Impact of regulatory changes
on government bond
Vivideconomics, London, UK
Purpose –The purpose of this study is to assess the seriousness of the impact of new regulatory factors on
liquidity in government bond markets since the onset of the global nancial crisis.
Design/methodology/approach –Questionnaires were circulated for examining the adverse impact of
regulatory changes on liquidity. New evidence was presented about the adverse impact of the process of
regulatory changes on market liquidity.
Findings –The paper presents new survey results on the adverse liquidity impact of regulations on market
liquidity. Responses show that government issuers differ in their assessment on the severity of the impact of
the various regulations. Determining this longer-term impact is quite complex because measures of liquidity
may not only reect the impact of regulatory changes, but also the responses by policymakers and market
participants (to these regulatory changes), covering in particular the following: market transparency, trading
practices, market infrastructure and other policies to promote liquidity, including by reducing unconventional
monetary policy measures. Also, market dynamics may have become more complex due to responses by
Practical implications –Debt managers need to take into account regulations with a signicant adverse
inuence on both market liquidity and the price discovery process. As liquidity in government bond markets
also has a direct impact on funding possibilities and nancing costs, funding liquidity may also be affected,
especially during periods with market stress. This means that the funding strategy may need to be adapted.
Originality/value –The paper presents new survey results on the impact of new regulations on market
liquidity. This assessment is quite complex because measures of longer-term liquidity may reect the impact
of regulatory changes and the responses by policymakers and market participants to these changes.
Keywords Government bond market liquidity, Market infrastructure, Market transparency,
New regulations, Trading practices
Paper type Research paper
Since the onset of the global nancial crisis, several (new) factors had an adverse impact on
the liquidity of government bond markets. Some of these relate to unconventional monetary
policy such as quantitative easing (QE), others to regulatory changes.
The focus in this article is on the market liquidity impact of regulatory changes. In
particular, the ongoing process of regulatory changes in the nancial system (Basel III,
Solvency II, CACs, MiFID II, Dodd-Frank Act, FTT, etc., including its implementation), had,
or is likely going to have, an impact on secondary government bond market liquidity
(Blommestein, 2016a). For example, trading in government bonds has become increasingly
challenging amid dealers‘balance sheet constraints due to increased capital requirements for
banks. The supplementary leverage ratio (the SLR is part of Basel III) had an adverse
impact on the use of repo-nancing by dealers in the USA.
There are reports that banks (dealers) have more difculties in digesting large supply and
demand imbalances of government securities. Banks in some jurisdictions have also
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Journalof Financial Regulation
Vol.25 No. 3, 2017
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