AFME has today published a paper on Liquidity Provision and Risk Management in Corporate Bond Markets. This document is intended to provide insight into the technical complexities and uncertainties inherent in hedging market risks assumed by banks when providing liquidity on demand to end investors. This report follows on from AFME's “MiFIR 2021 Corporate Bond Trade Data Analysis and Risk Offset Quantification” report, co-authored with Finbourne Technology, and seeks to provide further in-depth and technical analysis. This paper focuses on the material differences between fully trading out of a risk position (100% out of risk) and hedging the various market risks associated with holding that position.
The report also aims to explain how these inherent complexities and uncertainties are relevant for, and should inform, the ongoing reviews of MiFIR post trade transparency and deferral regimes being conducted in both the EU and UK.