BlackRock Inc. said the corporate bond market, which is one of the cornerstones of global finance, is “broken” and must be retooled to improve liquidity.
BlackRock, a major competitor in the bond market with $4.3 trillion in client assets, urged changes including unseating banks as the primary middlemen in the market and shifting transactions to electronic markets. Another solution BlackRock proposed: reducing the complexity of the bond market by encouraging corporations to issue debt with more standardized terms.
Banks have retained their stranglehold on corporate debt trading despite years of effort by BlackRock and other large investors to eliminate their oligopoly. The top 10 dealers control more than 90 percent of trading, according to a Sept. 15 report from research firm Greenwich Associates. To BlackRock, the dangers of price gaps and scant liquidity have been masked in a benign, low interest-rate environment, and need to be addressed before market stress returns.
“These reforms would hasten the evolution from today’s outdated market structure to a modernized, ‘fit for purpose’ corporate bond market,’” according to the research paper by a group of six BlackRock managers, including Vice Chairman Barbara Novick and the head of trading, Richie Prager, posted on the New York-based firm’s website yesterday.
Rules issued in 2010 by the Basel Committee on Banking Supervision and the Dodd-Frank Act passed by Congress prompted Wall Street bond dealers to cut their inventories of the debt, even as the market has expanded. With their capacity to act as market makers greatly reduced, the old over-the-counter market has been rendered outdated, according to BlackRock.
BlackRock, the world’s biggest money manager, suggests more venues in which dealers and customers can trade with anyone; increased standardization of new bonds to pool liquidity; revamping the method by which traders offer and accept prices; and promoting behavioral changes for market participants including investors, issuers and underwriters.
The paper expands on ideas from versions published in 2012 and 2013, which highlight the liquidity concerns and suggest more standardization for company bonds, to cut down complexities that make trading them more difficult.
U.S. Securities and Exchange Commission member Daniel M. Gallagher echoed that suggestion last week, saying regulators should standardize corporate-debt issuances to promote centralized trading of bonds.
Regulators and market participants should reduce the share of bond offerings that are “highly differential and bespoke,” he said Sept. 16 in a speech at a financial markets conference in Washington. To help, the SEC may need to alter some of its rules, including removing registration requirements, he said.
Standardization would allow more trading to occur on exchanges and other electronic venues, and would help stabilize markets in periods when investors rush to sell bonds, Gallagher said. The risk posed by investors trying to dump bonds after the Federal Reserve raises interest rates is “percolating right under” the noses of regulators, he said.
BlackRock was one of the first asset managers to attempt to revive bond trading when it created the Aladdin Trading Network, or ATN, in 2012. After volume proved disappointing, it partnered the next year with MarketAxess Holdings Inc. to attract a more diverse group of buyers and sellers.
As part of that agreement, BlackRock and MarketAxess developed a pricing system, an alert that notifies any investor on the system if an incoming order matches a bond they want to buy or sell, a person familiar with how it works said in November. That could allow two asset managers to trade directly with one another, preventing dealers from participating in and profiting from the transaction.
Bloomberg LP, the parent company of Bloomberg News, competes with MarketAxess in facilitating bond and swap trades between investors and banks, and in providing financial data and news to investors.
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