Liquidity Provision & Risk Management – Corporate Bond Markets

AFME has published a report on “Liquidity Provision & Risk Management – Corporate Bond Markets – Hedging vs Selling Down a Position“.
The report highlights the crucial role played by liquidity providers in the proper functioning of global fixed income markets, and the complexities involved in hedging market risks assumed by banks when providing liquidity on demand to end investors. The report provides an in-depth analysis of the material differences between fully trading out of a risk position and hedging the various market risks associated with holding that position.
The report emphasizes that the innate illiquidity of individual bond market instruments holds true for liquidity providers as well as investors, and that liquidity providers will need to hedge their new position against a number of market risks as they cannot quickly trade out of risk they have assumed from the client trade. The report highlights the various measures that can be taken by the liquidity provider to mitigate and/or hedge the risks involved.
The report also stresses the importance of ongoing reviews of MiFIR post-trade transparency and deferral regimes being conducted in both the EU and UK. The report suggests that the distinction between hedging and selling down a position is an important distinction to make and to communicate in the context of the ongoing reviews of MiFIR post-trade transparency regimes being conducted in both the EU and UK.