Week InReview | IMF warns on bond market liquidity | Fed survey reports significant deterioration in bond-market liquidity | FSB says FX benchmark reforms should be applied more widely | Let's Recap (In Case You MIssed It) | Binge Reading Disorder
Friday, October 2, 2015
Let's recap
In case you missed it
IMF warns on bond market liquidity
A low interest party bus cliffhanger
(Sep 28) In the IMF report "Market Liquidity Not in Decline But Prone to Evaporate" Gaston Gelos, chief of the IMF's Global Stability Analysis Division said: 'In recent years, factors such as investors' higher risk appetite and low interest rates have been masking growing underlying fragilities in market liquidity. He also noted that 'if financial conditions worsen or investors become weary of a particular asset class or financial market, market liquidity can quickly evaporate. Furthermore, swings in market liquidity in one asset class seem to spill over to other asset classes more frequently, and high-yield and emerging market bonds show some signs of deterioration in market liquidity. As spillovers between asset classes increase, it becomes more likely for a liquidity shock in one market to spread to other markets, possibly leading to a shock to the global financial system, as was the case in 2008.'
Significant deterioration in bond-market liquidity
Fed survey finds
(Oct 1) The Federal Reserve's September senior credit officer survey on dealer financing terms finds "approximately one-third of respondents indicated liquidity and functioning of markets for high-yield corporate bonds, CMBS and consumer ABS have deteriorated."
  • Survey on dealer financing terms received responses from 20 institutions between Aug. 18-31, refers to changes seen from June to August
  • Over one-third indicated effective financing rates in securities financing transactions have increased for high-yield corporate bonds, non-agency RMBS and commercial mortgage-backed securities
  • Nearly one-third of respondents reported an increase in resources and attention devoted to management of "concentrated credit exposure to central counterparties and other financial utilities"
  • Use of financial leverage by all classes of counterparties remained "basically unchanged"
  • Survey asked special question on use of central counterparty clearing services for OTC derivatives
  • Nearly half of dealers reported increase in the use of credit and interest-rate derivative contracts that are subject to mandatory clearing since beginning of 2014
  • More than three-quarters of those who reported an increase cited clients' need to comply with mandatory clearing requirements
  • Approximately one quarter indicated mutual funds, ETFs, pension plans and endowments increased their use of clearing services
FX benchmark reforms should be applied more widely
FSB says in progress report
(Oct 1) The financial Stability Board sees "good progress" in implementing its recommendations for changes to FX benchmarks.
  • Progress report "re-emphasizes that the FSB recommendations are intended to apply to all FX benchmarks, not just the WM/Reuters (WMR) 4pm London fix"
  • More complete implementation of the recommendations "would increase the likelihood of maintaining and extending the improvement already seen"
  • Regulators and FX market participants must remain focussed on achieving such an outcome
Binge reading disorder
Hand-curated, chosen with love
  • How Congress May Have Saved Goldman Sachs From Itself (Bloomberg)
  • Charlie Munger and the Pursuit of Worldly Wisdom (Farnam Street)
  • Neuroscience backs up the Buddhist belief that "the self" isn't constant, but ever-changing (Nautilus)
Transparency.
Inclusiveness.
Consensus.