Sponsored Access: A Bridge to Enhanced Bond Market Liquidity

The state of bond market liquidity has been fundamentally altered as regulatory mandates and other issues reduce the amount of capital traditional liquidity providers have available for secondary market-making and risk transfer. Consequently, the search for alternative pools of liquidity is underway. While there is a strong urge on behalf of market participants to reform the ailing fixed income market, for the most part, the market remains unbroken.

But the increased burdens placed on traditional market-makers are eroding the principal risk-based model. The path on which the market proceeds is not yet defined; some are calling for a complete overhaul of market structure — a revolutionary upending of the status quo, while others believe the path should be more evolutionary, an organic tweaking of market structure to fit within the emerging regulatory regime. The devil is always in the details. Breaking down the long-standing divide between wholesale and client-to-dealer markets is no easy task. One approach may be to employ the use of a sponsored-access model.

Sponsored access is a viable and proven method for maintaining the integrity of business relationships, protecting pre-trade information, and efficiently transferring risk. The formal development of this model may breathe fresh air into OTC markets that are desperately seeking solutions to a problem — illiquidity — that may only grow as the benign macro conditions we have enjoyed for some time start to reverse course.

In this TABB Group report, Sponsored Access: A Bridge to Enhanced Bond Market Liquidity, TABB Group assess the opportunity the sponsored access model affords participants in the ever-changing and increasingly illiquid bond market.