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Fixed income trading in the era of liquidity shortages 

September 15, 2015

Bob Sharma, Intelligent Insurer

In light of mounting concerns about the liquidity of fixed income markets, Keenan Choy and Richard Lewis, fixed income trading managers at Wellington Management, outline current conditions in the segments they cover and how the firm’s trading professionals, working with portfolio managers, are addressing the liquidity challenge.

With each passing month it becomes more difficult to transact without moving prices because of a shortage of market-making capital. One of the main causes of this shortage is the approaching full implementation of Basel III in 2019. Under this regulatory regime, banks are being required to hold greater amounts of capital to take trading positions on to their balance sheets, so they’re less willing to do so. Higher-yielding, higher-risk assets currently in demand by income-hungry investors are particularly expensive to hold under risk-adjusted capital requirements.

Regulatory efforts to improve market transparency, such as the second Markets in Financial Instruments Directive (MiFID II) in the EU and the Trade Reporting and Compliance Engine (TRACE) in the US, are not helping. We strongly support the goal of enhancing market transparency. 

Read more: Intelligent Insurer


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