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Electronic Bond Trading Set To Rise in Asia-Pac

Traders Magazine Online News, September 14, 2018

Shanny Basar

Traders in the Asia-Pacific region are becoming more willing to embrace electronic trading of corporate bonds according to a survey from the International Capital Market Association.

ICMA said in a report, The Asia-Pacific Cross-Border Corporate Bond Secondary Market, that electronic trading is between 10% and 40% of secondary market activity in the region, which is lower than in the US and Europe.

A number of respondents suggested that Asian markets have traditionally relied on personal relationships and trust, and picking up the phone to trade is an entrenched practice, although some now negotiate trades using social media and personal chat apps.

“Knowing your counterparty seems to underpin liquidity, and as one interviewee framed it, the regional bond markets are essentially a human dark-pool,”said the study. “But many of the interviews also suggest that this reluctance to embrace electronic trading may be changing.”

One respondent said regional firms have become used to electronic trading in the US. In addition, in the European Union the MiFID II regulations came into force this year and the reporting requirements are forcing more trading to shift onto venues.

"Regional regulators appear to be watching the impacts of MiFID II with a view to introducing their own regulatory initiatives around transparency and best execution,” added ICMA.

Other interviewees told the survey that cost pressures are forcing many banks to cut their sales teams and provide low-touch liquidity via platforms instead. The study said: “The ability to process and leverage proprietary order and trading data is seen by many as providing a potential competitive edge.”

The ICMA report highlighted the acceleration in issuance and size of the US dollar, euro and sterling corporate bond market from Asia Pacific issuers, which tripled to more than $930bn (€800bn) between 2011 and 2017.

“A number of participants pointed to what one dubbed the ‘Asia-fication’ of the APAC markets, with regional investment funds and life insurers beginning to dominate buy-side flows in US dollar, euro and sterling credit,” said the report. “ China is a large part of the story, with many Chinese investment firms and securities companies opening offshore offices (primarily in Hong Kong).”

Bond Connect

The People’s Bank of China and the Hong Kong Monetary Authority also launched Bond Connect in July 2017 to allow overseas investors to easily access the Chinese onshore bond market. International firms can can trade through the Hong Kong Stock Exchange, rather than requiring a quota.

“At the time of the interviews, Tradeweb was the only offshore trading venue connected to Bond Connect, although Bloomberg was about to receive approval and MarketAxess was in advanced discussions with Bond Connect, with other platforms also seeking connectivity,” said the report.

Tradeweb Markets, the electronic venue for trading fixed income, derivatives and exchange-traded funds, said in a statement in July this year that onshore bond trading activity in China had surpassed Chinese yuan 697bn ($107bn) since the launch of Bond Connect.

Lee Olesky, chief executive of Tradeweb Markets, said in a statement: "Tradeweb is well placed to accommodate the anticipated increase in investor demand for Chinese debt given our market-leading infrastructure, long-standing fixed income expertise, and extensive community of more than 2,000 institutions."

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