Rules putting bond mar­ket at risk

Reg­u­la­tors say Canada is now more vul­ner­a­ble to mar­ket shocks

Calgary Herald - - FINANCIAL POST - ARI ALTSTEDTER, LAURA J. KELLER AND AL­LI­SON MCNEELY With as­sis­tance from Erik Hertzberg in Ot­tawa.

Canada’s bond mar­ket mid­dle­men are warn­ing that rules put in place since the global fi­nan­cial cri­sis have left the coun­try more vul­ner­a­ble to mar­ket shocks than other na­tions.

One chief reg­u­la­tor says in­vestors and deal­ers should not only get used to it, but get ready for more.

Speak­ing at the Bloomberg Cana­dian Fixed In­come Con­fer­ence in New York on Wed­nes­day, Ian Rus­sell, chief ex­ec­u­tive of the In­vest­ment In­dus­try As­so­ci­a­tion of Canada, com­plained that the coun­try has been hit harder by bouts of mar­ket tur­moil be­cause of in­ter­na­tional reg­u­la­tions that make it more ex­pen­sive for banks to hold bonds are made worse by the small size of its debt mar­kets with fewer bond deal­ers fa­cil­i­tat­ing trades.

“The thin­ness of the mar­ket means it’s par­tic­u­larly ex­posed to gy­ra­tions and yield shocks,” said Rus­sell, whose or­ga­ni­za­tion rep­re­sents Canada’s deal­ers.

Reg­u­la­tors es­ti­mate that the size of Canada’s cor­po­rate bond mar­ket is about $500 bil­lion. The com­bined U.S. in­vest­ment-grade and high-yield cor­po­rate bond mar­ket is more than $8.88 tril­lion, ac­cord­ing to Bank of Amer­ica Mer­rill Lynch bond in­dexes.

Canada’s bond mar­ket also has only 12 main deal­ers to act as shock ab­sorbers by tak­ing debt on their own bal­ance sheets when there are more sellers than buy­ers in the pri­vately traded mar­ket, Rus­sell said. Reg­u­la­tions that make this more dif­fi­cult have had a dis­pro­por­tion­ate ef­fect on Canada, he added.

“It’s not as deep and re­silient as the U.S. mar­ket,” he said.

A com­par­i­son of how much cor­po­rate bond prices di­verged from their av­er­age in the past year shows that Canada bonds tended to move about $1.36, while U.S. swings av­er­aged about $2.65, ac­cord­ing to Bank of Amer­ica Mer­rill Lynch data mea­sur­ing the stan­dard de­vi­a­tion of each na­tion’s cor­po­rate bond in­dex.

Canada’s move­ment is al­most dou­ble what it was in the same pe­riod five years ago, be­fore the new in­ter­na­tional rules came into ef­fect, while the U.S. av­er­age is lit­tle changed, the data show.

Tracey Stern, a man­ager of mar­ket reg­u­la­tion at the On­tario Se­cu­ri­ties Com­mis­sion, agrees that fi­nan­cial shocks can have a greater im­pact on smaller mar­kets like Canada’s. That’s why some U.S. rules, like a trad­ing sys­tem with a 15-minute lag be­fore prices are pub­licly listed, may not work in Canada. Nev­er­the­less, she said price trans­parency is a pri­or­ity for her agency.

“There will be greater trans­parency, which hope­fully will bring greater liq­uid­ity,” Stern said dur­ing an in­ter­view with Matthew Win­kler, editor-in-chief emer­i­tus for Bloomberg.

“The pos­si­ble neg­a­tives of great- er trans­parency will be out­weighed by greater liq­uid­ity.”

Cana­dian reg­u­la­tors have pro­posed a sys­tem for the cor­po­rate bond mar­ket that for the first time would pro­vide public data on ev­ery se­cu­rity. In­for­ma­tion would be re­leased on a two-day de­lay to give deal­ers time to clear big trades with­out prices turn­ing against them.

The IIAC’s Rus­sell ap­plauded the two-day lag. But Stern, who is over­see­ing the over­haul, said the time de­lay could be shrunk to one day. She also voiced sup­port for elec­tronic trad­ing of bonds, which would cut out deal­ers by di­rectly match­ing buy­ers and sellers.

“Peo­ple don’t like change,” she said. “You need to have that dis­rup­tive force to get peo­ple to change.”


Ian Rus­sell, pres­i­dent and chief ex­ec­u­tive of the In­vest­ment In­dus­try As­so­ci­a­tion of Canada, says Canada’s bond mar­ket isn’t “as deep and re­silient as the U.S. mar­ket.” In­ter­na­tional reg­u­la­tions that make it more ex­pen­sive for banks to hold bonds are made worse by the small size of its debt mar­kets, he says.

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