The corporate bond market is increasingly coming under threat from stricter regulation on capital, liquidity and proprietary trading. Can new trading platforms such as TruMid and Electronifie come to the rescue?

Can new trading platforms save the corporate bond market? Traditionally, banks acted as huge bond warehouses and market makers so that asset managers could trade at will and in quantity.

But stricter regulation on capital, liquidity and proprietary trading have changed the picture such that banks’ inventories of corporate bonds are down by a half since before the crisis. To make matters worse, the market is extremely fragmented with upwards of 100,000 instruments in circulation in Europe compared with only about 1500 to 2000 stocks, as we reported in our special report on cross-asset solutions in July

All of this means that spreads are wide and bond markets are volatile as they react to news events and big orders under conditions of limited liquidity. Regulators are concerned that in a panicked market, liquidity would evaporate in no time.

Many observers are therefore cheered by new ventures in the platform space such as TruMid and Electronifie. With Electronifie, product and quotes will still come from banks to create prices and liquidity that will also allow asset managers to trade between themselves. There are three trading levels covering 4500 bonds. TruMid, by contrast, will create its liquidity by running sessions known as swarms for particular sectors and on topical themes.

But as well as the platforms, other changes may be needed, such as reducing the number of instruments by reopening existing bonds on the issuance side; by banks specialising in areas of the market that suit their profile and restricting their liquidity to these; and by asset managers holding their own liquidity and maybe charging investors for this. For example, funds that can only be redeemed once a month rather than daily will return more as they will be fully invested compared with daily ones that hold more liquidity.

This represents a huge change from pre-crisis corporate bond markets but with the trend among corporates both big and small to go straight to the capital markets rather than borrow from banks, getting it right is essential for economic growth.

Brian Caplen is the editor of The Banker.

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