Canada\’s investment industry association is urging regulators to back off shaky global credit markets.
Liquidity in global bond markets has already been low, and proposed reforms?“run considerable chance of further debilitating” the credit market, warns Ian Russell, leader of the Investment Industry Association of Canada.
Canada is relocating lockstep with European and U.S. regulators to overhaul the financial system, and the latest measures are aimed at increasing transparency and consumer protection in credit markets. But these?planned global reforms pushed by regulators such as the U.S. Securities and Exchange Commission \”will likely aggravate the liquidity condition in secondary markets,” Russell said within an industry letter to be widely circulated on Thursday.
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“The effects for credit markets might be severe,” he warned.
Regulators are looking at proposals that would bring a more centralized approach and much more transparent pricing to the multi-trillion-dollar municipal and corporate bond trading market, and wish dealers to reveal any extra fees they charge in certain transactions.
Unfortunately, Russell said, the new measures?could also bring \”adverse consequences,\” such as exposing the inventory positions of dealers acting as market makers. This?could spook key market players?\”just because the credit markets are undergoing an unprecedented collapse in liquidity,\” he explained in the letter.
Economic or geopolitical shocks like a default crisis in Greece, heightened tensions in Russia, or perhaps an earlier-than-expected interest rate hike?in the usa,?could further exacerbate the issues.
Investors could rush out of bonds, only to discover they cannot find buyers, a scenario that could \”quickly be a fire sale,\” the IIAC warns.
\”The concern among market participants is the magnitude of the shocks could be significant and also the follow-on impact on capital markets substantial, given the thin veneer of liquidity,\” Russell said.
The?\”liquidity drought\” within the bond market dominated conversations in the annual general meeting of the International Capital Market Association in Amsterdam this month, according to the IIAC.
The consequences for credit markets might be severe
\”Finding buyers on the market when investors look to sell has gotten more difficult, resulting in greater day-to-day volatility and wider bid-ask spreads,\” based on the industry association. Even the U.S. Treasury bond market Body of the most liquid in the world – is not immune to the turbulence.
Russell?urged regulators within the European Union, United States, and Canada to “proceed using the utmost care to avoid further damage to market liquidity.\”
Before venturing further in the future of reform, he encouraged regulators to \”step back\” and undertake a full review of the cumulative effects of post-2008 rules governing capital, liquidity and trading.