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All News » Bond Market Trading Rocked By Stricter Banking Rules

Bond Market Trading Rocked By Stricter Banking Rules

Trading and Banking Rules

In recent months, growing concerns over a lack of liquidity in the international debt and bond markets have escalated. Considered by some to be a direct result of trading rules put in place following the financial crisis, many are now asking that the framework be revised in order to revitalise the sector.

Leading the argument for a revision of the strict trading rules currently in place are the management teams of large corporations such as Blackstone and JP Morgan in addition to knowledgeable economists. And what do they consider the worst case scenario of the present regulations to be? A financial crisis on a par with, if not worse than, 2008.

How might this happen?

One of the most significant issues facing the bond trading market is that it has lost out in recent years as other investment opportunities have grown in popularity. As a result, bonds are less attractive and therefore harder to buy and even harder to sell. With this form of investment continuing to lose value, in addition to a prospective interest rate rise in the American market on the horizon, experts are worried that investors will favour withdrawing, compromising what little liquidity remains available, precipitating an exodus and thus creating even more instability in the market.

In response to worsening bond market trading conditions, two leading lobbying groups representing the interests of both managers and major global banking organisations have expressed their concerns to a wider audience. In a report compiled by PwC at the request of the Institute of International Finance and the Global Financial Markets Association the downturn in trading has been inextricably linked to the impact of the regulations introduced following the economic crisis.

Interestingly, the PwC report does not necessarily criticise the financial organisations themselves, rather it points the finger at the many restrictions imposed upon them which were a direct response to the credit crunch. According to the report, the regulations have all but removed the ability of money-based institutions to influence the market, meaning that bond trading has suffered dramatically under the new regime.

What next?

One recommendation is that any potential links between the regulations and the reduction in liquidity are properly analysed and understood in order to address future problems. It also wants to see more unity and communication between interested parties impacted by the changes in the bond market and, most significantly, it suggests a revision of any regulations deemed detrimental to the industry.

But although this is a popular argument amongst some in the sector, it has not met with universal support. As such it may take more than the report to force a change. The hope is that a new interpretation of the rules could free up movement in the bond industry and engender an overall improvement in the global debt market. And even if the framework itself may not be eligible for refinement, there is an expectation that the report will at least lead to a discussion of the regulations and the impact that they have already had.

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