The entry of market makers to enhance liquidity options in the secondary market for trading catastrophe bonds would be a dream come true, speakers suggested at the SIFMA ILS 2025 conference in Miami yesterday.
Highlighting the importance of the secondary market in keeping the catastrophe bond sector functioning as it should, panellists implied that even more liquidity may be required, as the market grows.
Mariagiovanna (Patti) Guatteri, Chief Executive Officer and Chief Investment Officer, Swiss Re Insurance-Linked Investment Advisors Corporation (SRILIAC), commented, “First of all, let me thank everybody involved in producing pricing sheets, because these are really the cornerstone of our market. I’ve been on that side, many years ago, and it’s not an easy job. That’s really important for valuation, without that, we couldn’t have a capital market.
“Thinking specifically on the secondary market, that’s what’s allowed liquidity of the market first of all. So without that, we could not have strategies that offer weekly, bi-weekly or monthly liquidity. So that’s really great value, with all the information that provides.
“So the secondary market is really existential to the cat bond market, and then maybe looking ahead, a wish or maybe a dream is having market makers in this market.
“I don’t know if we are there yet, but maybe that should be the next step in evolving this market.
“We need to be bigger, it’s not an easy market to provide market making, but that’s, you know, maybe a chicken and egg thing. We need to have bigger investing in the market to grow, that’s maybe the next step.
“Maybe we then get what we need to get to $200 billion.”
Continuing on the same topic, Chin Liu, Managing Director, Director of ILS, Director of Fixed Income Solutions, and Portfolio Manager, Amundi US, added, “Market makers would be my dream come true, right? Because right now, it’s all just work on order. We know sometimes the market can be very one-sided, when there’s inflow everyone has money on hand, when there’s outflow, nobody has any additional capacity.
“So having a market maker in the middle, I think we want to make sure there’s good profit margin for the market maker. But also that’s a great way of providing liquidity, providing price discovery to the market.
“You know if you want the bond strategy to be successful, in the end, the biggest difference between a bond strategy versus a traditional reinsurance strategy is that people are able to get out of a position at a reasonable market price.
“So having that secondary market is a foundation to make this market function normally and like the broader fixed income market. So I think it’s necessary.”
The comments come at an interesting time for catastrophe bonds and broader insurance-linked securities (ILS), when there are increasing numbers of new investor entrants and interested parties who typically come to fixed income investments with a more dynamic trading approach, such as hedge funds.
There are now investment firms focusing on the cat bond and ILS space who have acted as market makers in other asset classes and provided liquidity into more regularly dealt strategies, such as exchange traded funds (ETF).
The impending launch of the first cat bond ETF may require support from these types of players if it is to grow meaningfully in the space. So, perhaps the coming year could result in the first true market-making (or liquidity provision) activity emerging in the catastrophe bond space, making these comments at the SIFMA conference particularly timely.
It’s a function the market would clearly benefit from, if the current cat bond growth curve is to be continued or even accelerated and it could have beneficial effects for sponsors and investors. But it does come with questions about whether trading may need to become even more dynamic and how that can be supported in the space.
