Does Basel III create buy side liquidity risk? | IFR Article
IFR produced another article bemoaning the liquidity problems in the secondary credit bond market. An illustrative stat. is bank inventory: 2007 US$235bn; now "a mere" US$37bn. Aside from the day-to-day market liquidity challenge, have regulatory capital rules indirectly created a significant increase in buy side liquidity risk?
IFR's article is here: Fears grow over buyside's liquidity mismatch. See below for key points that jump out at me.
See also my prior post related to this: Fixed Income trading paradigm upheaval: banks restrict principal market making
Regulators watch buy side liquidity risk
Evidently BoE, Treasury and Fed are all watching closely. The fear is that bond funds often offer investors daily liquidity while the fund may not be able to liquidate bonds that fast - leading to the possibility off an investor redemption run up with which the fund might not be able to keep.
So technology to the rescue then?
Not so easy:
- eTrading platforms seem to be struggling given the lack of liquidity - Goldman Sachs G-Sessions and BlackRock's Aladdin both recently foundered
- Greenwich Associates suggests an "all-to-all" idea in its new European cash FI report (charges apply, free summary post here, webinar on March 18th registration here).
- An interesting idea, but probably substantial change, elapsed time and infrastructure spend
Hmmmm.... so what's the answer then?
Some funds are turning to the more liquid CDS indexes to get in or out more quickly. A bit "one size fits all" but market innovation may take some time to yield something better.