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November 22, 2012 4:20 pm
Investment banks are looking at the idea of building a directory of corporate bond holdings in a fresh attempt to boost liquidity in the $8.5tn market as well as their profits.
The directory would allow banks and investors to track each other’s holdings of corporate bonds, making it easier to source potential investments and trade electronically. At least two big law firms are said to be exploring the feasibility of the project, which has been likened to a collective “white pages” for bonds.
Corporate bond trading was once one of the biggest moneymakers on Wall Street. But the business has become less profitable for investment banks in recent years, despite booming new issuance, as post-crisis regulation makes it much more expensive for dealer-banks to hold a vast inventory of bonds on their balance sheets.
At the same time, big institutional investors have complained of a lack of liquidity in the US corporate bond market as dealer-banks retreat. Earlier this year a group of prominent asset managers met with Wall Street banks to discuss the issue. Since then banks have been floating a number of potential fixes for the lack of liquidity.
Some market participants are hoping that electronic trading could do for bonds what it did for the equity markets in the early 2000s. Goldman Sachs, for instance, has started GSessions, an electronic auction platform for corporate debt.
“The goal of all of these efforts is a new Nirvana, ‘capital-lite’ trading, in which low-cost client execution is profitably provided but liquidity-enhancing capital commitments are de-emphasised,” Bernstein bank analysts led by Brad Hintz, a former Morgan Stanley treasurer, wrote in a research piece published this week.
As underwriters of new bond issues, banks have historically known which customers they sell fresh debt to. In theory, the banks could share that information in a sort of centralised repository, but doing so would be vastly different to how the companies have previously hoarded information to help them do business.
“The market is very, very fragmented. So one solution which has been postulated is to simply have a white pages so that everybody knows who owns what,” said one market participant. “If you could do that, you could electronically ‘ping’ people [to see if they’re interested in trading] which might increase market liquidity.”
Such a directory would in theory be more up to date than the corporate bond holdings listed on data group Bloomberg, which are based on public filings, one market watcher said. However, one dealer noted that the idea of ‘pinging’ for potential trades already exists on bond trading platforms, such as MarketAxess.
One other potential fix on the table is the standardisation of corporate bonds.
At the moment, corporate bonds are issued in a large range of different maturities, sizes and types, resulting in hundreds of thousands of different individual bonds. Standardising the bonds, or creating so-called “on-the-run” issues, could also boost the market’s liquidity.
But investment banks continue to debate various ideas to restore liquidity to the market.
“There are a lot of dealers talking about doing things but they don’t necessarily have a good handle on what needs to be done,” said one market specialist at a US investment bank.
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