Will exchange-traded funds shape the future of bond dealing?

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Abstract

This note examines how bond exchange-traded funds (ETFs) could reshape the mechanics of bond dealing in Canada by inserting ETF managers and authorized participants into the traditional dealer‑to‑dealer intermediation chain. It describes how ETF “warehousing” of bonds—holding large, tradeable inventories financed by ETF shares—can substitute for some dealer balance‑sheet capacity, potentially supporting liquidity in stressed markets but also adding new layers of operational and funding complexity. The authors argue that ETFs are unlikely to fully replace dealers’ market‑making role but will increasingly influence pricing, risk‑sharing, and the organisation of bond intermediation, warranting close monitoring by regulators and central banks.

Figure 1: How ETFs might create a solution for bond inventory warehousing

Citation

Arora, R., Fontaine, J. S., Garriott, C., & Ouellet Leblanc, G. (2020). Will exchange-traded funds shape the future of bond dealing? (No. 2020-16). Bank of Canada Staff Analytical Notes.

@techreport{arora2020will,
  title={Will exchange-traded funds shape the future of bond dealing?},
  author={Arora, Rohan and Fontaine, Jean-S{\'e}bastien and Garriott, Corey and Ouellet Leblanc, Guillaume},
  year={2020},
  institution={Bank of Canada Staff Analytical Notes}
}