Interactive Data has launched a Liquidity Indicators Service, leveraging the same fixed-income evaluated pricing and reference data content that supports pricing and trading functions at buy-side and sell-side firms, to provide a series of security- and portfolio-level Liquidity Indicators.
Concern about market participants' ability to manage liquidity risk is being stoked by a combination of factors, including: a multi-year decline in dealer inventories; a sharp increase in the supply of outstanding debt instruments, with no comparable increase in trading volume; and anticipation that future interest rate increases could trigger a flight from fixed income assets. Regulatory responses include, most recently, the Security and Exchange Commission's (SEC) proposed rules for liquidity risk management programs for mutual funds, which, if adopted as proposed, would require fund companies to make significant changes to enhance or modify their risk management operations.
"Bond market liquidity continues to make headlines as regulators and participants alike want to ensure their preparedness for a rise in interest rates. The capability to model a range of liquidity scenarios in stressed and non-stressed conditions is going to become more of a part of the mutual fund playbook," says to Paul Kraft, a partner with Deloitte & Touche LLP and the head of Deloitte's mutual fund practice.
The Liquidity Indicators are designed to support firms' liquidity risk management needs during all economic cycles, even in stressed markets. They can be used to analyze a security's liquidity compared to other securities in various groupings including issuer, sector, asset class, or against bonds with similar risk characteristics such as yield or duration. The Indicators include estimates of the Projected Trade Volume Capacity of a fixed income security, which can be used in conjunction with firms' actual position sizes to estimate the potential number of days to liquidate a position under various stressed assumptions.
"Understanding liquidity risk is a top priority for many global financial institutions. This was confirmed in the feedback we received during our recent pilot program, particularly with mutual fund companies, given applicable regulatory guidelines and responsibilities to service shareholder redemptions on a daily basis," says Andrew Hausman (pictured), President, Interactive Data Pricing and Reference Data. "Our clients need to have confidence in their risk assessments, including analysis of their ability to exit a position at a particular price and the overall liquidity profile of their portfolio relative to the market. These tools can help them do that," he added.