The structure of market making in government bond markets has shifted from a bank-centric model to a hybrid one in which non-bank financial institutions, notably principal trading firms and hedge funds, play an important role alongside banks.
This shift has occurred in several
countries and, while farthest advanced in liquid segments, is also
evident in less liquid segments. The turmoil in March 2020 highlighted
structural vulnerabilities arising from the hybrid model and the
procyclical behaviour of some non-bank financial institutions. Proposals
for improving the resilience of liquidity in government bond markets
aim to reduce demand for liquidity during stress episodes, increase
intermediation capacity and improve the efficiency of intermediation.
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