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Global watchdog says bond market liquidity a concern

[LONDON] Bond markets may not be able to cope with the stress of many investors trying to cash in at the same time but data remains too patchy to support new rules, a global financial watchdog said on Wednesday.

The International Organization of Securities Commissions (IOSCO) said concerns over secondary bond market liquidity was one of its four top market risks for 2016, the others being cyber threats, misconduct in relation to retail financial products, and risks from use of collateral or cash to back trades.

"With the expansion in corporate bond primary markets, there is some concern about whether the secondary market structure will be able to withstand periods of market stress going forward," the report from the International Organization of Securities Commissions (IOSCO) said. "Further data gathering and monitoring may help to better understand the state of global corporate bond markets," the IOSCO report said.

Banks say liquidity, or the ability to trade easily without sharp moves in prices, has thinned in secondary bond markets because tougher capital rules make it uneconomic for lenders to hold large inventories of bonds for market-making. Central banks say prices have not been affected.

IOSCO said it was hard to gauge threats to financial stability as data is limited and largely focused on the United States, IOSCO said.

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The watchdog is also assessing the role of asset managers in secondary bond market liquidity.

The Financial Stability Board, which coordinates regulation in the Group of 20 economies (G20) and includes IOSCO as a member, said on Saturday it would report on market liquidity in September, and make policy recommendations for the asset management sector.

IOSCO said asset management was not on its list of market risks, but there are "important questions left unanswered"because of "knowledge gaps". "The debate about a lack of secondary market liquidity in corporate bond markets and the role of funds' interaction in this market has not been resolved," IOSCO said.


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