2015-03-18-奥纬咨询-The_Wholesale_and_Investment_Banking_Report_40页_1mb

Summary of "Wholesale & Investment Banking Outlook: Liquidity Conundrum"

Core Content

This document outlines the evolving landscape of liquidity risk in financial markets, particularly in the context of financial regulation and quantitative easing (QE). It highlights the significant shift of liquidity risk from banks to the buy-side, especially asset managers, and discusses the implications for banks, asset managers, and market infrastructure.

Main Points

Liquidity Risk Shift

• Regulatory and QE Impact: Financial regulation and QE have driven a major shift in liquidity risk from banks to the buy-side.
• Banks' Liquidity Provision: Wholesale banking balance sheets have decreased by 40% in risk-weighted assets (RWA) and 20% in total balance sheet since 2010.
• Future Reductions: Banks are expected to reduce their balance sheets by an additional 10–15% over the next two years, with credit markets being the most affected.

Impact on Asset Managers

• Increased Regulatory Burden: Asset managers are facing rising regulatory risks, especially with the potential for stress testing.
• Liquidity Concerns: Asset managers are increasingly concerned about secondary market liquidity, particularly in credit and European markets.
• Historical Context: The worst mutual fund redemptions in the last 35 years were around 5% in the worst 3 months, while current cash holdings are between 4–7%, indicating prudent risk management.
• Stress Test Scenarios: Regulators may test for more severe scenarios, such as 15–20% outflows, which could increase liquidity requirements and costs for asset managers.
• Cost Impact: Stress testing could add an extra 1–5% cost to asset managers, though larger firms are already better prepared.

Impact on Banks

• Diminishing Returns: Banks are under pressure to achieve 10–12% returns on capital due to reduced market making demand.
• Structural Changes: Banks need to focus on efficiency, dexterity, and scale to meet these returns, and may need to restructure their business models.
• RoE Expectations: Under a base case, banks expect a 3% growth in revenue until 2017, but to achieve 10% returns on capital, they need a 2–3% uplift in RoE through restructuring.
• Consolidation Trends: Consolidation is expected in the sell-side, especially in rates and FX markets, due to pressure on economics and supply.

Market Infrastructure

• Opportunities: Market infrastructure has limited opportunity for growth in execution and clearing from increased electronic trading, due to instrument heterogeneity.
• Focus on Data and Risk Management: There is greater potential for revenue in data and risk management analytics, especially in stress testing and liquidity management.
• Regulatory Focus: Regulators are increasingly concerned about systemic risks in central counterparty clearing (CCP) and operational risks, prompting a need for better transparency and standardisation.

Key Recommendations and Policy Debates

Policy Suggestions

• Macro-Prudential Roadmap: Encourage macro-prudential policy makers to build a roadmap that includes understanding credit holders, maturity terms, and systemic risks.
• Stress Testing: Propose stress tests for select fixed income funds based on historical redemption data, focusing on size, complexity, and market exposure.
• Standardisation of Corporate Bonds: Advocate for standardisation of issuance amounts, coupon dates, and maturities for large issuers to improve liquidity.
• Regulatory Powers: Ensure regulators have consistent powers to suspend redemption rights in extremis, similar to those in money market funds and UCITS.
• Valuation Standards: Reduce early redemption interests by agreeing on commonly accepted valuation standards, such as swing pricing.
• Transparency and Block Trade Exemptions: Calibrate post-trade transparency requirements to protect liquidity, including delayed reporting for large block trades.
• ETFs as Cash Substitutes: Evaluate the role of ETFs in portfolio construction, considering both benefits and risks.
• Regulatory Coordination: Call for greater coordination among regulators, especially in Europe, to address inconsistencies and systemic risks.

Asset Manager Survey Insights

• Liquidity Concerns: All asset managers are increasingly concerned about secondary market liquidity, especially in credit and European markets.
• No Consensus on Solutions: There is little consensus on solutions for credit market liquidity, but all asset managers are exploring internal and external strategies.
• Focus on Execution Models: Asset managers are looking to alternative execution methods, such as agency and electronic trading, but face challenges due to market heterogeneity.
• Regulatory Coordination: Asset managers crave regulatory coordination but do not believe it is imminent, especially in Europe.
• Leverage and Counterparty Risk: Asset managers are already pulling levers to manage liquidity and risk, including concentration on large counterparties and improved risk management.

Conclusion

The liquidity conundrum in fixed income markets is a profound and ongoing shift, driven by financial regulation and the exit from QE. This shift is expected to continue, with further reductions in liquidity provision by banks and increased regulatory scrutiny on asset managers. While electronic trading and new marketplaces are growing, they are unlikely to resolve the fundamental issues of market heterogeneity. Market infrastructure is poised to benefit more from data and risk management analytics than from execution platforms. The future of the industry will be shaped by regulatory changes, structural reforms, and the ability of firms to adapt to a more fragmented and less liquid market environment.