Fixed-Income ETFs Expand in Europe

Terry Flanagan

Fixed-income exchange-traded fund trading volumes grew 5% in the first quarter of this year while equity ETF volumes fell according to data from Tradeweb’s European-listed ETF platform.

Tradeweb Markets, which provide electronic fixed income platforms, launched a system for trading European-listed ETFs in October 2012 which allows trading on a risk, closing NAV or agency basis.

“Buy” requests for fixed income ETFs increased by 5% to 19% while “sells” remain unchanged at 10% between 1 January and 31 March 2014 according to Tradeweb. In contrast “buy” requests for equity ETFs dropped by 8% to 29 % and “sells” rose by 1% to 36%.

Adriano Pace, director of equity derivatives at Tradeweb, told Markets Media: “We have seen a major increase in the trading of fixed income ETFs, which are particularly useful for asset managers who find it difficult to trade the underlying bonds.”

The firm has taken advantage of its bond trading background to work with a large ETF issuer and develop a tool which allows market makers to automatically hedge their ETF positions with the underlying bonds on Tradeweb according to Pace.

ETF trading in Europe is highly fragmented as issuers may have to list the same fund on a number of different national exchanges. The Tradeweb platform allows clients to request quotes on any ETF listed in Europe from multiple dealers and view all the responses on one screen. Clients can also compare the dealer quotes against the relevant exchange to ensure they are getting a better price for the size they want to trade.

The number of dealers providing quotes on Tradeweb’s ETF platform has risen from 11 when the platform launched.

“We have 18 different liquidity providers and that should soon increase,” Pace said. “Most major dealers are on the platform and we have also added independent ETF market makers.”

Pace declined to comment on total ETF trading volumes on the Tradeweb platform.

“We transact a decent portion of the over-the-counter space,” he said. “It is estimated that the OTC market in Europe represents up to 70% of overall volume, and most is not reported”.

MiFID II, new regulations governing trading in the Europe, will require ETF trades to be reported, which will put greater emphasis on proving “best execution” according to Pace.

“Our platform automatically sends clients a PDF of their transactions so that it can be shared with middle and back offices and compliance,” he added.

In February State Street Global Exchange also launched FundConnect, an online multi-sponsor ETF platform for authorised participants in Europe.

Authorised participants have an agreement with the sponsor, who manages an ETF, to create or redeem ETF shares. They are usually a market maker, specialist or institutional investor, although they can also be a sponsor. The authorised participant borrows shares, usually from pension funds, and places them in a trust to create ETF units which can then be traded on an exchange like a normal stock.

Peter McHugh, head of FundConnect in Europe, Middle East and Africa, told Markets Media in February that the process for authorised participants in Europe to create or redeem ETF units is still very manual with phone calls and faxes going back and forth.

McHugh said: “The time taken for authorised participants and sponsors to manually process transactions could be measured in hours and our platform reduced that to 10 minutes and eliminates errors.”

FundConnect has been used in the US market since 2008 but had to be changed for the European market as ETFs can be listed in more than one country in the region.

The trading in Europe in the first quarter of this year follows the global pattern where fixed income exchange-traded products gathered $17.8bn, the largest net inflows by asset class, according to preliminary findings from consultancy ETFGI’s Q1 2014 Global ETF and ETP industry insights report, as equities had $8.4bn.

However equity ETF flows may be about to increase.

“March was the first month in 2014 when equity exposures gathered more net new assets than fixed income,” said Deborah Fuhr, managing partner at ETFGI, in a report. ”Gains came at the end of the month after comments from Fed provided assurance that short-term rates would not increase earlier than expected.”

Featured image via iStock

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