The Bank for International Settlements has called for tougher rules to stop bond funds from amplifying risks to financial market stability and has thrown its weight behind calls for tighter supervision of blockchain-based decentralised finance.
The umbrella body for central banks around the world said in its latest quarterly review that action was needed after bond funds had been forced to sell assets “on an elevated scale” in March 2020. An abrupt and widespread rush to the exits from these funds added to coronavirus-induced volatility across fixed income markets that was relieved only by massive interventions by central banks, the BIS said.
The institution’s position adds to earlier proposals for new safeguards by the IMF, Financial Stability Board and the International Organization of Securities Commissions.
“The turmoil raised questions about whether bond funds’ own lines of defence can prevent the potential amplification of risks during periods of stress,” said the BIS. A destabilising “fire sale” of financial assets could have arisen if central banks had not stepped in with a wide range of emergency measures, including huge new asset purchases schemes, many of which are still in place.
Fixed income funds own 18 per cent of outstanding US corporate bonds and 17 per cent of outstanding eurozone corporate bonds, giving these vehicles a critically important influence in determining prices.
Most bond funds allow end investors to take their money out with just a single day of warning, but the BIS said longer notice periods for withdrawals could be introduced to remove the problem of trying to sell illiquid assets in a falling market.
Its analysis indicates that managers of bond funds overestimated how much of their portfolio they would be able to sell in a single day to raise cash, particularly in volatile market conditions.
The BIS also suggested that, in some circumstances, actively managed fixed income funds could transfer bonds instead of…
