IOSC: Feedback on Liquidity Drivers in Corporate Bonds
IOSCO has published an information note summarizing the responses to its April 2022 working paper on ‘Corporate Bond Markets – Drivers of Liquidity During COVID-19 Induced Market Stress‘ (“Statement of comments”).
The feedback statement summarizes stakeholders’ views on possible ways to improve market functioning and liquidity provision in corporate bond markets. This includes assessing the feasibility, benefits, and costs of mitigating sudden changes in liquidity demand and alleviating supply-side market constraints, particularly in times of stress.
The Feedback Statement also takes into account the results of the Joint IOSCO-OECD Conference on Corporate Bond Markets held in June 2022.
Comments received from stakeholders are broadly consistent with the findings and observations contained in the discussion paper. Responses are generally in favor of continuing work to facilitate an increased supply of liquidity to corporate bond markets. However, it is recognized that there is no miracle solution. This reflects the fact that corporate bonds are rarely traded even in normal times compared to other large developed markets such as equities.
All of the evidence presented in the discussion paper, as well as the comments received, nevertheless suggests that there is room for improving the supply of liquidity and the functioning of the market.
IOSCO recognizes the importance of promoting liquidity in the corporate bond market, consistent with its mandate to support healthy global capital markets, while recognizing that bond markets have certain inherent characteristics that can undermine the supply of liquidity in times of stress.
The main conclusions of the working paper and the comments received will inform IOSCO’s ongoing review of the sector and future reflections on ways to improve market functioning and liquidity supply resilience in times of stress. . IOSCO will consider continuing work on improving liquidity provision in IOSCO’s next 2023-2024 work plan, including coordination with other international organizations as appropriate.
Mr. Jean-Paul Servais, Chairman of the Board of Directors of IOSCO, said: “IOSCO continues to support global efforts coordinated by the FSB to improve the resilience of non-bank financial intermediation. The significant growth in credit intermediation outside the banking sector underscores the critical importance of functioning market infrastructures and resilient market liquidity – both on the demand and supply side – for the capacity of the financial system to absorb systemic shocks. So far, international policy has mainly focused on reducing the demand for liquidity in times of crisis. It is also essential that the international regulatory community work together to consider ways to improve the provision of liquidity and the functioning of the market, particularly in times of crisis.