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Unclogging the Corporate Bond Market

Frédéric Messein will be speaking at the upcoming 4th Annual European Electronic Bond Trading Forum on 12th & 13th September in London


Written by Frédéric Messein, 29/07/2016

The most essential source of corporate bond liquidity remains investment banks. Market structure change driven by regulation and capital constraints means dealers struggle to fulfil their central role in the secondary market for credit trading.

With few exceptions, new electronic corporate bond trading platforms appear to attempt to circumvent this reality. Of the numerous new trading venues launched in Europe since 2012, the majority are all-to-all (A2A) or client-to-client (C2C) in nature. So far these models have gained limited traction, indeed many buy-side customers see the possible market share gains from such platforms as being in low single digits. This is primarily as the buy-side prefer to face trusted sell-side counterparts (be it as principle or increasingly agency) and the sell-side naturally need to know with whom they are trading.

SIX Swiss Exchange believes that the solution for an electronic corporate bond market trading resides in actually unclogging the long-standing, broker-dealer-centric market structure, to the benefit of all investors. When compared with the structure of European government bonds trading, corporate bonds is missing an independent, dealer-centric exchange. Supported by an efficient marketplace for dealers to leverage each others balance sheets and distribution sovereign debt, banks are able to trade opposing axes with each other efficiently and safely. In that respect, dealers are able to increase trading book velocity and better service their customers.

When we talk of a dealer-centric exchange, we do not mean a central limit order books (CLOBs). Whilst CLOBs can be useful for retail size credit, the core issue in today’s credit markets is with block size transactions. By which we mean trades of minimum two million Euro. Therefore, a new generation of electronic platforms is required that promotes market velocity but whilst ensuring information leakage is minimised. A dark pool for block size corporate bonds. These platforms must be based on indications of interest (IOIs), rather than lit firm orders, with the aim to finding the other side of the trade. When a possible trade is detected, the mechanism used for price determination should be both secure and anonymous. Participants must be protected against the kind of arbitrage or adverse market impact triggered by the unwarranted disclosure of proprietary information to the whole marketplace. The identification of potential matches becomes a passive process running in the background, provided that the contribution of IOIs by the dealers is automated. Trade opportunities are then ‘pushed’ to relevant participants when they arise. The active involvement of credit traders is then focused on anonymously negotiating tradable prices. This is, essentially, how SIX Corporate Bonds will function.

Stock exchanges should be the cornerstone of liquidity provision in the corporate bonds market. This is because they are non-conflicted, which means they do not need to disrupt the existing market structure, merely allow it to evolve. Stock exchanges are not in competition with dealers. Built on solid financial and technological foundations, exchanges should be the natural choice for safer and more reliable market operations.

Members of SIX Corporate Bonds enjoy all the benefits of transacting on a marketplace owned and operated by the SIX Swiss Exchange. All participants are guaranteed equal and fair access to the platform. Traders using the platform can rest safe in the knowledge that a regulated authority will handle the EU’s related MiFID II and Central Securities Depositories Regulation (CSDR)/T2S compliance obligations.

The corporate bond market structure, continues to evolve. Already the market no longer relies solely on voice and request for quote (RFQ) protocols. Instead, the market is increasingly comprised of a range of complementary and adjacent liquidity provision mechanisms.  In order to allow liquidity to flow again, the priority for both dealers and investors is, first and foremost, the establishment of an efficient marketplace that allows dealer to better serve customers. This is the goal of SIX Corporate Bonds.


About the author

Frédéric Messein, Head SIX Corporate Bonds, SIX Swiss Exchange

Frédéric Messein has been Head SIX Corporate Bonds since September 2015 and since January 2016 he is also member of the Management Committee of SIX Swiss Exchange. Frédéric Messein has more than twenty five years of experience in the global fixed income market. Before joining SIX Frédéric Messein was Global Head of Fixed Income & Foreign Exchange Product Management & Content Strategy for Thomson Reuters, where he spearheaded the coordination of fixed income and foreign exchange products, contents and projects globally. Prior to that, he was Head of Sales and Trading Products, EMEA at Reuters. Frédéric Messein has also worked for Reuters Financial Software in Paris, where he was Global Head for Premium Desktop Products. Before that Frédéric Messein took over Marvin SA from the founders as Managing Director and prior to that he was Director of Marketing for Reuters France.

This content is provided by Euromoney Seminars for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.