Portfolio trading continues to take hold in fixed income markets

As portfolio trading becomes more popular among buy-side traders, research has warned a large portfolio trade could increase risks around the CSDR buy-in regime if a single trade fails.  

Fixed income traders are increasingly engaging with portfolio trading to manage portfolios, particularly during the recent volatility due to the COVID-19 crisis.

According to research from Greenwich Associates, around 40% of fixed income investors in Europe said they have either executed or plan to execute a portfolio trade within the next 12 months. Portfolio trading allows traders to package multiple bonds into a single basket for execution in one transaction.

“Anecdotally, some clients have found portfolio trading a useful way to adjust their portfolios during the COVID-19 crisis, as they can mix bonds that are easier to trade with ones that are more difficult to execute,” said Tom Jacques, author of the report and principal at Greenwich Associates.

More commonly recognised as basket or program trading, portfolio trading has been part of the landscape for a while, but with the electronification of global bond markets and a surge in fixed income exchange-traded funds, portfolio trading has become an efficient way to deal with large, complex and multi-faceted bond transactions.

Speaking to The TRADE in March, fixed income platform Tradeweb said it had seen a steady increase in the number of clients adopting portfolio trading globally to increase certainty of execution on the whole basket. The number of daily line items executed via portfolio trading at Tradeweb surge more than 100% in March compared to the first two months of the year.

However, the research from Greenwich suggested that despite advances in technology, portfolio trading remains a largely manual process. A large portfolio trade could also increase risks around mandatory buy-ins under the Central Securities Depository Regulation (CSDR) should a single trade fail.

More than half of European buy-side traders respondents told Greenwich that the CSDR rules would harm liquidity in fixed income markets. Multiple buy-side trade associations and industry groups have warned regulators of the potentially detrimental impact of the rules, particularly the mandatory buy-in regime for failed trades.

The TRADE’s sister publication Global Custodian wrote recently that trade fails spiked significantly at the height of the coronavirus pandemic, according to data from the International Capital Markets Association (ICMA). Some banks reported that average daily settlement fails in the European repo market increased four or five times their normal rate in April. 

The EU markets regulator said recently it would delay the settlement discipline regime (SDR) set out under CSDR until February 2021. However, the watchdog denied a formal request to defer the mandatory buy-in regime and phase in new rules for failed trades, stating the new February go-live date will give market participants enough time to prepare.

«