With no disrespect to the honourable intentions of experienced people, I'd like to have an honest disagreement that the current heavy hand of policy, arguably successful in equity markets, may be inappropriate for birthing a vibrant wholesale fixed income market in India. The two mega bond market policy initiatives of recent times - the negotiated dealing system for gilts (NDS) and BSE posttrade corporate bond reporting - reflect a willingness to create monopolies, distrust global experience and raise more questions than they answer.
Let's start with NDS that has successfully introduced electronic gilt market. It is unclear whether other options for going electronic were fairly considered (ICAP's application has been pending for three years) and thus the important question is not ownership (private v/s public) but market microstructure (competition v/s monopoly).
Was NDS really important enough to overlook the opinion of the Attorney General of India that it is an exchange?
Isn't fragmenting markets by regulators unnecessary?
Shouldn't posttrade infrastructure like CCIL be open architecture and agnostic to what happens pretrade?
Why aren't regulators encouraging competition by allowing hybrid electronic intermediary platforms that would reduce transaction costs and improve price discovery?
Why is CCIL being allowed to use policy as a competitive strategy?
The second initiative is the mandatory corporate bond reporting platform operated by BSE. This is an admirable attempt to create post-trade transparency in a market whose volumes are a rounding error in our capital markets . It is also a market that is critical to funding infrastructure and lower banking and macroeconomic volatility.
But could the post-trade reporting platform provider have been neutral?
Why was BSE chosen over other exchanges that have more debt experience?
Why should BSE be given an unfair advantage in the battle for a trading system?
How will this trading system be different from the existing but famine-struck WDM platform of NSE?
Can and should banks be forced to become members of exchanges when fixed income deal execution is a small part of their overall activity?
Rather than issue fatwas that navigate the market towards a fixed destination or design, could we allow for more evolution? Philosopher Daniel Dennett called evolution a general purpose algorithm for creating "design without a designer" . Evolution chooses designs by trying out a variety of candidates: those successful are retained, replicated and reproduced, while those unsuccessful are discarded . Through repetition, evolution is a method of searching enormous, almost infinitely large spaces of possible designs for the small fraction of designs that are 'fit'.
As Dennett puts it, evolution finds "the needles of good design in haystacks of possibilities" . There is too much at stake to not allow the exploration of all possibilities (OTC, exchanges, hybrid intermediation, order matching, etc) in our fixed income market microstructure. Innovation is not the child of intelligent design (and monopolies) but of evolution (and competition).
If regulators judge policy by results, should they not be agnostic in their search for the right fit? Mumbai can and must fight Dubai's publicly-stated ambitions to "put our clock between Hong Kong and London on the walls of the world's financial institutions" . But we can't do it without vibrant bond markets and the "animal spirits" that come from brutal but fair competition.
Wednesday, January 17, 2007
Difficult questions about bond market
Manish Sabharwal of ICAP has an excellent article in Economic Times today. Here is the original, but the core is more readable here: