Market Making in Bond Markets

Jon Cheshire
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Jon Cheshire: Reserve Bank of Australia

RBA Bulletin (Print copy discontinued), 2015, 63-74

Abstract: In November 2014, the Committee on the Global Financial System (CGFS) published a report on developments in market making and proprietary trading in fixed income and related derivative markets (CGFS 2014). The aim of the report was to facilitate a better understanding of how ongoing changes in these activities may affect liquidity in markets and to assess whether these changes are driven by market or regulatory forces. The report found that there have been changes in liquidity conditions across markets, including in Australia, with market activity becoming more concentrated in the most liquid instruments and declining in less liquid ones. These changes in market-making activity have been driven by both market-based developments and regulatory change. To the extent that liquidity risks were underpriced in the period prior to the global financial crisis, many of the subsequent changes in market structure and the increase in liquidity premiums are welcome. However, with the changes still ongoing, bond issuers and investors will be likely to have to make further adjustments to the way in which they operate in fixed income markets and manage liquidity risks.

Keywords: market-making or market-makers; fixed income; regulation; liquidity; bond; proprietary trading or traders; derivative; inventory or inventories; electronic; BIS; CGFS (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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