, EBA and the Commission are also at the table," he said. "We've got four U.S. representatives."
  • Coen said he is "perplexed" by the "assumption that this is a U.S.-driven process."
  • The revision of the post-crisis capital framework currently under way will be completed by year-end, he says, but implementation by countries is "several years away."
  • "A discussion we have not yet had is implementation, phase-in, transitional arrangements. We will, I hope, publish something early next year - the final revisions. This will provide clarity and certainty as to the rules. But the actual implementation of those rules - we're several years away."
  • Asked about the issue of proportionality, Coen said: "When we're drafting the rules, first and foremost we're thinking of large, internationally active banks. The issue of proportionality, the manner in which the rules are applied to all financial institutions in a single country, is very important here," he said. "The rules aren't meant to be applied to all kinds of institutions."
Binge reading disorder
Hand-curated, chosen with love
Beyond Flash Boys: Matt Levine interviews Brad Katsuyama |  Stock exchanges are part of the plumbing of Wall Street, and the details of how they're run have never exactly captured the public imagination

The Great Market Switcheroo of 2016 |  As greed replaces fear, investors dive into riskier assets and former laggards lead markets

Tiny bank-beating trading firm doesn't use any human traders |  Self-learning machines help put XTX among top currency traders; company is expanding into other markets, geographies

American hedge fund managers ran $2.2 trillion, or 72%, of the $3.1 trillion managed globally in hedge funds |  The U.S. has more hedge fund managers, more money invested in hedge funds and more institutional investors that invest in hedge funds than any other country

A great cost migration is upending the financial industry |  Like many big asset managers, Janus Capital Group is caught on the wrong side of two powerful trends that are reshaping the financial industry