Markit piloting fixed income TCA

Markit is set to launch a fixed income transaction cost analysis service, which is already being used by a select number of clients.

Markit is set to launch a fixed income transaction cost analysis (TCA) service, which is already being used by a select number of clients.

Fixed income has been viewed as one of the most difficult areas to offer TCA, due to a lack of market transparency and available data.

However, regulators have been getting tougher on execution quality. Last year, the UK’s Financial Conduct Authority published a review of best execution said most firms were failing to apply rules to non-equity asset classes.

Outlining the difficulties, Henry Yegerman, director of analytics and research at Markit, said: "At first I was hesitant to do fixed income TCA because the market structure is very different from equities and we were concerned about the usefulness of any information provided. However, clients have convinced us that now is the right time, and we knew that our bond pricing service would help us to achieve meaningful TCA for fixed income for them."

While seeking client feedback on TCA development, Yegerman added that one large asset manager has been looking at fixed income TCA for the past four years, but had been unable to find a methodology it was comfortable with.

However, Markit said it is now in a place to offer robust TCA for fixed income, though said it is not yet as comprehensive as equities TCA.

One of the key issues that had to be tackled was finding a price to use as a benchmark, and opted to use its bond pricing service, which is used to price an average of 2.4 million bonds per day, something Yegerman said gives it the scope needed to provide a quality fixed income analysis.

Markit has also been working on ways to help firms that may have incomplete fixed income data.

"Experience in equities and FX TCA means we can use the lessons we've learned to help clients understand their fixed income trading, even in cases where their historical data has no timestamps, and provide them with genuine insights," he explained.

Asset managers are seeking out a broader range of TCA tools in part due to regulatory pressure, but Yegerman believes that it is end investors that are driving higher standards in the industry across all asset classes.

"Plan sponsors are becoming much more rigorous on TCA, even hiring their own TCA consultants, so it's imperative fund managers have the tools available to them to demonstrate best practice,” he said.

"Regulation and pressure from clients are forcing asset managers to expand the range of assets they perform TCA on. Although regulation is still some time away, pressure from end investors is already here and that's what fund managers are reacting to."