Fixed income asset allocation in UK pension portfolios has increased to a point where it has overtaken equities. Meantime, moves to increase transparency and reduce the cost of fixed income investment have reached a new level, with UBS tilting its dealing services towards electronic trading.
Equity allocation in UK pension funds fell to 38.5% this year, down from 41.1% in 2011, while the proportion of gilts and fixed interest rose to 43.2% from 40.1% in 2011. The figures were revealed earlier this week in the latest Pensions Universe Risk Profile (The Purple Book), a joint annual publication from the Pension Protection Fund and the UK Pensions Regulator.
Launched in December 2011, UBS’s Price Improvement Network-Fixed Income (PIN-FI) has been pulling up trees in the electronic trading of credit default swaps (CDSs) with more than 300 accounts and over 1,000 individual traders doing around 50 trades a day, according to recent press reports. The major value to the market has been that by letting the buy-side trade with each other, prices are no longer the sole purview of dealers. And the buy-side has becoming increasingly attracted to such a prospect of greater automation as trading desks take on more and more multi-asset responsibility.
PIN-FI leads a growing trend towards the electronification of bond markets. Last month, Vega-Chi launched its buy-side-only trading platform for US high-yield and distressed fixed income products, and bond trading venue Tradeweb bolstered its expansion efforts by adding central and eastern Europe, Middle East and Africa (CEEMEA) bonds to its electronic platform.
Sell-side firms moving to the automation of non-equity trading include Goldman Sachs, with its June 2012 launch bond trading platform, G Sessions, in the US.
According to research from consulting firm Celent, fixed income trading is moving unavoidably towards electronic trading. But the pace of change will vary across individual markets. One of the main drivers of the evolution is that regulations like Basel III, Dodd-Frank and MiFID II are taking their toll on the business models of the fixed income trading value chain, forcing capital optimisation and mandating certain clearing models.
“The net result of these regulatory initiatives will severely impact dealer models, putting pressure on revenues and thus liquidity in secondary markets,” said Joseph De Chazournes, senior analyst, Celent.
At UBS, the concerted development of PIN-FI predates all the major UBS announcements of the past couple of weeks; The restructuring of the investment bank, the winding down of its fixed income sales and trading business, and the firing of 10,000 staff. And the focus on electronic fixed income trading does not seem at odds with the present changes in strategy at the Swiss bank.
For the execution business, the drivers seem to be the same for fixed income as they are for other PIN offerings, which began in US equity trading in 2005; a focus on liquidity aggregation, utilising technology to help clients optimise workflow, and by not participating themselves, UBS avoids risk and capital costs whilst still being involved in the market.
The risk appetite issue cannot be underplayed at UBS, which by detaching its investment bank and winding down its fixed income business, is moving to greater alignment of products and services under its wealth management banner – a move which was met with approval from the markets, buoying UBS stock immediately after the announcement. Nonetheless, UBS sees the value in PIN-FI as a way to maintain connectivity to the fixed income markets and remain relevant as it uses the platform to help it potentially migrate into an agency-broker model.
If – as UBS seems to be banking – intermediaries play less of a role in trading generally, then the bid/offer spread becomes less relevant. Less involvement by dealers will mean pressure will build where takers and makers find each other themselves, rather than at the point where dealers interact.
Through PIN-FI, UBS will also try to solve the buy-side problem of a lack of on-screen liquidity when participants trade electronically. A hallmark of PIN in other asset classes is UBS’s attempt to be as firm as they can on pricing; It is the house view that people want to trade on an order book and this means participants want real firmness of price.