Citi plans to offer a wider range of emerging market instruments on its new fixed income trading platform but will not extend the offering to corporate bonds due to fears of liquidity fragmentation.
The new venue, Citi Credit Cross, is registered as a US alternative trading system and currently offers trading in Latin American sovereign bonds, with further emerging market products to be added this month.
The venue schedules auctions for each of the instruments traded on its platform then notifies buy-side clients of the trading period, the bonds being traded and the price at which they will traded, removing the need for negotiation between two counterparts. Trades are executed on a first in, first out basis.
Citi Credit Cross forms the bank’s response to impending legislation, such as Basel III, that will make it more expensive for banks to facilitate bond trading for the buy-side.
Part of the Basel III rules impose a requirement on banks to hold extra capital reserves based on risk-weighted calculations that are specific for each asset type they hold on their books. The more volatile or illiquid the instruments, the more capital banks will need to hold.
A number of financial institutions have launched or are preparing to rollout similar platforms to reduce the impact of the new legislation, including Blackrock and Goldman Sachs.
Tradeweb, Bloomberg, MarketAxess, Vega-Chi and Bonds.com are among the existing venues that offer trading in corporate and sovereign bonds using a variety of trading protocols.
While Citi initially planned to launch its platform last November for high-yield and investment grade bonds, the bank postponed its plans after concerns that fragmentation would make it harder for the buy-side to access liquidity.
“Fragmentation will offer market participants different trading protocols but might be detrimental to liquidity. The market may end up with platforms that instead focus on different niches, and a splitting of liquidity across multiple venues,” said Scott Helfman, a Citigroup spokesperson. “We are now using the system for a variety of Latin American sovereign bonds only and have no immediate plans to extend into corporate bonds.”