Comment on: “Dealer balance sheets and bond liquidity provision” by Adrian, Boyarchenko and Shachar

Central Counterparties and Liquidity Provision in Cash Markets

“…Since the height of the European sovereign debt crisis, trading activity and liquidity in the European sovereign bond market have recovered only slowly.This observation is in line with evidence from the US Corporate Bond and Repo market and points to the negative impact of post-crisis regulation on the ability and willingness of financial intermediaries (Bessembinder et al (2018); Adrian et al (2017); Di Maggio (2017) and Duffie (2017)) to engage in market making. Di Maggio (2017) states: "The combination of post-crisis capital and liquidity regulations and a lower return environment has made banks less able and willing to function as market makers". In this context, we investigate CCP usage and trading activity around the introduction of the leverage rule back in 2013.…”

“…Recent research on the impact of technology on trading shows that electronic trading is growing and that markets have become more transparent (O'Hara and Zhou (2021)). Moreover, since the financial crisis, new regulatory rules have reduced the capacity of traditional market makers to intermediate trades (see, e.g., Duffie (2017) or Di Maggio (2017)). Consistent with this, Fleming and Keane (2021) report that during the recent Covid-19-induced market stress episode, dealers' capacity to intermediate trades was not sufficient.…”