Rebecca Healey, Liquidnet’s Head of Market Structure & Strategy in EMEA, investigates how the introduction of new European regulations will impact trading in corporate bond markets in the first post of a 5-part research paper.
Under MiFID II, corporate bond trading will need to move from OTC to venue, whether that be SI, OTF or MTF. Asset managers now need to provide qualitative evidence for how venues have been selected and how trades have been executed.
Rather than restrict buy-side options to a known counterparty’s willingness to price risk, hold inventory or find latent liquidity, the requirement for the buy side to demonstrate best execution will accelerate the appetite for greater and more accurate data analysis of where true liquidity lies.
The impact of a selective balance sheet, the juniorisation of sales staff and the fallout from unbundling will continue to redefine liquidity formation. Voice trading will not die out overnight, however there is an inevitability to the eventual rise of electronic trading as firms move more activity onto platforms. This will evolve throughout 2018, as firms adjust to new sources, as well as new methods, of interacting with liquidity. The requirement for new technology as well as new personnel skill-sets will usher in a new era of Execution Champions in corporate bond trading.
During October and November 2017, global asset management firms representing $13.1 trillion in assets under management were interviewed to understand how the introduction of new European regulations will impact how they trade in corporate bond markets.
- MiFID II will trigger a move to trade corporate bonds electronically; 83% are making adjustments to trading practices ahead of forthcoming regulation.
- 97% cited the ability to source liquidity as one of their top three criteria for selecting execution counterparties post January 2018.
- 63% are planning to switch to greater automation, focusing on processing voice trading and the automation of order flow to accelerate an evolution in electronic trading.
- Just 13% of firms still allow PMs to direct order flow, with 47% of respondents now part of a totally segregated dealing desk, ring-fenced from the research process.
- The requirement to evidence best execution is leading to a change in practices; 90% expect to record the steps they take to find liquidity.
- The current dearth of valuable data for certain instruments means nearly half of those who plan to use TCA remain unconvinced as to its value.
- The full impact of unbundling has yet to be felt; only 43% of respondents are fully unbundled, and 66% are still in discussions with their brokers over the cost of research, indicating further change ahead for traditional buy- and sell-side relationships.
- 43% have concerns regarding how the SI regime will work in practice and a further 27% are waiting to see how the industry responds.
- Two thirds of respondents are stalling EMS deployment due to cost, vendor delays and IT constraints ahead of MiFID II. Eighty-five percent of those investing in an EMS are doing so to manage liquidity.
- The evolution of execution is underway with 83% of respondents citing one or more technology initiatives that they are looking at to potentially incorporate in their workflows.