inter dealer book let

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The Role of

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Securities Industry and Financial Markets Association

Average Daily rading Volumes

0.00

3.25

6.50

9.75

13.00

16.25

19.50

22.75

26.00

0 6 : Q 4

0 6 : Q 3

0 6 : Q 2

0 6 : Q 1

0 5 : Q 4

0 5 : Q 3

0 5 : Q 2

0 5 : Q 1

0 4 : Q 4

0 4 : Q 3

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0 4 : Q 1

0 3 : Q 4

0 3 : Q 3

0 3 : Q 2

0 3 : Q 1

0 2 : Q 4

0 2 : Q 3

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0 2 : Q 1

$ Billions

S o u r c e : M u n

i c i p a l

S e c u r i t i e s R u l e m a k

i n g B o a r d

Average Daily Trading Volume ofMunicipal Securities * 2002-2006

* Includes both dealer-to-dealer and dealer-to-customer transactions

0

20

40

60

80

100

0605040302010099

$ Billions

S o u r c e : F e d e r a l R e s e r v e B a n k o

f N e w

Y o r k

Average Daily Trading Volume ofFederal Agency Securities (1) 19992006

(1)Primary dealer activity

Coupons Discount Notes

0

50

100

150

200

250

300

0605040302010099

$ Billions


f N e w

Y o r k

Average Daily Trading Volume of AgencyMortgage-Backed Securities (1) 19992006

(1) Primary dealer activity

0

100

200

300

400

500

600

700

Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1

$ Billions


f N e w

Y o r k

Average Daily Trading Volume ofU.S. Treasury Securities * 20032006

* Primary dealer activity. Approximately 45% of trades in U.S. Treasury Securities areconducted through IDBs.

03 0403 05 06

0

5

10

15

20

25

S o u r c e s : F e d e r a l R e s e r v e B a n k

o f N e w Y o r k

Average Daily Trading Volume forCorporate Bonds (1) 2002-2006

1 Primary dealer activity; excludes all issues with maturities of one year or less,and includes REMICs.

$ Billions

0 6 : Q 4

0 6 : Q 3

0 6 : Q 2

0 6 : Q 1

0 5 : Q 4

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0 5 : Q 1

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curities Brokers Brokers in the municipal bond markets 1 are specialized securities companies who act as inter-mediaries working to acilitate transactions between bro-ker/dealers and dealer banks in these markets. IDBs aresometimes described as providing a Petri dish o liquid-ity in the bond markets. That is, they provide a nurturingenvironment wherein market participants can ascertain

in ormation about a given market, thereby eventually acili-tating a trade between buyers and sellers.

That IDBs are crucial to the unctioning o the markets hasbeen repeatedly highlighted in times o market stress. Intimes like these, dealers are o ten the only parties willingto buy bonds they believe are undervalued, and to holdthem until a market imbalance is righted. Because IDBsare global and trade on a 24/7 basis, their ability to identi ydealers and arrange trades is regarded as key to keepingthe nancial markets open in such highly stress ul times asthe a termath o the attacks o September 11, 2001.

THE MARKETSThe IDB community distributes in ormation and acilitatestransactions in the secondary, or wholesale, nancial debtmarkets between dealers and dealer banks around theworld. Although market participants o ten re er colloquiallyto a single bond market, there are actually quite separatemarkets, which include: (1) high grade sovereigns, includ-ing the U.S. government and G-10 oreign governments,(2) U.S. ederal agencies and government sponsored en-

terprises (GSEs, and, collectively with ederal agencies,Agencies), (3) corporate debt, (4) Agency and non-Agen-cy mortgage backed securities (MBS) and asset-backedsecurities (ABS), including collateralized debt obligations(CDO), (5) high yield securities, such as high yield cor-porate debt, distressed debt and emerging markets debt,including emerging markets sovereigns, (6) municipal se-curities, and (7) interest rate, credit and other derivativeproducts. Some o these debt markets utilize IDBs morethan others. Typically, markets which make extensive useo IDBs include the corporate bond, xed income deriva-

tives, U.S. Government and Agency, municipal securitiesand emerging markets.

Overall, the markets that IDBs are active in can be char-acterized as single-price auctions. Unlike exchanges,trades in these markets tend to occur sporadically. They

are characterized by evaporative liquidity, as partic-ipants are either ready to transact at given prices, or

out o the market entirely. As a result, dealers seek outIDBs with expertise in the securities they seek to tradein, so that they can test trade ideas against what maybe possible in the market at any given time. This is incontrast, or example, to an open-outcry system (suchas a utures pit or other exchange) wherein many marketparticipants provide bids and o ers on many trades in apublic environment.

THE ROLE OF IDBSInterdealer brokers play varying roles in each o the

ixed income markets and have become instrumentalto their e ectiveness and e iciency. IDBs draw togeth-er buyers and sellers so that trades can be executedby market participants.

Some IDBs are licensed as broker/dealers; others arenot. Whether or not an IDB is licensed depends on thesecurity or instrument being brokered. For example,whereas brokering credit rate de ault swaps does notrequire a license, per orming the same services or U.S.Treasury notes does.

IDBs provide potential buyers and sellers with the criticalmarket in ormation they need to trade. This in ormationincludes the narrowness o bid and o er quotes, or ex-ample, and ollows a strict protocol regarding identi cationo sellers. In general, dealers with an order to buy or sell a

0

500

1,000

1,500

2,000

2,500

3,000

3,500

'06*'05'04'03'02'01'00 S o u r c e s : T h o m s o n F

i n a n c i a l

, U . S . T

r e a s u r y a n d F e d e r a l A g e n c i e s

Issuance in the U.S. Bond Markets

2000-September 2006*

* As of September 2006.

$ Billions

Includes long-term issuance only

Municipals Corporate Treasury Federal Agency Mortgage Related Asset-Backed

1 A Municipal Securities Brokers Broker (MSBB) is a municipal securities broker or dealer who acts exclusively as an undisclosed agent in the purchase or sale o munici-pal bonds, notes and other instruments or a registered broker or dealer or registered municipal securities dealer, who has no customers as de ned in MSRB Rules andwho does not have or maintain any municipal securities in its proprietary or other accounts. As an undisclosed agent, an MSBB acts in the limited capacity o providinganonymity, communication and order matching. It does not exercise discretion as to the price at which its transactions are executed or when they are executed.


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bond (on behal o a customer or themselves) must ascer-tain the best price available in the interdealer market. Intheir search, they can contact an IDB directly via telephoneor obtain an aggregated quotation rom an IDBs electronicscreen. An IDB may also act as the dealers independentintermediary, thereby protecting the dealers identity andlevel o trading interest. This is to guard against the possi-

bility that revelation o this in ormation to the market couldnegatively impact the price at which the dealer is willing tobuy or sell the security.

Municipal Securities Brokers BrokersIn the municipal securities markets, a municipal securitiesbrokers broker (MSBB) intermediates in the interdealersegment o the secondary market (made up o dealersand dealer banks). There are several aspects o the mu-nicipal bond market and its regulatory structure that setMSBBs apart rom IDBs in other markets. First, as aconsequence o this markets size, complexity and lacko homogeneity, MSBBs tend to specialize in subsec-tions o the municipal bond markets, either by region,issuer or type o security. Second, unlike IDBs in othermarkets, MSBBs do not normally present traders withlive or tradeable prices via electronic plat orms.Rather, business is primarily conducted through voicecommunication. Third, MSBBs use a method or nd-ing prices or securities which is unique to that market.This method is re erred to as Bids Wanted, where adealer asks an MSBB to gather bids rom the interdealer

market on a speci c security so the dealer or ultimateowner (customer) may make a sell or hold decision ontheir position.

It is important to note that under the Securities Ex-change Commission net capital rules, 2 MSBBs areprohibited rom maintaining customer accounts, andare urther speci ically restricted rom maintaining aninventory o securities or their own accounts (ie pro-prietary inventory). Thus, all transactions that an MSBBundertakes must be equally-matched buys and sells.Registered broker/dealers and dealer banks are theirclients, including (a) dealers seeking liquidity on be-hal o a customer, retail or institutional, or (b) dealersseeking to distribute a new issue or adjust an inventoryposition.

All MSBB executions must have a dealer or dealer bankas the contra-party. MSBBs may provide in ormation tonon-dealers; however, they may not execute transactionsdirectly with customers.

EARNING TRANSACTION FEESIDBs earn transaction ees when acting as intermediar-

ies. This transaction ee is customarily known to all partiesprior to a trade. By virtue o their business model, IDBsdo not receive remuneration or posting prices which theyreceive rom buyers and sellers, although this practice in

act represents the vast majority o their daily activity. Theway they earn a transaction ee is i the seller and buyeragree to execute the trade. An IDBs transaction ee isearned at the point o sale.

IDBs almost never know what the execution price will beand they necessarily must work to nd the best acceptable

price to the buyer and seller, in the hope o earning theright to acilitate that trade.

IDBS VALUE TO THE DEBT MARKETSIn general terms, IDBs add value to the markets by:

Enhancing price discovery and transparency

(Via communicating dealer interests andtransactions)

Providing anonymity and con dentiality (Via their

position in the middle o trades)

Facilitating in ormation fow (Via acting as a cen-

tral in ormation point)

Facilitating enhanced liquidity (Via their broadrange o contacts)

Improving market e ciency (Via their rapid ac-

cess to liquidity)

Lowering costs (Via their provision o prices totraders without incurring sta ng costs)

Enhancing price discovery and transparencyIn connection with their acilitation o transactions, IDBsprovide pre-trade price discovery in their markets. Prior to

execution, an IDB distributes its dealer quotes, in the ormo bona de bids and o ers or securities through a varietyo methods ranging rom custom-designed trading plat-

orms to voice and e-mail communications. The IDB hasreceived this in ormation rom dealers who have the sameor similar market interests.

2 SEC Rule 15c3-1(a)(8)(ii) states: The term municipal securities brokers broker shall mean a municipal securities broker or dealer who acts exclusively as an undisclosedagent in the purchase or sale o municipal securities or a registered broker or dealer or municipal securities dealer, who has no customers...and who does not have ormaintain any municipal securities in its proprietary or other accounts.


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Securities Industry and Financial Markets AssociationSecurities Industry and Financial Markets Association

The IDB usually aggregates quote in ormation in order toshow its dealer clients the best quotes available in themarket place. In the municipal bond markets, or exam-ple, an MSBB will select the highest bid and lowest o -

er available otherwise known as refecting a market to show to dealers who are interested in trading. Dealersuse this in ormation to trade or their own account and to

acilitate customer transactions. In this way, IDBs provideanalogous services or the xed income markets as theconsolidated quotation system provides or the equitiesmarkets.

IDBs also provide in ormation to dealers about the depth othe market, or example providing di erent quotes basedon the par value o a particular security being bid or o ered.Regardless o the market, however, IDBs who use electron-ic screens will distribute best prices to all participants, notonly to those who might be interested in trading. In con-trast, or e ciencys sake o -screen brokers may only call

traders who they believe may have an interest in tradingthese particular bonds. Overall, IDBs publish the best bidand o er available to the markets in an e ort to improveprice discovery and with the ultimate goal o bringing buy-ers and sellers together at one price.

Providing anonymity and con dentialityPursuant to industry practice and regulation 3, the relation-ship between a dealer and an IDB is a con dential rela-tionship. An IDB maintains participant anonymity with re-gards to broker/dealers and dealer banks during the pricediscovery process in the sale and purchase o bonds. 4 Thisis in order to prevent competing dealers rom discerningeach others strategies by monitoring the market activitieso their competitors.

During price discovery, dealer interactions with IDBs masktheir identity rom the marketplace. This anonymity re-duces the market impact costs associated with the value

3 Under MSRB Rule G-24, the MSBB must not disclose the identity o buying and selling dealers or dealer banks to contra-parties or anyone else, and must not disclosetrading strategy in ormation that is given in con dence by dealers or dealer banks.

4 IDBs do not disclose dealers identities pre-trade. For matched principal business, the IDB is the counterparty and the names are never given up. For trades where the IDBintroduces the counterparties to each other (re erred to as name give-up trades), the IDB will give up the name at the time o execution.

Dealer Dealer Dealer

IDB Exchange

U.S.Treasury

GovernmentSponsoredEnterprises

HedgeFund

InvestmentManager

PensionFund

CentralBank Corporation

MutualFund

CorporateIssuers

MunicipalIssuers

rading FlowsISSuerS

SeLL-SIDe

buy-SIDe


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to the market o the knowledge that a particular dealer isseeking to buy or sell a speci c quantity o bonds. For ex-ample, a large bank or dealer may be looking to acquire orsell a large amount o inventory. I done directly, such mas-sive trades may well a ect market levels, with consequentnegative impact on the dealers trading strategy. By trans-acting their business through an IDB, the initiator o trad-ing activity remains anonymous. And the large quantity obonds can be sold in smaller lots, thus maintaining a stablemarket and uni orm price throughout the transactions.

For students o human nature, it will be apparent that an-other important reason anonymity is highly valued by trad-ers is what ormer Fed chairman Alan Greenspan recentlydescribed as the gregarious nature o this business.While traders have a natural impulse to publicize their ac-complishments, it does not bene t them to have the mar-ketplace as a whole know their identity as a participant inany given trade. This, plus the act that disclosing a par-ticipants identity does not enhance liquidity, is the reasonwhy IDBs do not typically disclose the identity o their deal-er clients. The marketplace receives the in ormation that is

IDBs currently use one o three businessmodels to per orm their services includ-ing (i) voice model, (ii) hybrid model,and (iii) electronic model.

Voice BrokerageVoice brokerage, the conventional meth-od o communicating prices betweenbroker dealers, has been the traditionalway to disseminate executable pricesand indications o interest. Clientscommunicate with IDBs via telephoneto place orders, assess market liquidity or execute trades or bonds. Te IDB isable to obtain additional in ormation

rom the client as to the price and truesize o the bond it is seeking to buy orsell. Te IDB assists the broker dealerin obtaining liquidity through solicita-tion, even in illiquid securities, on ananonymous basis.

Hybrid Brokerage ModelAs the markets and technology haveevolved, IDBs have combined the voiceprocess with electronic systems. It isimportant to note that this visual con-

rmation o the marketplace has servedto improve both market transparency and liquidity. Clients may anonymously post quotations on an electronic screendirectly or submit the quotation to theIDB via phone or posting on the elec-tronic screen. Tis model allows brokersto proactively assist clients in ndingliquidity through solicitation and nego-

tiation. Hybrid brokerage models may anonymously execute orders througheither (i) telephonic negotiation andelectronic execution, (ii) an electronicnegotiation and execution, or (iii) anelectronic auction.

Orders executed through electronicnegotiation mimic the role o the inter-dealer broker in the negotiation process.Clients may access an executable quota-tion directly by hitting a bid or tak-ing an o er and engage in a negotiationwith the contra-party or urther size.Identities o the parties are not revealeduntil a trade is completed.

Certain other hybrid brokerage mod-

els, speci cally those used or municipalbonds, allow users to enter requests orbids with a stated duration time that theauction is open. Te request or bidslists the security description and asso-ciated size but does not include a price.Te IDB will contact dealers to solicitinterest in the bid. Dealers may respondto the request or bid by submitting rmo ers either electronically or via tele-phone. Following a telephonic negotia-tion, an execution occurs i the bidderreceives the price at which it is willing tobuy the securities. Such hybrid systemsalso allow dealers to post o erings atspeci c prices. Tese o erings serve asindications o interest rather than rmquotes and brokers may access theseo erings telephonically. On some sys-

tems, request or bids and o erings may be placed on electronic system directly by clients.

Electronic BrokerageAs markets become more commod-itized, they lend themselves to ully elec-tronic trading. IDBs have developedtheir own proprietary systems, notably in the U.S. Government securities mar-ket. Certain IDB trading plat orms,again, particularly in the U.S. Govern-ment securities market, are interdealerplat orms, where dealers trade anony-mously with each other on these pro-prietary systems. Trough electronictrading, IDBs provide real-time execut-able trading systems to clients. Clientsmay post anonymous quotations on theelectronic system or access real-timeexecutable quotations that are automati-cally executed when posted bid pricesare hit or posted o ers are lifed. Tesize o all orders is aggregated at eachprice point or display purposes andorders are executed according to price/time priority. Users may post hiddenliquidity at a stated price. IDBs provid-ing electronic brokerage distribute pric-

ing in ormation through market data vendors and directly to clients. (Clientsnormally utilize ully electronic market-places or highly liquid securities thatare actively traded such as U.S. Govern-ment securities and some corporate andmunicipal bonds.)

Current IDB Business Models


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Securities Industry and Financial Markets AssociationSecurities Industry and Financial Markets Association

needed that is, the price and the amount o bonds trad-ed in order to come to a deeper understanding o themarket and o where liquidity is available, without needingto know the identity o the participants in the deal.

Facilitating in ormation foIDBs signi cant role in acilitating the fow o in orma-tion between dealers is a critical service which both en-hances liquidity and results in improved prices or marketparticipants.

Pre-trade, IDBs acilitate market in ormation (prices on se-curities, interest in buying and selling securities and transac-tions in securities) fow in several ways. First, in many mar-kets, IDBs post and disseminate market in ormation through

an electronic system to their dealer clients.5

This in ormationtypically includes the bond issue description, the bids ando ers in the bond, and the associated size o the bids ando ers. Second, in providing anonymity to their dealer clients,IDBs thereby encourage dealers to supply the IDB with mar-

ket in ormation, typically in the orm o calls received seek-ing bonds or rom those looking or a buyer o their bonds.Finally, by aggregating quotations, IDBs provide participantswith valuable in ormation that refects the buying and sellinginterest in the bonds among dealers.

This in ormation, o course, has its limits. Depending onthe market, participants must post a securitys availabilityin order to obtain a market price. Too, some systems mayonly disseminate requests or bids. In all cases, the dis-seminated in ormation does not attribute the willingness tobuy or sell to any given broker-dealer.

IDBs also acilitate post-execution price transparency. Forexample, a ter a municipal bid-wanted trade is executed,

an MSBB may provide a dealer with in ormation about thecover bid, i.e., the next best bid a ter the level at whichthe bond traded or whether the bonds are re-o ered andat what price. This is important in ormation or dealers tohave in assessing the depth o the market and the risk in-

5 Electronic trading plat orms acilitate price discovery and trade execution in bonds and other xed income instruments, providing post-trade pricing services, pre-tradeanalytics and research. Real-time post-trade data is available ree o charge to participants; some sell this data to non-participants as well. Dealer-to-dealer plat ormstend to service the government bond markets; dealer-to-customer plat orms (usually provided by investment banks) service both the government and corporate bondmarkets. These plat orms allow trading in a large number o bonds across a broad array o sectors, including corporate, Government and emerging market debt. Dealer-to-dealer plat orms provide systematic, executable two-way pre-trade prices to plat orm participants that use a cross-matching or rm quote trading method. Mostdealer-to-customer plat orms, however, operate solely through a request or quote method.

Te Five Handed radeAs IDBs broker securities and deriva-tives or broker dealers and dealer banks,it is ofen the case that these dealers areoperating as an intermediary or a retailor institutional customer. As a result, inthese transactions ve participants areinvolved as ollows:

Te dealer (2nd Hand) is con-tacted by the retail or institutionalcustomer (1st Hand) who is in-terested in buying or selling cer-

tain securities. I the securities donot meet the dealers trading inventory parameters, the desk willplace a buy or sell order with anIDB (3rd Hand).

Te IDB will, through its network o dealer contacts, nd a dealer(4th Hand) willing to sell or buy the securities.

Tat dealer who is willing to sellor buy the securities rom the IDBwill probably have a retail custom-er or institution (5th Hand) whois interested in selling or buyingthe securities.

Tere are ve parties involved inthe completion o this trade, thusthe term Five Handed rade.

1st Hand 2nd Hand 3rd Hand 4th Hand 5th Hand

C stom C stomD al#1 IDb D al#2


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volved in bidding or o ering bonds at particular levels. Thisin ormation permits dealers to quote markets with bettercertainty, and presumably at lower spreads, increasingsecondary market liquidity and the ability or investors tosell their bonds.

Its important to note here that the bene ts o market datadistribution that the IDBs have long championed have beeninstitutionalized by regulators in some markets. In corpo-rate bonds, all transactions are reported on the NASDTRACE system (National Association o Securities DealersTrade Reporting and Compliance Engine) system. 6 In themunicipal bond world, all MSBB trades in municipal secu-rities are reported to the Municipal Securities RulemakingBoards Real-Time Transaction Reporting System. 7

Whether pre- or post-trade, IDBs dissemination o in or-mation reduces market participants costs associated withsearching or buyers and sellers and levels (ie prices) in a

decentralized marketplace and provides them with accessto the current market price or a speci c bond.

Enhancing liquidityRegardless o the particular nancial market, several ac-tors a ect market liquidity: issuers name, issuers creditrating, outstanding size o the particular issue and the to-tal size o other issues outstanding rom the same issuer.

Traders are more willing to buy and sell bonds that are roma recognized issuer and part o large issues. Such bonds

are also likely to be more liquid or easier or an investorto sell back into the market at a competitive price. Otherthings being equal, traders or dealers, then, ace less pricerisk with bonds rom large recognizable issuers than withbonds rom smaller issuers. In addition, bonds with a vari-able or foating interest rates are more liquid than thosewith a xed coupon, since their prices are less volatile.

In their roles as agents, IDBs provide dealers with quotesrom other dealers, thereby enhancing the in ormation

available to the market and the markets overall e ciency.In addition, an IDB may participate in certain marketplac-es by posting quotations or its own account and by act-ing as principal on unmatched trades to acilitate trans-actions, add liquidity, increase revenue opportunities andattract additional order fow. Thus, IDBs acilitate tradesand ensure a more liquid market. Too, the act o mar-

ket competition among IDBs means that overall liquidityis urther enhanced because there are competing, decen-tralized pools o liquidity which traders can access.

Finally, traders multiple responsibilities o ten include man-aging their rms risk, dealing with customers in additionto investigating new market opportunities. As a result, theyo ten look to IDBs to support them on the market side withtheir specialist knowledge.

As one example o this, an MSBB can be said to provide li-quidity because they have speci c knowledge o a state orregion or specialty bond. As such they act as an in orma-tion clearinghouse or municipal bonds o a certain type.Their expertise, in e ect, eliminates the need or a desk-to-desk search on the part o potential buyers and sellerso that security. The act that there are competing MSBBswith specialist knowledge also means that there is moreliquidity or traders to access.

Improving market e ciencyIDBs save their dealer clients time. For traders, time is othe essence, because trading activity does not typicallyoccur with regularity. As a result, traders enhance theirpro tability by making the greatest possible number obond trades per day.

Regardless o the market, when a trader is looking to par-ticipate in a given market, time is critical. As it is the IDBsspecial concern to have up-to-the-minute knowledgeo market participants activity, this must be available todealer/ traders at a moments notice. For traders, the time-saving element o working with IDBs may easily make thedi erence between executing or missing a trade.

Lo ering CostsBy collecting in ormation rom dealers on an independentbasis, inter-dealer brokers gather the liquidity available

or a particular bond series. This unction serves to makeavailable a market value or o ten illiquid securities andalso serves to lower search costs or broker-dealers.Without IDBs, brokers and/or dealers would be in theposition o having to expose their identity to the market-place as they search or liquidity. This would only serveto impair their bargaining position and raise their costs,as inevitably the in ormation would be used against themin the marketplace.

6 IDBs report all corporate bond trades to TRACE. In 2005, approximately 5.96 million corporate trades were reported through this system by all participants. See NASDRule 6200 series.

7 MSBBs report all municipal bond trades to RTRS. In 2006, approximately 6.41 million municipal trades (maturities o 9 months or more) were reported through this systemby all participants. See MSRB Rules G-12 and G-14.


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IDBs also bring together and execute transactions or buy-ers and sellers o bonds. The transactions may be e ectedon an agency basis. IDBs use their knowledge o marketcolor to assist in the price negotiation process and tobring together buyers and sellers. This service brings themarket together and provides broker-dealers with e cientmatching.

HOw IDBS EXECUTE TRADES

Other than in those circumstances when an IDB acts orits own account, all IDBs transact in one o three ways:

(1) In markets where the IDB maintains the dealers ano-nymity, the IDB like all market participants trades asagent or one side and executes the trade as a risklessprincipal, and shares in the risk o clearing and settlementthrough a central Registered Clearing Agency, such as theDepository Trust Clearing Corporation (DTCC).

(2) In a name give-up transaction, the IDB steps outo the transaction at the point o sale, leaving the buyerand seller to clear and settle through the appropriatemarket mechanism.

(3) In exchange-traded products such as utures contracts,the IDB also steps out o the transaction at the point osale, thereby allowing the counterparties to noti y, clearand settle through the exchange.

(Please note that in the second and third cases, where theIDB is acting only to acilitate the trade, it is important tonote that it is the buyer and seller who assume the riskand there ore utilize the appropriate mechanism or theirrespective markets to clear and settle the trade.)

THE FUTURE FOR IDBSMany observers cite the tremendous growth in the sec-ondary xed income markets as the major actor drivingseveral other trading trends. These include a plethora onew products, volatility in interest rates, increased allo-

cation o capital or trading by banks and hedge unds,demand or signi cant de cit nancing in many o the G7countries, increased new issuance in the corporate bond

and MBS markets o securities, shi ts in the oreign ex-change markets as well as signi cant changes in the sup-ply and demand or commodities such as oil, coal andgas. As the need or specialized knowledge proli erateswith these growing markets, so does the demand orIDBs services. In addition, as volume has grown, so hasthe need or transparency and the sophisticated trading

systems IDBs employ to provide more and better in orma-tion to market participants.

Generally speaking, as rapidly evolving trading technolo-gies make more in ormation available to market partici-pants, products tend to become commoditized. As this oc-curs, trading opportunities tend to decrease. Participantssuch as IDBs who earn ees by acilitating trades there oretend to move away rom trading in these products, o tentoward more esoteric products and the voice- acilitatedbrokerage that support them.

In markets where trading opportunities are feeting, IDBshave historically demonstrated their capability to acilitateliquidity and maximize their participation. For example,as most regulated institutions (especially banks, broker-dealers and pension and insurance companies) now usethe bond markets to hedge their exposure to interest rateand credit risk, IDBs increasingly play an integral role inthis growing market. In markets such as xed incomederivatives and emerging markets debt, IDBs have overthe last teen years continued to innovate to respond tomarket needs or e ective price dissemination and mar-ket knowledge.

As marketplaces evolve, IDBs will continue to closely trackmarket needs, providing in ormation, liquidity, anonymityand a centralized place to execute trades. This ability con-tinues to refect the respect and reliance placed in them bythe xed income markets globally.


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