Oliver Wyman and Morgan Stanley published their joint annual report about wholesale and investment banking today titled, The Liquidity Conundrum: Shifting risks, what it means. The report finds that a reduced provision of liquidity in fixed income markets faces policy makers and investors and how it’s resolved will have long-term investment implications. The report assesses the challenges faced by the securities industry, which is worth USD750 BN in annual revenues. It finds there has been a profound shift in value during the last five years towards the buy side and away from the sell side. QE has driven asset prices higher but dampened volatility, while regulatory change has driven capacity out of the sell side. Risks have also shifted as liquidity in secondary markets has thinned, while assets in fund structures offering daily liquidity has grown. AuM in daily redeemable funds have grown 10% per annum and are now 76% above 2008 levels. Credit is a key area of concern, as low interest rates have pushed investors into higher yielding and less liquid assets.
“Our analysis highlights an important shift in risk that has occurred as a result of the post-crisis policy response of bank reform and unorthodox monetary policy,” said Christian Edelmann, partner and head of corporate and institutional banking practice at Oliver Wyman. “Liquidity has decreased sharply creating new risks for investors and issuers, but there are no easy answers. Policymakers face a difficult set of trade-offs and how they and the industry responds will have profound implications on traded markets and investors.”
The report considers the expected impact of reduced market liquidity on the securities industry overall; the regulatory response it may trigger and what that means long term for banks, asset managers and market infrastructure providers. The report finds that banks need to add another 3% to returns from restructuring initiatives e.g. tougher strategic decisions, changing the way it interacts with clients and moving more of the infrastructure into supply chains. It argues we can expect to see further consolidation of share within the sell-side, but that the competitive landscape is becoming more diverse and returns accordingly more dispersed. There is now a 10 percentage point discrepancy in returns between banks of a similar size.
“Our interviews highlight that liquidity risk in credit markets was asset managers’ top concern. What may surprise is that European managers are more worried about liquidity than American. We think this is driven by the smaller size of sticky retirement savings market and European wholesale banks are under even more pressure to shrink”, Huw van Steenis, banks analyst at Morgan Stanley, said.
“Regulatory risks are rising for asset managers as policy makers increasingly worry about the risks to financial stability from US QE exit and market structure changes”, he added.
The report argues that under a base case scenario of incremental regulatory reform and stress testing, the buy side would need to invest in additional trading, collateral management and risk management which could mean additional costs of 1-5 percentage points. The report also explores the risks of tougher reforms. These could result in reduced investment freedom, and could include increased fiduciary requirements, new capital requirements or changes to redemption terms. Such changes could also indirectly accelerate shifts to exchange-traded funds (ETFs), which are deemed more liquid, and funds with lock-up periods, such as alternatives.
The report also considers how shifts in risk are impacting market infrastructure players. Despite significant growth in asset prices, market infrastructure has only benefited marginally compared to the asset management industry from the asset reflation trade. This reflects a number of adverse events that have impacted the sector such as low rates, subdued volatility, deleveraging trends, in addition to increased competition. In future, the most attractive opportunities in market infrastructure will arise in data and risk management rather than execution platforms.
No comments:
Post a Comment