FIXED INCOME MARKETS TRANSFORMATION: EQUITY FRAGMENTATION REVIVAL? October, 2015

Transcription

1 1 FIXED INCOME MARKETS TRANSFORMATION: EQUITY FRAGMENTATION REVIVAL? October, 2015

2 AGENDA 2 1. CONTEXT FIXED INCOME MARKET IS FACING NUMEROUS TRANSFORMATIONS 2. PLATFORMS PANORAMA & RECENT INITIATIVES 3. IMPACTS FOR THE TRADING COMMUNITY 4. GETTING TO KNOW AILANCY

3 FIXED INCOME MARKETS ARE FACING NUMEROUS TRANSFORMATIONS MIFID II BASEL III 3 Smaller Size REGULATION Platforms RFQ LIQUIDITY ELECTRONIC Fragmentation Algo Trading Drying Up BOND MARKET Smart Order Routing Several factors are dramatically reshaping the Fixed-Income Markets

4 A SIGNIFICANT DECLINE IN LIQUIDITY THAT IS GOING TO GET WORSE LIQUIDITY REGULATION ELECTRONIC 4 BOND MARKET THIN MARKET Overall bonds volumes have been increasing for the past years, due to an issuance boom, however turnover has decreased (the value of bonds traded divided the amount outstanding) Liquidity is more and more concentrated on a few number of bonds (80% of Liquidity concentrated on 20% of Bonds 1 ) Euro-denominated Corporate IG Volume Q Source : Dealogic SMALLER SIZE TRADES Trading has become fragmented The average daily number of trades in the corporate bond market has surged, but the size of these trades has declined. Those wanting to transact in size often need to slice and dice orders 3M rolling Avg for IG Corp bonds in the Secondary Markets Source : FINRA TRACE and T. Rowe Price 1 According to the Head of Financials at Union Investment

5 PAST REGULATIONS HAVE ALREADY RESHAPED THE MARKET AND FUTURES ONE WILL ACCELERATE SUCH TRANSFORMATION LIQUIDITY REGULATION ELECTRONIC 5 BOND MARKET December July July January December Q January April Q DODD- FRANK BASEL III EMIR Political agreement EEU Parlement vote ESMA technical advice ESMA technical standards Regional transposition MIFID II Decrease of Principal Liquidity New capital requirements have forced Market Makers and CIB to reduce the size of their propbook Their capacity to provide liquidity to the Market has consequently significantly decreased in volume and size of orders Increase of Transparency MIFID II will impose pre & post--trade transparency to bonds beyond a certain level of liquidity (see detail next slide) To meet those requirements, OTC Trading will need to shift on platforms displaying, quotes, interests, orders and report executed transactions (Post-Trade reporting)

6 Transparency Transparency MIF II NEW TRANSPARENCY REGIME WILL SPLIT THE BOND MARKET IN TWO WORLDS LIQUIDITY REGULATION ELECTRONIC 6 BOND MARKET 1 LIQUID BONDS Submit to Transparency unless few exceptions Criteria defined by ESMA (Cf next slide) 2 NON LIQUID BONDS Not submit to pre-trade trasnparency Standard Waivers Order mgt Facility* (iceberg) Size specific* Large in scale* Pre-trade RFQ and voice trading Pre-trade Post-trade Deferred Deferred Post-trade Deferred Market Structure will need to evolve to meet those new requirements with an expected shift from OTC to Platforms Such assets will remain predominantly traded OTC but the reduced liquidity will require new form of trading * see definitions next slide

7 LIQUIDITY CRITERIA ARE BASED ON AN INSTRUMENT BY INSTRUMENT APPROACH LIQUIDITY REGULATION ELECTRONIC 7 BOND ESMA has finally retains a bond s liquidity assessment based on an instrument by instrument approach MARKET (IBIA) : o Such evaluation will be done on a quaterly basis o Relevant competent authority by instrument will be in charge of this evaluation o Following criteria will be used to determine liquid bonds LIQUID CRITERIA WAIVERS Evaluated by Instrument on a quaterly basis Quantitative liquidity criteria (3 of them to be met to be classified as liquid) Average Daily notional Amount Average Daily Number of Trades Percentage of days traded over the period EUR 2 80% Order management facility : orders held in an order management facility of the trading venue pending disclosure Size specific to the instrument : inactionable indications of interest in request-for-quote and voice trading systems that are above a size specific to the financial instrument, which would expose liquidity providers to undue risk and takes into account whether the relevant market participants are retail or wholesale investors Large in scale : orders that are large in scale compared with normal market size For the first quarter after issuance Bond Type Bond Liquid classes Issuance size (Greater or equal to) Sovereign Bonds Public, Covertible, Covered, Corporate, other bonds Pre-trade Trade percentile Post-Trade Large In Scale Size specific to instrument 60 (except covered bonds 40) 80

8 BOND TRADING IS STILL IN THE BEGINNING OF ELECTRONIFICATION LIQUIDITY REGULATION ELECTRONIC 8 BOND MARKET WHY BOND MARKET IS NOT ALL ELECTRONIC LIKE EQUITY? Instruments traded There is a major difference between Bonds and Equities related to the number of instrument traded When a corporate raises capital through equity, it does it through one equity instrument versus several debt instruments (one for each Issuance at a specific rate & maturity.) Chicken & Egg Electronic platforms exists since several years but have failed to capture a vast majority of the bond market liquidity. So far liquidity was easily accessible through Market-Makers with some reluctance to drive flow through Platforms due to Market Information Leakage For one Vodafone stock traded in Europe, 20 Vodafone Bonds can be traded % of electronic trading Bonds US Treasuries 23% 37% EU Gov Bonds 31% 37% Source : WHAT WILL CHANGE? The recent lack of liquidity of the OTC Market Structure will urge Investors to find other source of liquidity and accept some Market Information leakage by posting interests/orders on electronic platforms Additionally, for liquid bonds falling under MIFID, it will become anyway a requirement to offer pre-trade transparency either through a SI, MTF or OTF status

9 DO YOU THINK NOTHING WILL CHANGE? 9 REGULATION LISTEN TO THE CROWD. LIQUIDITY BOND MARKET ELECTRONIC The challenge for the coming years will be to make markets more efficient and therefore less dependent on banks for the financing of liquidity. An ecosystem capable of generating new sources of liquidity must be created. Intermediating the bond markets is shifting from a principal risk-taking business for banks to a brokerage business. In the high-volume government bond markets, tradeexecution algorithms will be new drivers of efficiency. In the corporate bond markets, new systems will drive efficient internalizing of orders and matching across networks of dealers. We believe the secondary trading environment for corporate bonds today is broken there are four drivers which, together, have the potential to substantially improve liquidity in the corporate bonds market : More all to all trading venues not just dealer-tocustomer or dealer-to-dealer Adoption of multiple electronic trading (e-trading) protocols not just request for quote (RFQ) or central limit order book (CLOB) Standardisation of selected features of newly-issued corporate bonds Behavorial changes by market participants recognizing the fundamentally changed landscape It is striking that the dramatic technological advances that have transformed the equity markets over the past decade have had only a modest impact on the trading of fixed income securities I don t think there s a problem with liquidity. It s that you can t find it

10 AGENDA CONTEXT FIXED INCOME MARKET IS FACING NUMEROUS TRANSFORMATIONS 2. PLATFORMS PANORAMA & RECENT INITIATIVES 3. IMPACTS FOR THE TRADING COMMUNITY 4. GETTING TO KNOW AILANCY

11 THE MARKET IS REACTING TO RESTORE ACCESS TO LIQUIDITY 11 From a Principal based model TO an Agency broker-like liquidity seeking model NEW LIQUIDITY MODEL Broker/dealer inventories are down 65% since 2007 Asset managers cannot find the liquidity required from dealers Buy-Side now own 90% of the outstanding bonds They will have to seek and find it among other buy-side inventory Platforms Numerous initiatives are coming to the market right now. New Crossing platform for fixed income corporate bonds designed specifically for the buy side Fixed-Income Dark pools allowing traders to seek for liquidity without information leakage New concepts : Pre-Trade information networks Platforms to exchange information on inventories for a better price discovery and facilitate liquidity seeking

12 PLATFORM PANAROMA 12 In anticipation of MIF II market structure changes, a revival of initiatives PRE ALL TO ALL Govies Mixed EuroMOT (BORSA ITALIANA) Market Axess 1 Tradeweb MTS Bondvision Bloomberg Galaxy (TRADINGSCREEN) MIFI wave 2 Post-crisis calm Corporate ExtraMOT (BORSA ITALIANA) EuroTLX (LONDON STOCK EXCHANGE) Vega-CHI BondMatch (NYSE EURONEXT) BondCube Liquidnet Tradecross (Deutche Boerse minority) (TRADING SCREEN/BUY-SIDE)) 3 MIF II wave DEALER PTF Corporate FI CROSS (STATESTREET) BondPool (Morgan Stanley) Gsessions (Goldman Sachs) CreditPlace (HSBC) POSIT FI (ITG) «PRE-TRADE NETWORK» CONCEPTS Legend Platform RFQ CLOB Dark-Pool Pre-trade network Leader Other Information network Inventory seeking ALGOMI (TBD ) B2SCAN (MTS ) 3 NEPTUNE (MULTIPLE BANKS) Inventory Information network Closed (Shareholding) AILANCY EUROPEAN FIXED INCOME PLATFORMS PANORAMA In the context of current dried liquidity, the Market is trying to reinvent the Fixed Income Market Structure with new concept and initiatives such as Bond Dark Pool, Information Network, Buy-Side communities,

13 FOCUS ON RECENT INITIATIVES LIQUIDITY NETWORKS 13 PROJECT NEPTUNE CONCEPT Create common protocol for exchanging information about securities inventory available in the market The scope of Project Neptune is pre-trade and therefore complementary to the electronic trading initiatives Illustration Standardized network of information for pre-trade liquidity based on FIX protocol Buy- Side Sell- Side Sell- Side (1) (1) (1) (1) Buy- Side Buy- Side FIX (1) (1) (1) Sell- Side Sell Side (1) (1) (1) Trading Interests Sell- Side Buy- Side DETAIL WHY? Allow much wider connectivity among market participants Increase likelihood of counterparties finding eachother in a disparate and heterogeneous environment WHO? More than 25 financial institutions (Buy-Side and Sell-Side) including Aviva Investors, AXA IM, Nordea Investment Mgt, Standard Life Investments, BNP- Paribas, Goldman Sachs, Morgan Stanley, State Street, JP Morgan, Credit Suisse, WHEN? Nov-14: set of best practices for the use of FIX protocol defined Jan-15 : agreement on details May-15 : In implementation phase Expected Live-date not communicated

14 FOCUS ON RECENT INITIATIVES LIQUIDITY NETWORKS ALGOMI-HONEYCOMB CONCEPT Use historical market data (trades, IOI, Portfolio, ) to graphically display who are the potential Buyers & Sellers of a particular illiquid Bond Create a real-time internal network of salespeople and traders (a Bond Social network ) trading on a particular bond (chat, direct connection, list of people active on a bond) Inspired by Social Network technology Illustration Honeycomb graphical display of potential liquidity Social Network of people active on a specific bond FINTECH INNOVATION OF THE YEAR (EUROMONEY-2015 AWARDS)) 14 DETAIL WHY? Only 1.5% of bonds now trade every-day, which means the market needs to rethink and find new ways of exchanging information, sharing and using data WHO? Former UBS Executive on fixed-income Backed by a Private Equity Fund (20m$ raised) 140 employees WHEN? 2012: creation of the firm 2014 : launch of Honeycomb with sell-side then buy-side May 2015 : 10 Banks & 50 Buy-Side using the product

15 FOCUS ON RECENT INITIATIVES LIQUIDITY NETWORKS B2SCAN CONCEPT Search engine that allows buy-side traders to search for axed bonds By aggregating bank inventory, runs and axes, it enables asset managers to search for the bonds they wish to trade, identify an appropriate counterparty and execute the trade on MTS BondVision. Illustration Combined offer of B2SCAN to search for a potential counterparty and Bondvision to execute the trade Buy-Side Pre-Trade B2SCAN Trade Bank Bank Bank Bank 15 DETAIL WHY? Significantly increases the probability of a successful trade and improves the efficiency of the execution workflow process. WHO? Partnership between MTS Bondvision & B2SCAN (search engine for bonds) MTS part of London Stock Exchange Group facilitates a number of electronic regulated markets for fixed-income (including BondVision) WHEN? Jan-15: launch of partnership between MTS & B2SCAN

16 FOCUS ON RECENT INITIATIVES DARKPOOLS TRADECROSS CONCEPT Buy side designed crossing platform for Fixed Income corporate bonds. New and innovative trading model that is not offered today on traditional platforms to ensure trade confidentiality and reduction of market impact Illustration 16 DETAIL WHY? Current trading platforms does not meet buy-side expectations to protect information leakage and market impact WHO? TradingScreen and 15 of the largest Long-Only Asset Managers in Europe WHEN? Nov-14: initiative launch Jul-15 : Go-live of TradeCross with 15 Buy-Side Phase II to come with 40 mores Buy-Side

17 FOCUS ON RECENT INITIATIVES DARKPOOLS 17 LIQUIDNET FIXED INCOME CONCEPT All-to-All anonymous electronic network for corporate bonds Illustration Two order-books A visible central limit order book A Block-Trading facility (Darkpool) for firms order >$5M where visibility of the order is limited to the contra orders within proximity to each other. 2 Order Books, one classical visible central limit order-book and one dark dedicated to blocs Client Lit Book DarkBook Blocs >5M DETAIL WHY? Combining an established Corporate Bond platform (Vega-CHI) with LiquidNet Network would create one of the largest institutional liquidity pool dedicated to corporate bonds WHO? LiquidNet acquisition of Vega-CHI, a Bond-Platform created in 2010 initially dedicated to Convertibles Bonds WHEN? March-14: LiquidNet purchase Vega-CHI Q : Launch scheduled

18 AGENDA CONTEXT FIXED INCOME MARKET IS FACING NUMEROUS TRANSFORMATIONS 2. PLATFORMS PANORAMA & RECENT INITIATIVES 3. IMPACTS FOR THE TRADING COMMUNITY 4. GETTING TO KNOW AILANCY

19 MIFII Non Liquid Bonds MIFII Liquid Bonds A REDEFINED TRADING PROCESS 19 HISTORICALLY OUR VIEW POST MIF II A process driven by the prevailing Market Structure Buy Side Main used channel Voice/Chat Banks Risk Buy Side Porfolio Mger A more fragmented and complex process Electronic Best Ex SOR ALGO Slice Historical Platforms Market Axess Bloomberg Tradeweb. Porfolio Mger Dealing desk PM often directly involved in the process Electronic Used for the most liquid Govt bonds Market Axess Platforms Bloomberg Tradeweb. Dealing desk Portfolio Manager will have to stepback from the execution process Digital Liquidity Seeking Liquidity network ALGOMI B2SCAN Tradecross POSIT NEPTUNE Brokers/ Banks Darkpool Liquidnet Execution Execution Platforms A Trading process dramatically impacted with: an Equitisation of the process for the MIFII liquid bonds submit to Pre-Trade transparency new way of trading and finding liquidity for the Non-Liquid ones

20 MIFII Non Liquid Bonds MIFII Liquid Bonds IMPACTING THE WHOLE VALUE CHAIN 20 1 Buy Side Porfolio Mger Dealing desk BUY-SIDE WILL NEED TO ADAPT THEIR ORGANISATION, PROCESS & SYSTEMS TO THIS NEW ENVIRONMENT 2 3 Electronic Digital Best Ex SOR ALGO Slice Liquidity Seeking Historical Platforms Bloombe rg Market Axess Tradeweb ALGOMI B2SCAN Tradecross POSIT NEPTUNE Brokers/ Banks. Liquidity network Darkpool Liquidnet Execution Execution SELL-SIDE WILL NEED TO INNOVATE TO PROVIDE NEW OFFERS AND PRESERVE THEIR TRADITIONAL BUSINESS AGAINST THE NEW LIQUIDITY NETWORKS INITIATIVES Dealing desk organization & systems More time will need to be dedicated to order execution (slice & dice, liquidity seeking, best exec monitoring) that will even more require the use of centralized dealing desk and technology for such asset class with portfolio mangers fully stepping down from execution Electronification of the liquid bond market The Liquid Bond Market will run through an «Equitisation» with More fragmentation Higher usage of electronic execution New Algo/Smart Order routing sell-side offers Enhanced technology (OMS/EMS, TCA, ) to achieve and monitor best execution New way of finding liquidity The Non Liquid Bond Market will need to find new way to facilitate access to liquidity with new digital networking initiating directly competing with the traditional business of Brokerage Sales trading A fast moving environment A flurry of platform will emerge with decision to made on which and how to connect As always after a period of expansion we will face consolidation

21 ARE YOU READY? WHAT ARE THE IMPACTS FOR THE BUY-SIDE? 21? Is my organization adequate? The increased complexity of finding liquidity in a more and more fragmented environment requires deeper expertise to achieve Best Execution and source liquidity. To face those challenges, the use of centralized dealing-desk (internal or external) will be re-inforced? Is my OMS/EMS at level? Technology matters to access pre-trade information, to be connected to Platforms, to monitor execution, to route & slice orders in a fragmented world Vendors must adapt themselves to this new environment and as always some will go one step further?? How to monitor Best Exec? Which Platform, Network,? Best Exec is a well-know concept for Equities, but what does it mean for Bonds? With Pre-Trade transparency, it will now be possible to measure Best Execution for Liquid Bonds, and Market Data Providers will play a crucial role on it. However for non-liquid ones, it will be a question of measuring if all best efforts have been achieved to find liquidity where it sits? With the flurry of new Platforms, Information Networks, the question will be to position itself, either through an exhaustive or selective connectivity, or by using new offer such as Aggregators or Liquidity Seeking proposed by Brokers? Ready to Transaction Report? Finding liquidity and achieve Best Execution will be a hard work, but it will not be all. The level of details required by MIF for Transaction Reporting (Portfolio Manager ID, Trader ID,.) and the risk for fines surrounding it,will require heavy upgrade of its System & Control framework.

22 EVENT ARE YOU READY? PUBLICATION EVENT PUBLICATION PUBLICATION HOW AILANCY CAN HELP YOU? YOUR CHALLENGES AILANCY EXPERTISE 22 Is my organization adequate? A specialist of buyside organisations Survey - Outsourcing in AM Is my OMS/EMS at level? A market tools expertise Benchmark - OMS/EMS Benchmark - PMS How to monitor Best Exec? An acquired expertise in the equity market Ailancy Speaker on Best Exec Roundtable Ailancy Platform panorama Which Platform, Network,? Initiatives watch and several RFP Brokers realised Ready to Transaction Report? A recognized MIFII expertise MIF II FUTURE CHANGES

23 ARE YOU READY? WHAT ARE THE IMPACTS FOR THE SELL-SIDE? 23? Is my offer adequate? The structural changes of the liquidity make it a MUST to rethink its offer New Information Network initiatives and Buy-Side darkpools are directly competing with the traditional business of bloc intermediation and Market-Making? Is my IT Platform at level? Technology matters to access pre-trade information, to be connected to Platforms, to provide best execution IT platforms need to be upgrade to this new environment? How to monitor Best Exec? Best Exec is a well-know concept for Equities, but what does it mean for Bonds? With Pre-Trade transparency, it will now be possible to measure Best Execution for Liquid Bonds. However for non-liquid ones, it will be a question of measuring if all best efforts have been achieved to find liquidity where it sits?? Which Platform, Network,? With the flurry of new Platforms, Information Network, the question will be to position itself, in line with its offer strategy : exhaustive connectivity to be an Aggregator, DMA offer, Added- Value offer (e.g SOR, ALGO, ), launch of its own Platform (SI, OTF, MTF)? Ready to Transaction Report? Finding liquidity and achieve Best Execution will be a hard work, but it will not be all. The level of details required by MIF for Transaction Reporting (Portfolio Manager ID, Trader ID,.) and the risk for fines surrounding it,will require heavy upgrade of its System & Control framework.

24 EVENT ARE YOU READY? PUBLICATION EVENT PUBLICATION PUBLICATION HOW AILANCY CAN HELP YOU? 24 Is my offer adequate? A specialist of Sell-side offers Multiples RFP to select Brokers RFP Benchmark OMS/EMS Is my OMS/EMS at level? A market tools How to monitor Best Exec? An acquired expertise in the equity market Ailancy Speaket on Best Exec Roundtable Ailancy Platform panorama Which Platform, Network,? Initiatives watch and several RFP Brokers realised Ready to Transaction Report? A recognized MIFII expertise MIF II FUTURE CHANGES

25 AGENDA CONTEXT FIXED INCOME MARKET IS FACING NUMEROUS TRANSFORMATIONS 2. PLATFORMS PANORAMA & RECENT INITIATIVES 3. IMPACTS FOR THE TRADING COMMUNITY 4. GETTING TO KNOW AILANCY

26 GETTING TO KNOW US 26 Our missions cover all players in the banking and financial industry Banks Credit Institutions Investment Firms Asset Managers Insurance Companies, Pension Funds The scope of our involvement Market studies and strategic positioning Definition and implementation of operational strategies Support in product development projects Process design and analysis Post-merger integration & transition programs Partnership, outsourcing, and synergy research IT Strategy Improvement of operational performance and profitability Regulatory change advisory and implementation Marie-Thérèse AYCARD Financial markets Risk / compliance Private banking Anne PLAZANET Asset Management Securities services Life insurance Pierre MONTEILLARD Retail banking Financial services Philippe DENYS Retail banking Private banking IT strategy Thibaut DE LAJUDIE Capital markets Securities services Online banking Sadik FILIPOVIC Insurance Pension funds Silver economy Séverine LE VAILLANT Retail banking Private banking Organization and process optimization Christophe DAVIES Retail banking IT strategy Distribution

27 AILANCY EXPERTISE OF THE ENTIRE SECURITIES VALUE CHAIN 27 References in Brokerage Investors Brokerage Clearing Settlement Agent Custody References in Asset Management References in Settlement and Custody

28 INVESTMENT SERVICES RECENT STUDIES Asset Managers operations outsourcing Practices - SURVEY Vision et perspectives par typologie d acteurs Comment tirer partie des évolutions de Target 2 Securities? Relation Client Our outsourcing tends to impact a larger part of Asset Managers operations departments Eclairage sur les impacts et les questions structurantes sur les business model, l organisation et le système d information Une nouvelle configuration poussant les acteurs à revoir leur organisation Post-Marché Etude Benchmark : Gestion des réclamations par les établissements bancaires et par les assureurs Benchmark des OMS/EMS Market Data dans un nouvel univers réglementaire et technique Bourse en ligne Organisation de la fonction MOA Face aux évolutions du marché, comment identifier les opportunités potentielles et repenser ses choix d équipement. Quelles solutions mettre en œuvre pour optimiser la gestion des données financières? Le renouveau des offres de bourse en ligne répond-il aux attentes des clients? Comment impliquer les métiers, quelle contribution à la gouvernance du système d information?

29 CONTACT US 29 Our details AILANCY 32, rue de Ponthieu Paris Tel: Fax: Thibaut DE LAJUDIE Tél thibaut.delajudie@ailancy.com Jérôme CHARPENTIER Tél jerome.charpentier@ailancy.com Alexandre BRUNO Tél alexandre.bruno@ailancy.com