(Bloomberg) — BlackRock Inc.'s aim of simplifying the $7.7 trillion U.S. corporate bond market isn't gaining support among investors or corporations, according to JPMorgan Chase & Co. and Western Asset Management Co.
BlackRock, the world's largest money manager with $4.3 trillion, has made three attempts in as many years to draw attention to a corporate bond market that it says is broken. One of its main proposals for making trading easier is for corporate issuers to standardize the sizes, maturities and times of year that they raise money, on grounds that it would reduce the number of outstanding bonds.
"What we've heard so far is very little desire from companies to standardize," Kevin Corgan, head of North American credit trading at JPMorgan, said Thursday at an industry conference sponsored by Tabb Group LLC in New York. Banks such as JPMorgan can't drive the process, he said. Rather, "it's really about the companies themselves having a desire to standardize," he said.
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Mike Buchanan, head of global credit at Western Asset, agreed. "I don't necessarily think that's the answer, but I do like that these types of conversations are happening," he said during the same panel discussion. "I don't think you're going to see dramatic improvements in liquidity due just to standardization." Western Asset manages $466 billion.
In September, BlackRock argued that low interest rates and muted volatility mask the "extent of the breakage" in the bond market. The firm's suggested overhaul also includes unseating banks — a group that includes JPMorgan — as the primary middlemen in the market and shifting transactions to electronic markets.
Bank Oligopoly
"The current environment breeds complacency — for issuers and investors alike," said Tara McDonnell, a BlackRock spokeswoman. "Market regulators have been right to call for change. However, it's not just regulatory changes that are needed. To modernize bond markets requires a rethinking of market structure and changes in behavior by all market participants: issuers, intermediaries, investors and regulators."
A BlackRock representative wasn't immediately able to comment.
Despite years of effort by some investors to eliminate the bank oligopoly in the bond market, the firms have retained their stranglehold on trading. The top 10 dealers control more than 90 percent of trading, according to a September report from research firm Greenwich Associates. To BlackRock, the dangers of price gaps and scant liquidity need to be addressed before market stress returns.
Staying Anonymous
"Keeping dealers involved is important" as the market evolves, Buchanan said. Because Wamco likes to stay anonymous when it trades, having a bank as an intermediary is essential, he said.
Maintaining a large role for the banks aligns with research published last week by Greenwich Associates. Eighteen electronic trading systems are currently competing for orders, and all of them need dealers to provide bond prices if they hope to succeed, according to analyst Kevin McPartland.
The new bond-trading systems are seeking to help investors find the debt they want, alleviating the difficulty doing so caused by revamped regulations. Increased capital requirements are also making it less profitable for Wall Street firms to hold bonds in anticipation of client demand. As a result, asset managers and hedge funds currently own 90 percent of the outstanding corporate bonds, McPartland said.
'Giant Experiment'
JPMorgan's Corgan said that there are enough competitive trading venues vying for business now.
"We are going through a giant experiment," he said. "We will see successes."
Lee Olesky, chief executive officer of Tradeweb Markets LLC, in October began offering his customers the option of buying and selling investment-grade U.S. company debt on its platform for the first time. Only about 15 percent of trading happens electronically, with the rest occurring directly among humans, he said at the time.
Bloomberg LP, the parent company of Bloomberg News, competes with Tradeweb and others in facilitating bond trades between investors and banks.
Today, speaking on the panel beside Corgan and Buchanan, Olesky had some advice for how the bond market should proceed.
"To my right are two of the top clients in the world," he said. "Listen to them."
–With assistance from Mary Childs in New York.
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