FRIC Research Seminar with Martin Scheicher, ECB

The next FRIC Research Seminar with Martin Scheicher, ECB will take place over Zoom on October 5 at noon.

Speaker: Martin Scheicher, Adviser, Single Supervisory Mechanism, ECB

Title: Intermediation in bond and swap markets: Mechanisms, trends and impact of Covid crisis

Abstract
The current structure for trading bonds and swaps builds on bank Dealers as core intermediaries. These firms provide essential liquidity to clients by buying and selling instruments in part from their own books. The reforms in the aftermath of the Global Financial Crisis (GFC) together with the changing macroeconomic have had a sizable impact on the mechanisms, infrastructure as well as the costs of trading fixed income instruments. The purpose of this presentation is to analyse the post-GFC role of bank Dealers in OTC fixed income markets. We focus on two questions: 1) Is trading of swaps and bonds converging to a high-speed “futures market” setup with significant transparency and “all to all” trading? 2) What is the impact of the market changes on the Dealer business model? To answer these two questions, we combine an institutional and research perspective with a focus on EU markets. We use public data and findings from the rich academic literature to describe the (bank) Dealer OTC business and its post-GFC evolution. Furthermore, we analyse how the Covid shock has affected the main OTC fixed income market segments. The analysis of this turmoil allows us to discuss on the impact of the reforms in a crisis environment. Overall, we argue that OTC fixed income markets are becoming “faster” due to the progress of electronic trading and the rise of non-bank traders, thereby constraining the profitability of the Dealer business model in its 20th century setup. These developments create new challenges for systemic risk mitigation and safeguarding of liquidity provision, which have also been highlighted by the Covid crisis in March 2020.