DLT Inevitable In Fixed Income

Shanny Basar

New distributed ledger solutions will be rolled in parts of the fixed income market in the next six to twelve months and widespread adoption is inevitable according to the International Capital Market Association’s latest quarterly report.

Gabriel Callsen, market practice and regulatory policy at ICMA, said in the report that DLT initiatives have gained further traction in recent months, notably in niche sectors such as private placements and post-trade.

“It is expected that DLT solutions will be rolled out to the market within the next six to twelve months,” he added. “While it is too early to gauge the take-up and impact on market structure, there is a sense of inevitability that DLT will be adopted sooner or later.”

For example, in June enterprise software firm R3 and four of its member banks – ABN Amro, Commerzbank, ING and KBC – said they had built a prototype for issuing Euro commercial paper on R3’s Corda DLT platform.

Roman Schmidt, divisional board member advisory and primary markets at Commerzbank, said in a statement: “The Euro commercial paper proof of concept is a material building block for the way new issuance can be created and distributed using distributed ledger technology. This milestone has proven that together with our ecosystem partners we can shape the future within capital markets.”

Callsen said an ICMA working group has conducted a mapping exercise of over 50 technology solutions which is being finalised and will be published in the near future, focussing on primary, secondary and repo markets in Europe. He said market electronification varies significantly between investment grade with the least progress in credit repo markets, which is still highly manual and labour intensive. In the bond post-trade market the use of technology is widespread, but also fragmented.

“Whether for collateral management, corporate actions or reconciliations, a myriad of systems is available for interlinked, yet different processes,” he added. “Perhaps unsurprisingly, the use of DLT in this area is considered to generate the greatest benefits in terms of efficiency gains and cost reduction.”

Callsen continued that a visible trend is the emergence of information networks which aggregate dealer inventories and aim to match up potential trading interests, rather than facilitate execution.

Consultancy Greenwich Associates said in a report at the beginning of this year that liquidity intelligence, helping to enable bilateral negotiations for illiquid bonds, is likely to be more important than the growth of electronic trading in fixed income. Greenwich found that 80% of investors feel that reduced bond market liquidity is affecting their ability to implement their strategy.

As a result, platforms that open up the pool of potential buyers and sellers have made progress and all-to-all trading volumes have increased. For example, MarketAxess said in its second quarter results this year that Open Trading, the firm’s all-to-all trading network, continues to see increased client adoption and reached a new record as a share of total trading volume.

Other platforms, such as bond information network Algomi, provide liquidity intelligence by using data to help locate any bond. This year Algomi acquired AllianceBernstein’s Automated Liquidity Filtering & Analytics to provide an aggregated picture of bond liquidity signals across multiple electronic venues, message platforms and direct dealer inventories. AllianceBernstein  had created and developed ALFA as an in-house liquidity tool to provide aggregated real-time information on liquidity and trade intent.

Last year Algomi partnered with Euronext and this year the joint venture was expanded globally with the pan-European exchange working to establish an Automated Trading System in North America.

“If Uber can upend the taxi business without owning any cars, it might be possible for a complete data set with the right intelligence to create a virtual balance sheet without having one of its own,” added Greenwich. “As such, putting the two solutions together should take us a long way toward a more fluid secondary market.”

MiFID II, the regulations covering financial markets in Europe take effect on 3 January 2018, and extend pre- and post-trade transparency requirements to bond markets as regulators take a more data-driven approach.

Callsen said: “On the one hand, firms will be obliged to capture an array of internal data to comply with regulatory requirements. On the other, technological capabilities to source and aggregate trading data, and feed these into internal risk and pricing systems, will be critical to both the buy side and the sell side.

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