Asset managers needed to provide 'missing liquidity' in secondary market
EUROPE – An investment bank has called on pension funds and asset managers to provide the liquidity currently missing in the secondary market, but market participants believe too many barriers need to be overcome.
Speaking at the International Capital Market Association (ICMA) conference in Copenhagen last week, Philippe Rakotovoa, global head of corporate and investor clients at Crédit Agricole, said that at a time when liquidity was drying up in the secondary market, the role of market participants was being shuffled.
He said that, because the current market cannot sustain a "market-maker" and a "market-taker" type of model, the only route is the "equitisation" of fixed income, at least on the credit side, with investors filling the gap.
"It becomes very clear that investors can or could be massive liquidity providers to the market, not for the sake of providing liquidity but just to manage their portfolio," he said as part of a panel looking into the regulatory and commercial challenges for the secondary market.
"There already are some investors that are natural providers of liquidity such as hedge funds."
Rakotovoa went on to say that when asset managers needed to reallocate on a continual basis, this represented a "massive" source of liquidity.
"I'm not saying it's easy or cheap, but this is certainly feasible," he said.
He added that such a move would not be detrimental to the banks, since, judging by their trading books during the crisis, the system that has prevailed until now has shown that the current model is unsustainable for banks.
"We are going to move towards an equitisation type of model," Rakotovoa said.
On the transparency and regulatory ramifications for asset managers now seen as market makers, he compared the situation with the primary market.
"If you take, for instance, the primary market, it was the only market that kept functioning during the crisis," he said.
"Even though the market has been closed from time-to-time for a few days or maybe a week, it was still resilient.
"The reason for this is because the primary market has offered full transparency on the price, which, in turn, has led to greater investor confidence and kept the market functioning."
Rakotovoa argued that the main issue with the secondary market was the lack of transparency that prevailed during the crisis.
"If you are committing capital in an asset class that can have asymmetrical moves, you do not want to give transparency on the price – otherwise, you put your capital at risk," he said.
"But if you do not provide transparency, you keep investors from coming to the market on a regular basis."
Rakotovoa lastly argued that the asset management industry in Europe was "very important" in terms of size, but was at a different level in terms of maturity compared with the US, where asset managers "easily provide prices on everything".
"This lack of transparency on prices in Europe affects the secondary market," he said.
However, another member of the panel, John Serocold, senior director of market practice and regulatory policy at the ICMA, stressed that asset managers could only provide liquidity if they were "properly" rewarded for doing it, precisely the issue the current market makers such as banks are facing.
Additionally, Søren Gade, executive director of the Danish Securities Dealers Association, pointed out that, if end-investors are to provide more day-to-day liquidity to the market, it would change their whole set up and imply a certain cost structure.
"If the market model is to change, it will certainly take time, and the asset management industry will have to take some important initiatives before we get there," he said.