Monday, March 18, 2013 7:30:19 AM

Industry-led European bond platform takes shape

A collaborative industry push to establish a bonds trading platform in Europe led by Deutsche Bank, has gained considerable buy- and sell-side support and will use an order book to match buyers and sellers of bonds.

The platform will be formed as a reaction to the impact of new regulation – notably Basel III – that will make it more expensive for banks to hold large bond inventories, and subsequently reduce their ability to trade on principal for buy-side clients.

Dominic Holland, director of credit and e-commerce sales at Deutsche Bank, told the initiative had support of 10-15 asset managers, with up to 50 others showing strong interest, in addition to 10 brokers.

"A lot of the momentum has been driven by conversations with UK buy-side firms and over the next three months there'll be significant progress regarding the model and infrastructure we decide upon," Holland said.

Holland said the group had selected order book trading as the preferred model for the platform, which would let market participants input buy or sell interests which sit until a match is found, after which volume and price details would be decided bilaterally.

The choice of an order book to execute trades was driven in part institutional investors' concerns that information leakage had restricted the willingness institutional investors to trade fixed income products. Currently, buy-side firms typically call a number of brokers to request a quote in the bonds they want to trade, increasing the risk of market impact.

"We think a matching engine platform with sponsored access for clients would aid the transfer of risk from the buy-side to the sell-side, and amongst brokers," Holland said.

Other trading options considered included request-for-quote models, such as those used by Tradeweb and MarketAxess, and the click-to-trade system used by Bloomberg's bond trading platform, all of which Holland believes have a future under new regulatory regimes affecting bonds trading.

Holland indicated that although Deutsche Bank had taken the lead on developing the platform, it would not be a Deutsche Bank product, or be part of its Autobahn product suite. Instead, it would stand alone, outside of the firm's corporate structure.

An industry-led effort to create a new source of bond liquidity for Europe would help market participants adjust to the new environment to trade bonds ahead of the new regulations being implemented, according to Holland.

"Uncertainty relating to new rules is compounding fragmentation amongst competing electronic initiatives - both innovations to existing platforms as well as new entrants - it is not solving the problem, but creating more fragmentation," Holland said.

In addition to Basel III, which compels banks to hold risk-weighted capital against the instruments held on their balance sheets, MiFID II - which includes regulation of non-equity instruments for the first time - may also raise costs with new rules relating to transparency.

MiFID II will push for greater transparency of fixed income trading, as currently there are no pre- or post-trade transparency mechanisms for bond trading in Europe. The current Irish presidency of the Council of the European Union has signalled a push towards creating a function similar to the TRACE system in the US, which offers delayed reporting and volume omission capabilities to limit market impact for large trades.

A number of bond platforms have, or are, being created in advance of the new regulation, including Goldman Sachs G Sessions, which runs infrequent auctions for trading corporate bonds. BlackRock has also launched its Aladdin platform, that lets buy-side firms match bond trades directly with each other. and Vega-Chi also offer bond trading platform, while NYSE Euronext's Bondmatch platform has been live since July 2011.


Richard Henderson +1 212 217 6916