American dollar and Russian ruble

At least six banks have started cautiously returning to the Russian bond market, reported Reuters today. JP Morgan, Bank of America, Citigroup, Deutsche Bank, Barclays and Jefferies are all reported to have started once again facilitating trades in Russian government and corporate bonds for their clients.  

A spokesperson for Deutsche Bank confirmed to The TRADE that the information on its Russian bond trading activities was “factually correct”. 

Most banks halted their Russian debt trading earlier this year following heavy sanctions imposed by the US, UK and Europe in response to the Russia-Ukraine conflict, as reported by The TRADE.  

A spokesperson for Deutsche Bank confirmed to The TRADE that the information on its Russian bond trading activities was “factually correct”. 

Following a ramping up of US sanctions against Russia, the Treasury prohibited market participants in the US from purchasing both new and existing debt and equity securities issued by a Russian Federation entity, causing most banks to cease their activities. JP Morgan, one of the last banks to exit, halted trading in June.  

On 22 July, new guidelines from the Treasury allowed holders to start winding down their positions again, within the parameters of current sanctions, allowing investors to exit their toxic positions. The US Treasury approved an auction in credit default swaps sold on Russian bonds late last month, with the Office of Foreign Assets Control (OFAC) issuing licenses for the auction and associated wind-down activities, following a group request by market participants.  

The Treasury also clarified that banks would be allowed to facilitate, clear and settle transactions of Russian securities in order to help their US clients wind down their positions. A Treasury spokesperson said the move was designed to help US and global investors make a clean exit from their Russian holdings.  

It would now appear that activity is being cautiously resumed, with most of the banks operating on a request-only, case-by-case basis.  

Citi, Bank of America and Jefferies declined to comment. JP Morgan and Barclays had not responded at the time of publication.

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Despite increased adoption of low-touch protocols and algorithmic trading in global fixed income markets, bond trading will still need the human touch for large trades and during times of market stress, according to senior buy-siders.

Making the case to delegates as part of an Oxford-style debate at the Fixed Income Leaders Summit Europe conference in Barcelona, two heads of fixed income dealing acknowledged that bond trading will continue to evolve with technology, but the human trader and human relationships will remain a key part of trading fixed income.

“Bond trading will continue to evolve with more data and as new tools to execute trades are introduced to the market, but my problem is how do I transact a block trade during times of high volatility or in an inefficient market,” said Mike Poole, head of fixed income dealing at Jupiter Asset Management.

“Low-touch and algo-driven trading will not work across the board in fixed income. As market participants, we have the ability and duty to ensure the market evolves in a way that allows a number of trading protocols to flourish, including human trading protocols for large transactions that can be executed in a variety of market conditions. My fear is that reliance on a small number of trading techniques will erode relationships that we have built up over decades. Change for the sake of change does not always equal progress.”

Poole continued that while the human element is important, there must be more efficient processes to evolve those human relationships, not algorithmic trading, because it’s the human trader that gets those blocks done and that’s how risk is cleared. David Walker, head of fixed income dealing at M&G Investments agreed with Poole, adding that as many fixed income divisions are scaling back the trading desk, he has been adding traders that are specialised in certain products to the fixed income trading team.

“I’m upscaling my dealing desk with specialised dealers so that they have time to speak to the street and share ideas with the portfolio manager. Sure, electronic trading is efficient and protocols like portfolio trading are good, but I’ve looked at portfolio trading closely and found that the result was not always as good as when we’ve traded those bonds ourselves… Electronification in fixed income has leveled off, and the evolution is over.”

On the other side of the argument, Brett Olson, head of fixed income execution at BlackRock iShares, and Bart Smith, co-head of the ETF Group at Susquehanna International Group, declared that the trend towards the electronification of fixed income trading will, in fact, continue.

“ETFs have kicked off this process,” Olson said. “Dealers have had to rapidly price and trade baskets of bonds and they are evolving with advancements in technology and platforms in mind to facilitate that shift. Not only do I believe bond trading is evolving more towards low-touch, I know it is.”

Similarly, Smith noted that it’s uncommon to hear asset managers asking how they can get more out of high-touch trading relationships, but market participants are increasingly looking to low-touch trading protocols to facilitate more difficult trades.

“This has already happened,” Smith said. “Regulatory pressures have limited the ability for banks to hold inventory and the buy-side have their own regulatory pressures to contend with. Transparency and best execution lend themselves to increased use of technology and low-touch trading solutions.

“Low-cost and low-touch trading continues to put pressure on areas of the market that are inefficient, and eventually that will happen as we see new market entrants and technological innovation. It’s [high-touch trading] just not economically viable anymore. It will continue to migrate upstream. We love human beings, but the ‘equitisation’ of fixed income has well and truly begun.”

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The firm’s members can now trade bonds issued by corporations domiciled in emerging markets, as well as emerging markets government bonds in hard and local currency. Local markets, including Mexico, Turkey, South Africa, Czech Republic, Hungary and Poland, have already been added, with plans to add more in the coming year.

Constantinos Antoniades, global head of fixed income at Liquidnet, stated that the challenges facing asset managers in the emerging markets bonds space are often very similar to the obstacles in the corporate bond market.

“It was an easy decision to extend the network of asset managers, technology, innovation, and streamlined workflow we’ve created in the corporate bond space to emerging markets. Our deep pool of natural liquidity, and the information protection and transaction cost savings it provides, enables traders to refocus their attention to where it matters-alpha generation.”

Liquidnet added that it has secured 90 asset managers who trade emerging market bonds to participate in the launch of the asset class.

Over the last quarter, Liquidnet has bolstered its fixed income teams with two hires to support the growth in its members. Daniel Reddington, formerly an executive director for emerging markets sales and trading, joined the sales team at Liquidnet in New York. He is reporting to Chris Dennis, who is currently the US head of fixed income sales at Liquidnet.

In London, Liquidnet has hired Daniel Swaby, who has previously worked at MarketAxess and Natwest Markets. Swaby is reporting to EMEA head of fixed income sales, Jonathan Gray.

Research from Greenwich Associates has stated that emerging market bond traders in the US have predicted a rise in volumes next year, with a portion of that volume expected to be traded electronically. Greenwich said that as electronic trading has increased access to data and markets in the developed world, the same is now being seen in emerging markets.

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Carl James, global head of fixed income trading at Pictet Asset Management, explained to delegates at the Fixed Income Leaders Summit in Amsterdam, he has recently expanded his trading desk with two new hires. 

“The buy-side need to be more proactive with the use of technology and data, we should be using it ourselves. I just hired two new people on trading desk with no trading background, but they are data scientists,” James said.

Being able to adequately assess the quality of data is one area which has often been highlighted by the buy-side as a challenge ahead of MiFID II.

Questions have also been raised as to whether the buy-side will be equipped with enough data to have an edge over the banks and become key players in fixed income markets.

On a separate panel session, Fabien Oreve, global head of trading at Candriam Investors Group, explained MiFID II will also provide the opportunity for junior traders to step up in fixed income trading. 

He told delegates: “Pre- and post-trade transparency will drive fixed income to more electronic trading and bring small tickets to platforms which should improve liquidity. 

“In that environment, with more data and more small tickets, there is greater possibility for junior traders to take control of what used to be controlled by experienced traders.”

Antonio Pilato, head of trading desk, Generali Investments Europe, also explained asset managers should look at how MiFID II will change the structure of the trading desk in terms of people, processes and technology. 

“The portfolio managers need to put more education in place for the traders and the trading desk so that they can better understand how to use the data that will become available,” he said. 

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Fixed income buy-side trading desks would consider partnering with each other in order to access liquidity more efficiently, according to a survey.

A poll of 100 heads of fixed income at asset management and hedge fund firms in Europe, carried out by Worldwide Business Research, found a significant 78% would team up with other buy-side trading desks to increase access to liquidity.

Contributors to the report were unsurprised a huge majority of fixed income buy-side trading desks would consider this method to source liquidity.

“It’s simple, cut the middle man out. It is quite clear that a majority will say yes, which is the reason why I am surprised that 22% said no,” said David Saab, managing director at JP Morgan.

Carl James, global head of fixed income trading at Pictet Asset Management, questioned how trading desks teaming up would play out.

“From these results, I am interested to know as to what buy side 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,” he said.

Sourcing liquidity was considered the biggest challenge for 55% of respondents, closely followed by 52% who said sourcing and paying for reliable data.

Saab commented he was not surprised to see sourcing liquidity is the biggest challenge for buy-side trading desks.

“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,” he explained. 

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Fixed income, currency and commodities revenues at the top 12 investment banks around the world increased for the first time in 2016 since 2012.

Driven by strong results in credit and securitisation, revenues increased from $69.9 billion in 2015 to $75.9 billion in 2016, according to data from Coalition.

In 2012, sales in fixed income stood at $102.7 billion, but this dropped 31% over the course of four years.

Large investment banks enjoyed a surge in fixed income profits in 2016, with Barclays, Societe Generale and HSBC all reporting an increase in trading sales.

The markets business at Barclays saw income surge 9% to £5.2 billion in 2016, driven by an increase across fixed income products compared to the year prior.

Credit income soared 44% in 2016 to £1.1 billion compared to 2015 due to an overall strong performance in fixed income flow credit from market volatility and client demand, Barclays said.

Similarly, HSBC’s global markets business saw sales increase by $353 million in 2016 to almost $15 billion, driven by a surge in fixed income trading.

Adjusted revenues for credit products grew 27% in 2016 compared to the year prior, as rates product sales surged 54% to $2.1 billion.

The fourth quarter in 2016 saw profits in bond trading increase for Goldman Sachs, JP Morgan and Morgan Stanley.

Goldman Sachs saw a 78% increase in net income for fixed income, currency and commodities (FICC) trading in the fourth quarter last year, compared to the same period in 2015.

JP Morgan reported similar statistics, with a 32% surge in trading profits to $5.7 billion in the fourth quarter of 2016, again driven by fixed income activity.

At Morgan Stanley, sales and trading income grew 39% in the fourth quarter of 2016, compared to the same period in 2015.

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Monitoring the recent boom in electronic bond trading platforms is presenting new challenges for regulators, according to the International Organisation of Securities Commission (IOSCO).

A report authored by IOSCO explained regulators are faced with monitoring activity in the bond market as it shifts to new trading venues and counterparties.

As of January this year, 128 bond trading platforms were available to fixed income market participants as traders seek new technology to improve connectivity and electronic trading.

This boom in innovation has seen traders readily embrace electronic trading and a variety of alternative protocols offered to meet bond market needs.

However, IOSCO explained this has led to fragmentation and difficulties for those trading the bond market, highlighting the importance of connectivity.

The report explained many corporate bonds do not frequently trade and the corporate bond market and market quotes are often unavailable or unclear.

It also said the proliferation of electronic trading platforms has created a set of challenges bond traders in identifying which are the best counterparties and platforms to utilise for any given trade.

The now fragmented nature of the fixed income market with increased electronification has raised the importance of integrating multiple platforms to allow re-aggregation of liquidity across liquidity pools.  

New bond platforms entering the market face navigating the sometime competing demands of different market participants - many of whom look for tailor solutions.

“Along this unique order custody chain, difficulties in parsing prices marketed simultaneously on multiple platforms have also emerged, creating the appearance of duplicate orders and misrepresented market liquidity,” IOSCO said.

IOSCO also referred to the Deutsche Boerse-backed dark pool, Bondcube, which failed in 2015 after just three month when more than 500 buy-side-to-buy-side participant matches yielded only a handful of trades.

“New trading venues may struggle with the capital and resources needed to withstand the high level of competition and long ramp up time often necessary to gain sufficient market support to build a revenue base,” the report explained.

IOSCO concluded market concern remains around the sheer number of corporate bonds available to trade, the lack of a centralised liquidity pool and “many different execution preferences by market participants will make it difficult to achieve rapid increases in efficiencies for locating and pricing securities.”

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Goldman Sachs expects the recent flourish in fixed income trading activity to continue into 2017, as the market experiences increased optimism globally.

Chief financial officer, Harvey Schwartz, explained on the US investment bank’s fourth quarter earnings call that its fixed income clients’ confidence steadily built up over the second half of 2016.

Goldman Sachs reported a 78% increase in net revenues for fixed income, currency and commodities (FICC) trading in the fourth quarter last year, compared to the same period in 2015.

Schwartz said expectations of strong fiscal policy, divergence of interest rates and greater confidence about economic growth were behind the growth of bond trading.

He explained clients are more confident “we aren’t heading into a deflationary cycle, [investors are] more confident about economic growth, and so I would say there was increased optimism around the world.

“Now those are the kind of things that always drive our business, our clients are very sensitive to that it changes sentiment. So I would say that that felt more like a trend across the past six months of the year.”

Goldman Sachs’ institutional clients services business - which includes equities and FICC trading - saw revenues grow 25% to $3.6 billion, compared to the fourth quarter in 2015.

Lloyd Blankfein, chief executive officer at Goldman Sachs, said: “After a challenging first half, the firm performed well for the remainder of the year as the operating environment improved.”

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Large investment banks have reported a surge in trading revenues in the fourth quarter of 2016, led by a significant increase in fixed income trading activity.

Goldman Sachs saw a 78% increase in net revenues for fixed income, currency and commodities (FICC) trading in the fourth quarter last year, compared to the same period in 2015.

“[FICC] operated in an environment generally characterised by improved market conditions, including rising interest rates and tighter credit spreads,” Goldman explained.

The bank’s institutional clients services business - which includes equities and FICC trading - saw revenues grow 25% to $3.6 billion, compared to the fourth quarter in 2015.

Lloyd Blankfein, chief executive officer at Goldman Sachs, said: “After a challenging first half, the firm performed well for the remainder of the year as the operating environment improved.”

JP Morgan reported similar statistics, with a 32% surge in trading revenues to $5.7 billion in the fourth quarter of 2016, again driven by fixed income activity.

The US investment bank saw fixed income markets revenues increase 31% compared to the fourth quarter in 2015, as equities revenues grew 8%.

“Credit and securitised products revenue reflected increased client risk appetite. Commodities revenue improved on increased client activity in a better energy market,” JP Morgan said.

At Morgan Stanley, sales and trading revenues grew 39% in the fourth quarter of 2016, compared to the same period in 2015.

Fixed income revenues were up from $550 million in 2015, to $1.5 billion in the fourth quarter, again due to “improved market conditions compared with the prior year period.”

Citigroup reported saw its markets and securities services revenues increase 24% to $4.1 billion in the fourth quarter of 2016, with fixed income up 36% compared to the fourth quarter in 2015.

The growth reflected “increased client activity and improved trading conditions in spread products and rates and currencies,” Citi said. 

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Bond market initiative Neptune has announced both Citi and Deutsche Bank have agreed to provide data for its network and taken stakes in the company.

The Neptune network provides a venue for dealers to share information with investors on bonds they are looking to buy or sell.

The network consists of 17 dealers who are now using real-time data on 11,500 bond securities with over $100 billion in gross notional across 20 different denominations, Neptune said.

Citi and Deutsche will also join the likes of JP Morgan, Credit Suisse and Goldman Sachs on its network board.

Chief executive officer at Neptune Networks – a subsidiary of Neptune – Grant Wilson, said the addition of Citi and Deutsche Bank “is an important step to expand the reach and scope of the Neptune pre-trade data network.”

Neptune also announced an upgrade to its desktop with the addition of a watch list tool which provides a route to new clients for access to the network. 

The initiative said whilst the new tool is an important addition, “Neptune remains focused on enabling asset managers to use their preferred method of visualising the pre-trade data – this includes in-house OMS, third-party OMS vendors or a direct FIX connection.”

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