ISDA has teamed up with Greenwich Associates to conduct a survey that explores the impact of the coronavirus pandemic on derivatives market liquidity. The survey investigates the causes of the liquidity disruption that occurred in March 2020, the scope and extent of the problem, and the impact of government intervention.
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Highlights from the survey include:
- The top financial event related to COVID-19 that disrupted liquidity was perceived to be the reduced risk appetite of banks. Close behind was the sudden need for short-term funding by corporates.
- The primary response to managing liquidity issues was to trade in smaller sizes. This was, by far, the most commonly cited buy-side response.
- Liquidity deteriorated in multiple product sets and in nearly all regions. Market participants in the UK were particularly negative on liquidity, with 96% of respondents reporting declines or large declines in liquidity before central bank intervention.
- Liquidity providers listed a number of issues that hindered their ability to provide liquidity, including one-way flows, increased volatility and the breakdown of basis trades. These varied depending on region, with the cost of short-term funding cited as a bigger issue in Asia and the EU than in the UK and US.
- Government intervention was seen as an important factor in restoring market liquidity, with 67% of market participants characterizing US Federal Reserve and US Treasury action as effective or extremely effective. A similar proportion (59%) categorized action by the European Central Bank and European Commission as effective or extremely effective.
- When asked about the impact of financial regulatory reform of the past decade, the top response was that it ensured banks were sufficiently capitalized to weather the current crisis. The second most cited response was that it reduced the capacity of banks to provide liquidity and to extend their balance sheets to businesses.
The survey was based on responses by 172 buy- and sell-side market participants from across the globe.
Source: ISDA