Yann Couellan, Head of FICC Trading at BNP Paribas Asset Management assesses how fixed income is and will change going forward.
To date, what has been the impact of MiFID II, and other regulation, on fixed income?
It is clear that the European Market Infrastructure Regulation (EMIR) has driven fundamental changes on the fixed income landscape. Next June, Category 3 counterparties will be subject to clearing and this will continue to move trading onto electronic platforms. However, we still plan to also do bi-lateral trading although we have had to fine-tune our approach and connectivity.
MiFID II has impacted the fixed income market with extended transaction reporting, investor protection, market liquidity with new trading obligations, as well as the pre and post trade transparency requirements, which should have the most impact going forward. However, today it is too early to determine exactly what the beneficial impact will be. This is because, at the moment, there are not enough bonds that fall under the requirements and meet the transparency thresholds. For example, there are just 466 out of 71,000 bonds that were seen as sufficiently liquid to be subject to the real-time transparency requirements of MiFID II. I think ESMA will consider recalibrating the thresholds and it will be interesting to see what happens.
How did the industry prepare?
In the same way as other buyside firms and trading teams we prepared by having a dedicated team working closely with our legal and compliance departments, as well as the national regulator, to ensure that we were covering all aspects of the regulation. This ranged from how the regulation would impact the business – not just on the pure trading level – but also with regard to cost, compliance, trading and operational efficiency, etc. It has been a huge effort but one that has to be ongoing and continuous. Take the daily reporting requirements, there is another dedicated team overseeing the workflow to make sure we are compliant. Technology has also been a key factor and buyside firms have invested significantly
There is a lot of hype about technology and big data, but how is it changing the industry and fixed income trading? How are fixed income teams using data and data analytics tools to access liquidity?
Yes, there is a lot of hype about artificial intelligence and machine learning, but in many cases it is too early to judge what their potential will be. However, the liquidity environment is challenging in the fixed income markets and we need to embrace tools that allow us to combine our pre and post trade data with market intelligence to give portfolio managers and trading teams better insights and allow them to monitor bonds throughout their lifecycle. The fixed income market is different to equities, which are much more electronic, and it is not as easy to get valuable data on bonds because many do not trade that frequently. We are currently looking to develop our proprietary trading tools to leverage the use of big data and to use FIX connectivity to aggregate all the information from the disparate sources for our fund managers and traders to help improve the investment decision-making process.
How has the relationship between portfolio managers and traders changed over the past few years?
In the past, the portfolio managers would raise the orders and then hand them over to the traders to execute them, but the relationship between the two has changed. Today, there is greater communication and collaboration, with a deeper understanding of how they can work together to add value in terms of capturing market insights, optimising execution and improving the investment strategy. Traders can help fund managers make sense of the market and ensure that they capture relevant market information. However, the buyside relationship with the sellside trader is still also important because they can provide useful insights and tools.
Overall, what has been the impact of electronic trading, and is an execution management system (EMS) a necessity?
An EMS is very useful where trading is done on-exchange, such as with equities and futures. In fixed income, an EMS is less relevant due to the challenging liquidity conditions on many bonds and the market structure, with bonds executed using the request for quote (RFQ)-based trading model. However, technology and hybrid protocols derived from the equity and/or FX markets are now starting to be embraced by market participants. Here I am especially thinking about rules-based, and data-driven logic that drives autotrading, as well as all-to-all protocols and auctions for specific markets. Also, technology and comprehensive analytics that leverage data help to improve traders’ and portfolio managers’ market knowledge by challenging their perceptions.
Has fragmentation been an issue?
There is fragmentation, but everyone has access to liquidity, although some buyside firms have more valuable insights than others, depending on their embedded technology. I often hear that electronic trading has made markets more efficient, which is true, and e-trading platforms have been created which facilitate the exchange between market participants, although it is the market participants themselves who create liquidity. For example, on the day of the announcement of the Credit Sector Purchase Programme (CSPP) by the ECB (European Central Bank) in March 2016, trading was possible mainly via voice. The liquidity was not on the platforms, and going forward there needs to be a way of making trading more efficient. At the moment, a few platforms dominate the e-trading landscape. However, I see the development of niche platforms that will increase coverage of the fixed income markets. This, for example, could be in emerging market bonds, or in other specific areas of the market where there is limited access. However, one of the biggest challenges with implementing these niche types of platforms is the cost.
Looking ahead, what are the biggest challenges ahead and greatest opportunities?
In general, building efficient trading systems while keeping implementation costs low is a big challenge. There is so much dispersion of information in the market that the buyside ideally needs to connect to multiple data sources. Also, even if there is a logical and obvious move to electronic trading with a greater offering from the e-trading platforms, there is still a cost and complexity in aggregating everything that is not being traded electronically. Regulation has brought greater transparency, but the markets still remain opaque and there is still a lot of work that needs to be done to make the markets more efficient and ‘electronify’ market information in an easily readable and comprehensive format.
As for opportunities, firms need to have a good understanding of what is happening in the markets and to have strong trading desks that work together with fund managers to capture new clients. The key differentiators come down to trading efficiency, market understanding and access to liquidity.
Yann Couellan is Head of FICC Trading at BNP Paribas Asset Management. He has more than 25 years’ experience of fixed income, derivatives and money market dealing. He joined BNPP AM in November 2017 from AXA Investment Managers where he spent 10 years as Head of Fixed Income Execution. He previously worked in dealing roles at IXIS Asset Management, ETC (E-Trading Company) and Cantor Fitzgerald, after beginning his financial career in 1992 as a junior dealer at Maison Roussin. Couellan has been co-chair of the ICMA Secondary Market Practice committee since 2017.