The Board of the International Organization of Securities Commissions (IOSCO) is publishing its report on corporate bond markets – drivers of liquidity during COVID-19 induced market stresses and invites stakeholder feedback on the analysis.
Feedback will inform IOSCO’s ongoing review of the sector and future consideration on ways to improve market functioning and the resilience of liquidity supply under stress.
The corporate bond analysis provides the broader context on the underlying markets that buyside investors such as ETFs and traditional open-ended funds increasingly invest in. These markets have grown exponentially since the Global Financial Crisis. The COVID-19 induced market stress highlighted the potential systemic significance of disorderly corporate bond trading and liquidity dysfunction. While market dynamics are evolving with new entrants such as ETFs and increased electronification, secondary corporate bond trading remains mostly reliant on a small network of OTC dealers in markets that remain fairly illiquid. The March 2020 events raised questions about market-functioning and whether improvements could be made to bolster liquidity and alleviate supply-side constraints in stress.
IOSCO is also consulting on good practices for IOSCO members, asset managers, and trading venues to consider in the operation and trading of Exchange Traded Funds (ETFs) and to supplement IOSCO’s 2013 Principles for the Regulation of Exchange Traded Funds.
For ETFs, the 11 proposed good practices address product structuring (including means of facilitating effective arbitrage and range of assets and strategies for ETF offerings), disclosure, liquidity provision and volatility control mechanisms. They respond to significant recent global ETF market growth, and the increasing number of new products with exposures to novel and less liquid asset classes and more complex investment strategies.
March 2020 also raised challenges for ETFs with some fixed-income ETFs experiencing temporary spikes in premia or discounts and widened spreads compared to ETFs with more liquid underlying assets.[1] The good practices offer detailed guidance on how best to facilitate effective arbitrage and market-making for ETFs that reference fixed-income assets.
Ashley Alder, IOSCO Chair and Chief Executive Officer of the Securities and Futures Commission (SFC) of Hong Kong encouraged stakeholders to input into both processes: “Orderly corporate bond market functioning is critical to the needs of the real economy, and underpins many of the products that open-end funds (including ETFs) invest in. ETFs are an increasingly popular product and IOSCO’s good practices will help these products continue to function well and support the needs of investors. I encourage stakeholders to provide feedback on both publications.”
Carmine di Noia, Director, OECD Directorate for Financial and Enterprise Affairs noted that “thanks to the rapid response of regulators and central banks, primary corporate bond markets remained open during the COVID-19 crisis raising a record USD 3 trillion in 2020 alone. However, corporate debt levels now raise concerns as to the extent to which credit quality deterioration could affect the recovery. IOSCO’s report provides valuable lessons on ensuring vibrant capital markets continue to support corporate sector resilience. The OECD looks forward to working with IOSCO on this important endeavour.”
How to respond
Responses to the discussion questions within the report Corporate Bond Markets – Drivers of Liquidity During COVID-19 Induced Market Stresses should be sent to CBML-feedback@iosco.org before 30 June 2022. In addition, IOSCO together with the OECD, will host a conference in the summer to gather additional perspectives on these markets.
