A study of secondary corporate bond markets by IOSCO revealed "no substantial evidence" that liquidity has deteriorated from "historic norms for non-crisis periods." IOSCO conducted the study in response to industry concerns about a perceived deterioration of liquidity due to changes in market structure and regulation.
Although liquidity is not in decline, the study (which covers the period from 2004-2015) showed that corporate bond markets remain fragmented among over-the-counter markets and across jurisdictions. The study emphasized that changes to the "characteristics and structure" of corporate bond markets resulted from growth and developments in (i) new technology, (ii) electronic trading venues, (iii) execution models and (iv) dealer inventory levels.
In light of the quality-of-data challenges encountered by IOSCO (primarily because of the decentralized nature of bond trading), the study reasserted the prior recommendation by IOSCO that regulators should have access to "timely, accurate and detailed" information on secondary bond markets in order to better monitor trends.
Commentary/ Nihal Patel
There is a very healthy debate over the current status of bond market liquidity (one Bloomberg columnist even ran a daily feature called "People Are Worried about Bond Market Liquidity"). While many other analyses have cited the Volcker Rule and other regulatory efforts as harming liquidity, the IOSCO report (at fn. 22) says that "its analysis of liquidity metrics does not provide substantial evidence to support the suggestion that regulatory reforms in and of themselves have led to diminished liquidity in the secondary corporate bond markets." The report also notes (at fn. 90) that while it does not cover "stress scenarios," other studies have found that in certain stress periods, dealers subject to Volcker have decreased their market-making activities.
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