| NEW YORK, Sept 18
NEW YORK, Sept 18 U.S. fixed-income investors
are turning to a greater number of dealers to find liquidity as
higher bank capital rules lead dealers to reduce their
market-making activities, according to a study by Greenwich
Associates released on Wednesday.
Dealers are focusing more of their activities on their
largest clients as they shrink their balance sheets and as
trading margins for fixed-income instruments come under
pressure, Greenwich said. Smaller funds, as a result, are
struggling more to complete affordable trades.
Fixed-income buyside firms are expanding the number of
dealers they trade with, to an average 9.4 this year, up from 9
last year and from 7.6 in 2009. The survey is based on responses
from an average 1,122 U.S. fixed-income investors.
"Stricter bank capital requirements have drained liquidity
from the U.S. fixed-income market," Greenwich said in the
report, saying that 85 percent of its respondents cited reduced
market liquidity as among the most important issues faced this
Some investors also complained that turnover at banks has
reduced their ability to execute timely and affordable trades as
they deal with less experienced staff.
At the same time, more buyside firms say that they have
increased trading with firms that provide them research, as
banks become more selective in sending out reports. The number
of firms that say they reward dealers for research increased to
45 percent, up from 28 percent last year.
Many firms that use derivatives, meanwhile, waited until the
last minute to prepare for new rules that require them to send
trades to central clearinghouses, resulting in them having to
accept unfavorable terms from brokers to gain access to
clearing, Greenwich said.
The shift to clearing has not yet created a noticeable
impact on swaps market liquidity, though some short-term
disruptions were still seen as likely.
Greenwich said the introduction of electronic trading in
derivatives is likely over time to benefit smaller- and
mid-sized investors with tighter spreads and access to more