17 May 2009

Reforms urged on sterling corporate bond market

IMA has warned appropriate reforms are needed in the UK corporate bond market, to prevent the sector from becoming a “backwater” and in turn presenting both a lack of funding and higher costs for all investors concerned.

IMA has warned appropriate reforms are needed in the UK corporate bond market, to prevent the sector from becoming a “backwater” and in turn presenting both a lack of funding and higher costs for all investors concerned.

 

The representative body of the investment industry has issued a paper which suggests there is now “an entire absence of market-making” and dealer market structure may not recover, which leaves the sector in danger of facing “significant future funding problems for UK corporates” and in turn generates potential problems for long-term investors, including pension funds.

 

The IMA argued part of the problem is the secondary market data used by investors has been damaged somewhat as a result of operating on a market maker model because any slowing of activity affects the information people use to value their holdings.

 

As a result, it suggests significant reform should be considered, arguing “radical change to market structure are not unprecedented” as the London Stock Exchange moved in 1996 from telephone-based market makers to electronic order books.

 

Within its proposals, the IMA suggests exchanges and MTFs should consider whether they have a role to play in the corporate bonds market through some form of anonymised trading systems like the electronic order book or “bulletin boards” for rarely-traded securities.

 

Similarly, it claims the Bank of England should, in the short-term, consider selling corporate bonds back into the market, in the same way as it has bought gilts and high-quality corporate bonds, to help stimulate activity and shift yields.

 

Likewise, the IMA said the Bank of England and Financial Services Authority should open the way so authorised investors, rather than only counterparties, are allowed to carry out market-making functions.

 

Research for the paper was conducted by Professor John Board of ICMA Centre, Professor Charles Sutcliffe of Henley Business School and Stephen Wells at the University of Reading.

 

Press release

 

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