Sterling corporate bond market structure affecting retail customers

A report commissioned by Investment Management Association (IMA) on the sterling corporate bond market observes that the current market structure is preventing direct retail participation in the corporate bond market.

This is due to a number of reasons:

The very large number of bond issues and the complex way they interact make it difficult for investors to understand the implications involved for each issue in the event of corporate failure. Although the number of companies issuing bonds is akin to that in the equity markets, each issuer typically has a plethora of different bond-issues but only one type of share.

The minimum permitted investment ("lot") in the UK is typically much higher than in Europe, making the likelihood of retail participation in the UK less likely. In the UK, lot sizes are usually £50,000. In Germany, 23 of the 29 corporate bond issues in 2008 were at lot sizes of €1,000.

The OTC nature of the market makes it hard to achieve ‘normal' levels of pre and post-trade transparency, as compared to other markets. Furthermore, there is difficulty in designing and implementing best execution rules - and this is a critical for retail investor protection.

Commenting, Jane Lowe, Director of Markets at IMA said: "While markets should be freely available to both retail and institutional customers, the research shows that, while bonds may on the face of it be easier to understand than equities, the nature of primary issuance and secondary market trading arrangements in the UK act to prevent retail participation in the sterling corporate bond market."