Fixed Income Struggles With MiFID II

Shanny Basar

Nearly half of fixed income traders said they are struggling with MiFID II compliance as the deadline approaches at the start of next year, but their biggest concern is sourcing liquidity.

WBR Digital & Fixed Income Leaders Summit surveyed 100 Heads of Fixed Income based in Europe in the third quarter of this year. In the survey, 45% of respondents said they are struggling to meet the requirements of the new European Union regulations which come into force in January 2018.

MiFID II extends best execution requirements from equities into fixed income and also introduces new pre-trade transparency rules and post-trade reporting. Nearly one third, 28% of respondents were most concerned with compliance with post-trade transparency requirements including trade and transaction reporting.

However MiFID II compliance was only fourth on the list of top three challenges facing their trading desk. More than half, 55%, of respondents said sourcing liquidity is the biggest challenge, followed by sourcing and paying for reliable data and increasing on-the-desk technology.

David Saab, managing director, at JP Morgan Private Bank, said in the report: “Not surprised to see that sourcing liquidity is the biggest challenge. I would say liquidity is there but at a price! The illiquidity premium is becoming a new concept in bonds. It used to be common when speaking about private debt but not with standard bonds.”

In order to source liquidity 78% of respondents said they would consider partnering with other buyside desks to increase access to liquidly more efficiently.

Carl James, Pictet Asset Management

Carl James, global head of fixed income trading at Pictet Asset Management, said in the report: “I am interested to know as to what buyside traders think ‘partnering’ means. Is it to build a block trading dark pool? or perhaps collaborating on technology build? As it has already been happening with companies such as Neptune.”

Asset managers can use the Neptune network, via their own systems, to receive the high quality bond axes and pre-trade inventory data from multiple banks. This enables institutional investors to be more effective and targeted when looking to execute large size orders in products such as corporate and emerging market bonds.

The platform was launched in 2015 to use FIX standard messages for pre-trade information flows, allowing banks and investors to exchange controlled and targeted real-time axe and inventory data The network now has 25 large banks in its consortium and generated more than 30,000 pre-trade real-time “axe” indications in the network on a daily basis.

In order to improve corporate bond market liquidity Algomi, the bond market infrastructure provider, partnered with BNY Mellon and HSBC this month to enable wider access to private data held by the custodians.

Custody clients of BNY Mellon and HSBC can choose to receive alerts when members of Algomi’s Honeycomb network are looking to trade the bonds they own. The bond holder can then decide whether to trade through BNY Mellon or HSBC affiliated broker dealer’s trading desk.

Stu Taylor, chief executive of Algomi, told Markets Media that the partnership could have a profound impact on corporate bond liquidity.

“Total corporate bond issuance is potentially $80 trillion while BNY Mellon and HSBC have about $25 trillion in custody,” added Taylor. “BNY Mellon has a 45% share in the US while HSBC has 30% in Asia and we are looking for other partners, especially in Europe.”

BNY Mellon and HSBC expect to roll out the initiative to clients early next year, potentially with other custodians.

Taylor said: “There are fragmented datasets across the global custody network and prime brokerage. There is a huge potential for  signposting this data across a network.”

As a result, the survey found that 54% see implementing technology as the biggest priority for fixed income trading desks.

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