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Bond Traders Say CSDR Rules on Failed Trades Will Hurt Market Liquidity

More than half of European buy-side traders participating in a new study from Greenwich Associates believe new Central Securities Depositories Regulation (CSDR) rules scheduled to be implemented in the European Union next year will reduce liquidity in fixed-income markets.

“Fixed-income trading desks are already struggling with new time demands associated with stricter best execution requirements, enhanced transparency and trade reporting obligations,” says Greenwich Associates Principal Tom Jacques, author of CSDR—Not Failing to Change European Bond Markets. “At a time when most trading desks are short of resources and headcount, the need to spend time confirming security availability will represent a new burden.”

Not just CDSR: A Changing Fixed-Income Marketplace in Europe
To the extent that CSDR will complicate trading in the secondary market, it may increase the reliance of many firms on the primary market for liquidity. This has led many to promote innovation in that market as well. Other advances in fixed income have also been sweeping Europe, such as the increased participation of non-dealer market makers. Participants in the Greenwich Associates study had strong opinions on the new market makers, and they were generally positive not only on their own merits but also by forcing dealers to improve their own quality.

Portfolio trading is another example. Around 40% of investors have either executed or plan to execute a portfolio trade in the next 12 months. “Anecdotally, some clients have found portfolio trading a useful way to adjust their portfolios during the COVID-19 crisis, as they can mix bonds that are easier to trade with ones that are more difficult to execute,” says Jacques.

Despite advances in technology, portfolio trading remains a largely manual process, and trading a large portfolio increases the risk that any single trade will fail, risking a mandatory buy-in under CSDR. However, portfolio trading remains a relatively specialized activity and if all providers have implemented effective risk management technology, the risk of settlement failures is no higher than with standard bond trading.

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