October 2011 waterstechnology.com/imd FIXED INCOME

Inside Market DataFIXED INCOME

SPECIAL REPORT

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Once considered a safe place to park money, fixed income lost its luster following the credit crunch, and is taking a beating again as national debts increase and European sovereigns face default. Nevertheless, this volatility is leading to increased trading volumes—especially in more reliable, liquid assets as investors seek safe havens—with corresponding increases in demand for market data.

However, simply moving assets won’t solve fixed income’s more fundamental challenges: While a wealth of data—from real-time prices and indexes to ETFs based on bond indexes and historical trade data—exists for more liquid instruments, challenges still remain around sourcing data for less liquid assets, which carry the most risk and require model-based valuation processes to price. And while moving over-the-counter assets onto exchange-like platforms and swaps execution facilities will eliminate some counterparty risk and lead to more—and better-quality—data overall, market participants aren’t convinced that this will solve the more complex requirements of the fixed income markets.

“Putting something on-exchange doesn’t mean there will automatically be appetite for it,” says Lee Sanders, head of fixed income and money markets for London and Paris, and head of fixed income in London at AXA Investment Managers, adding that even if demand exists, other factors—such as clearing costs—could make this an unattractive option and drive firms to alternative trading

models. “What is important is liquidity... we just want reliability of being able to buy or sell.”But the good news for the industry is that data is very much in demand, and consumers are being more critical about the source and credibility of market data as they seek out benchmark, executable prices and supporting information to aid transparency.

And even better news, much of the demand is being driven by stricter controls around trading and risk. “The demand for market data and related information is an offshoot of the need to better understand holdings, counterparties, liquidity positions, and financings,” says John Jay, senior analyst at Aite Group. With these and other

efforts around data quality and availability, the market is well on the way to removing risk and locking in liquidity. n

Locking in Liquidity

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LETTER FROM THE EDITOR

Max BowieEditor, Inside Market Data

www.waterstechnology.com/imd October 2011 3


Inside Market DataFixed Income Special Report

NEWS ROUNDUP

TR, IDC Ally with BPAM

S&P CapIQ Pitches Model Valuation Bond PricingS&P Capital IQ has unveiled its new Model Valuation pricing tool, which the vendor says more accurately reflects the market’s view of a bond’s credit risk and provides more transparency into the valu-ation process.

The service uses credit default swaps and a risk-neutral adjustment factor to isolate the market view of credit risk, initially covering 22,500 North American, Euro-pean and Asian government and corporate bonds in 33 currencies—though the ven-

dor will release an updated version later this year with a further 30,000 bonds.

Aside from gaining transparency around inputs used in valuation and pricing, cli-ents can also use the offering to identify and analyze outliers, mark their books and aid investment decisions around relative value analysis and for research validation.

As well as the valuation, clients can view the benchmark curve, swap curve, interest rate and methodology, compiled and cal-culated using S&P Capital IQ’s analytics

libraries and cross-referencing tools, and proprietary and third-party data.

Content from Model Valuation is already available via the vendor’s Micro-soft Excel API plug-in, initially aimed at middle-office staff performing price verifi-cation and those managing risk, and is also in beta testing on its Global Credit Portal, alongside other evaluated and price data, with graphs and tables of data including pricing approaches, the underlying prices used and risk measures. n

Thomson Reuters recently launched a series of bond and sukuk (Islamic non-interest-bearing bond equiv-alents) indexes developed with the Bond Pricing Agency Malaysia, a Kuala Lumpur-based bond pricing provider, to provide transparent investment vehicles for investors, money managers and analysts investing in Malaysian securities. The two launched a total of 108 indexes, covering six bond classes and 778 issues, which are available over Thomson Reuters’ datafeeds, its Eikon desktop terminal and its Datastream statistical time-series database.

Meanwhile, Interactive Data is distributing evalu-ated prices for long-term Malaysian fixed income assets from BPAM to broaden its coverage in the region. The evaluations are available via the vendor’s FTS portfolio administration tool and its Express-Net web-based service for Asia-Pacific clients. n

US regulator FINRA has cre-ated tables of information on the Market Data Center section of its website depicting market activity and pricing information for asset-backed and mortgage-backed securities trade data, to provide investors and market participants with market insight into securitized fixed income products. The tables, which were developed in partnership with FINRA’s real-time data provider Interactive Data, summarize trade data reported to FINRA’s TRACE (Trade Reporting and Compliance Engine) feed, and

will be updated after market close each day.

The tables include the number and volume of trades, and number of securities traded, to help gauge liquidity and market sentiment, and pricing data such as average price, volume by trade size and buy or sell data, covering mort-gage-backed pass-through securi-ties, forward MBS trades dubbed TBAs (“to-be-announced”), and agency and non-agency collateral-ized mortgage obligations, com-mercial mortgage-backed securi-ties, asset-backed securities and collateralized debt obligations. n

FINRA, IDC Bow TRACE Activity

4 October 2011 www.waterstechnology.com/imd

Credit Market Analysis, the over-the-counter credit data subsidiary of CME Group, has introduced a new product to its CMA Datavision CDS instrument pricing service that incorporates the credit default swap “Quanto” spread of key euro-zone Sovereigns to help investors incorpo-rate the impact of foreign exchange rate differences into CDS pricing models.

CMA rolled out CMA Datavision CDS Quanto in September, aimed at govern-ment institutions, banks and insurance companies who trade CDSs on European sovereign debt and large corporate bonds.

“To shield protection buyers from a devaluation rather than a default, Euro-

pean sovereign CDS protection is written in US dollars rather than euros,” so that a country cannot simply print money, which would avoid a default but devalue its currency—meaning that CDS traders must understand the impact on domestic spreads from the implied change in the euro-dollar exchange rate in the event of a default, to accurately value their portfolios, says Jav Bose, product owner of the Data-vision product line at CMA.

Bose says traders can buy CDSs in euros instead, but that these so-called “quantos” always create a difference in the spread between the protection in dollars and the protection in euros, based on calculations

involving the impact of the exchange rate between the euro and the US dollar, intro-ducing an implied devaluation risk.

Sovereign debt investors previously based their valuations on interest rates rather than FX rates, since the chance of default was so low. But with several euro-zone countries now at significant risk of default, which could lead to devaluation of the euro, holders of sovereign debt have started to require the CDS Quanto spread to factor in this risk, while those holding sovereign debt in euros require currency curves that factor in the extra valuation risk from the FX rate so that they can properly evaluate their positions. n

CMA Bows Quanto Spread CDS Pricing Curves


New York-based fixed income and deriva-tives pricing startup Benchmark Solutions has added pricing data for callable bonds to its BMark Real-Time pricing platform, as part of its ongoing plans to expand its coverage of the over-the-counter fixed income and derivatives market by rolling out new asset classes in phases.

Benchmark, which launched its BMark platform in July following two years of operating in stealth mode (IMD, July 13; Dec. 13, 2010), made streaming, pre-trade prices for callable bonds available to its clients—primarily front-office pro-fessionals at buy-side and sell-side firms, including hedge funds, asset management firms and regional dealers—in September.

The new pricing data adds to BMark’s existing pre-trade prices—which are

updated every 10 seconds—covering over 80 percent of corporate bonds trades reported to regulator FINRA’s TRACE (Trade Reporting and Compliance Engine) facility, and credit default swap curves across six tenors.

BMark is built on the vendor’s Mar-ket Calibrated Framework pricing engine, which analyzes over 12 million live market inputs—including the same types of data that large dealers use to generate their prices, such as interest rate and TRACE data, as well as market factors like compa-rables and volatility—to derive independ-ent prices, spreads and yields that reflect the current market value of bonds to sup-port trade decisions and manage risk, even when there are few trades for a given bond reported to TRACE, says Benchmark

founder and chief executive Jim Toffey. The data is available via the web-based

BMark platform, which allows users to set up watchlists, alerts and custom views based on criteria such as maturity, sector, and credit quality, and can be exported to other applications using Benchmark’s API or Microsoft Excel add-in. Users can also drill into the prices to see the BMark Attribution analytics, comprising real-time factors impacting prices, such as interest rates, credit spreads and CDS basis, along with yield curves.

“The credit crisis in 2008 demonstrated a need for greater transparency in the fixed income market, especially given that 95 percent of the assets don’t trade on a daily basis and there is little or no pricing for them,” Toffey says. n

Benchmark Expands Bond Pricing Coverage

Xignite Eyes Bond Data, On-Demand Analytics IncomeWeb services data provider Xignite plans to signifi-cantly increase the amount of market and reference data that it can offer on-demand, as a result of a recent $10 million funding round.

“We have a broad set of market, real-time and ref-erence data, but there are still plenty of areas where we don’t have great cover-age—bonds, for example. So we will be spending capital to bring every sort of data and analytics onto our platform,” says Xignite chief executive Stephane Dubois.

In particular, the vendor is seeing demand for bonds data, especially reference and security master data as well as prices for a broader range of instruments. “We have a basic product that

we launched last year, but now we can beef that up with full reference data and global information, as well as traded prices from dealers and liquidity ven-ues worldwide and evalu-ated prices,” Dubois says, adding that building a comprehensive collection of data will require Xig-nite to “consolidate lots of information from lots of sources… because not eve-rybody has full coverage or every piece of information on a bond.”

On top of any new data, the vendor also plans to offer complex analytics—such as options Greeks cal-culations that require large amounts of underlying data—as a managed service, whereas firms would have typically run these calcula-tions in-house. n


Canadian data vendor Gmarkets is rolling out TermLine, a lead-ing indicator generated by aggregating user requests for data within its data desktop, to provide insight into levels of market interest in specific asset classes, instruments and geographic regions—initially capturing queries and provid-ing interest levels for treasury bonds, derivatives and curren-cies, after which the vendor will expand its coverage based on cli-ent feedback, says president and chief executive Robin Hanlon.

TermLine, which will be available via the Gmarkets Pilot Financial GPS desktop, gauges interest in an area by captur-ing queries for data on specific instruments, asset classes and geographies on the Gmarkets platform. First, it establishes a baseline of “normal” activity to take into account scenarios such as user watchlists repeatedly que-

rying the system automatically for updated data on the same items. Then this allows users to monitor the level of interest in a specific area or asset based on the volume of queries by other Gmarkets clients, and to config-ure alerts for when user-defined thresholds are breached.

Hanlon says TermLine will be especially useful in provid-ing insight into pre-activity in the over-the-counter markets, which are not as transparent and liquid as exchange-traded equi-ties, and could be incorporated into trading decisions or serve as a potential predictor of trading flow—for example, an increase in interest levels may influence pricing adjustments or a trader’s decision to liquidate or hold a position. Given the sizes and volumes that they trade, the tool may be most appealing to banks, dealers and inter-dealer brokers, she adds. n

Gmarkets Preps Pre-Activity ‘Interest’ Indicator


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Fragile, uncertain markets across Europe, combined with new regulations, are hav-ing a profound effect on the importance of transparency in the fixed income space. It is more critical than ever that institutions seek trusted, independent benchmark data to meet the growing focus on internal risk and control processes and regulatory requirements, as well as to drive market analysis and profitable trading decisions.

Integral to transparency is reliable, high-quality market data, sourced neutrally from regulated, trusted venues. As a facilitator of electronic fixed income trading markets across Europe, MTS offers comprehensive market data based on constant executable pricing for bonds traded on the platform throughout the trading day.

Demand for fixed income market data from across the globe—and increasingly outside of Europe—has continued to rise strongly over the past year. We have seen a significant increase in demand for real-time bond data for trading and to satisfy best execution compliance, for price fix-ings and transparency around how they are calculated, as well as for historical data and real-time indexes.

As more trading shifts onto exchanges in response to new regulations such as MiFID 2, more market data will naturally become available as a result, mirrored by an increase in the number of questions about how data is produced—something that depends on the execution venue from where the data is sourced. Are we looking at firm prices, indicative request-for-quote prices, or composites?

Given the new growth in choice in fixed income data, market participants are plac-ing particular emphasis on prioritizing the quality of data, which hinges on the qual-ity of the execution venue from where it is

sourced. MTS prices cover the European government, quasi-government and cov-ered bond markets, and are taken directly from the MTS trading platform.

So as more volume shifts from voice-brokered to regulated electronic markets such as MTS, there is an increased need for participants to assess the data available to them as a decision-making tool, and to compare the quality, accuracy and granu-larity of each data source.

OpportunityThis can be an opportunity to do some-thing different. Looking at the evolution of data and usage in other asset classes, we have an idea of how this will change for fixed income in the short- to medium-term, and the changes in trading styles that this will accompany.

MTS is currently developing a new tick data service, which we believe is groundbreaking for the fixed income space in terms of its depth, quality and quantity of data. Participants, regulators, debt man-agement offices and researchers will have access to an un-netted, tick-by-tick data feed, comprising every price available in the market. This development will provide more granular data—greater transparency, but also more flexibility around what our participants can do with this data.

The industry is also consuming more historical bond data, which regulators, DMOs and buy- and sell-side institutions use to back-test strategies to analyze their performance against real market condi-tions as well as for research purposes. Transparency and accuracy of historical data is of paramount importance to back-testing—it must give a true reflection of the market at any given point. Under-standing the risks and opportunities of

a strategy before trading is more critical than ever when managing complex prod-ucts in a market with increasing reporting requirements and regulatory oversight.

Alongside sovereign debt data, demand for transparent corporate bond data has also grown. By their very nature, these credit instruments are less liquid, as the market is larger and liquidity is spread more thinly than the sovereign market, so quality data can be harder to find. MTS is in the process of launching MTS Credit, which will include standard RFCQ (request for competitive quote), execution on single-dealer pages and an all-to-all electronic market (MTS Prime) for all non-government bonds, including cor-porate bonds, which will for the first time offer participants the ability to trade corporate bonds in an order-driven mar-ketplace, moving towards the same level of transparency and efficiency as the equity and derivatives markets.

This will result in the creation of rich, quality market data for a wide variety of corporate bonds, and a level of transpar-ency previously unavailable, but for which there is clear demand: One of the first questions people ask about this new mar-ket is about the data that will be produced.

Transparency is set to remain at the forefront of the agenda as regulations take shape over the coming year and the fixed income market evolves more rapidly than ever before. Market data has already taken center stage as participants across the buy- and sell-side attempt to set best practices ahead of the final regulatory decisions. By choosing the most accurate, transparent data providers, the market can rise above the aftershocks of the financial crisis and become more efficient as a whole. n

Bond Markets’ Transparency RevolutionEconomic uncertainty, regulation and market forces are bringing change to the fixed income markets, with traders increasingly demanding more transparency and data quality. Christine Sheeka, market data product manager at European bond trading platform MTS, explains that it’s not just what you do with data that counts, but where you get the data and how liquid and credible that source is. Christine Sheeka

MTS

SPONSOR’S STATEMENT



ROUNDTABLE


IMD: How has recent market turbulence—the financial crisis, recovery and continued uncertainty, especially in Europe—affected fixed income trading volumes and de-mand for market data? Nick Themelis, chief information officer, MarketAxess: During the credit crisis of 2008, liquidity in the fixed income mar-kets, particularly among many of the large dealers, declined significantly. One result of this was that a greater number of smaller, regional dealers entered the fixed income market as buy-side firms searched more widely for liquidity. As a result, MarketAxess has more than doubled the number of dealers on its electronic trading platform since 2008 to include many of these regional dealers and thereby enhance the liquidity available electronically to investors. Overall e-trading vol-umes have also increased as a result, with total volumes on MarketAxess up 35 percent in the past year.

A second significant trend since the credit crisis has been increased demand for fixed income market data, especially in illiquid products and instruments, as market participants look for a clearer view of those markets. Investors today are looking for more detailed market data, such as streaming datafeeds or

custom reports (real-time or end-of-day), especially to under-stand how volatility affects their portfolios. Custom services such as the MarketAxess Service Bureau help clients apply market data feeds to individual portfolios to give a complete daily picture of pricing for every security in those portfolios for valuation analysis. The MarketAxess Service Bureau identi-fies firm, executable levels by pulling from TRACE and non-TRACE-disseminated data, MarketAxess system trades, and depth of market coverage.

Anshuman Jaswal, senior analyst, Celent: In the early period of the recovery after the crisis, fixed income trading went up and investment banks’ revenues showed corresponding growth. But this changed last year. The fixed income trad-ing volumes were much lower in 2010 compared to 2009, although there has been a recovery in the first half of 2011. The demand for market data has also fluctuated accordingly, but we expect that it should improve in the latter half of 2011. As there has been some improvement in the market, the data demand is also expected to benefit, since the trading volumes have risen.

With trading volumes in fixed income and associated instruments remaining volatile in the face of still-fragile economic conditions, demand for market data is increasing as firms seek more transparent and granular data to support trading and risk management. New regulations and market structure changes soon to come into force will have major implications for how fixed income assets are traded and the market data available. Will these cure the crisis of confidence in fixed income after the credit crunch?

Curing Credit’s Insecurity Complex


John Jay, senior analyst, Aite Group: During ongoing times of market stress, sustainable volumes tend to fall as wider bid-ask spreads lead to greater illiquidity. Therefore, the probability of gapping prices tends to increase. Investors, such as those exposed to Greek sovereign debt, will look to data on the credit default swap (CDS), global bond, and foreign exchange markets as factor inputs to determine their own exposures and risk management needs. In turn, their portfolio assessments may have material effects with respect to their margin costs, counterparty risk and hedging costs, as well as their market and liquidity risk positions.

Christine Sheeka, market data product manager, MTS: Following the European Central Bank’s intervention in summer 2011, we did see tighter spreads, but this effect has weakened over time. The ongoing turbulence in the euro zone means that volumes still remain low—though they are significantly better than the situation we found ourselves in following the collapse of Lehman Brothers in 2008. We have seen some evidence of perceived and potential counterparty risk, but this is mitigated as most trades are carried out via a central counterparty.

Volatility in the market has reinforced the demand for relia-ble, high-quality market data sourced neutrally from regulated, trusted venues. The demand has come from an increasingly widespread group, both in terms of the kinds of users we are seeing and the geography they cover. We have seen particular demand for real-time bond data for trading and best execution purposes to satisfy compliance requirements. The MTS mar-ket structure delivers constant tradable pricing for the bonds traded on its platform. This continual source of benchmark data has played a key role in the increase in demand for our data, as participants require executable—rather than just com-posite or indicative—prices.

Lee Sanders, head of fixed income and money markets for London and Paris, and head of fixed income in London, AXA Investment Managers: There has been reasonably robust activity in government bond trading—95 percent of our UK turnover is in gilts, and this is also high in Paris. But turnover has been significantly lower in corporate credit, where numbers are down by 20 to 30 percent on what you would expect, based on previ-ous months… so we’ve been demanding indications of interest

from the market, and these are becoming more valuable to gauge liquidity.

Does that push you towards other products? We’ve seen a pickup in credit default swap trading in London as some of our issuance clients want protection trades and negative basis trades, so that’s another asset class they are trying to use. But in sterling credit, a lot of banks have sensed a move away from CDSs… so are setting up more in cash bonds, and taking fewer derivative positions.

Roderik Gonggrijp, director of European securities, S&P Capital IQ: Anecdotal evidence suggests a decrease in European trading volumes over the last few months [but] demand for market data, from the perspective of a high-volume user, has increased sig-nificantly in these times of market volatility. Always important, it is critical under these conditions to have near-unrestricted access to market data from a variety of sources for the purpose of deriving and supporting transaction prices. Coupled with the increased demand for market data is the need for independent evaluations. Independent evaluation can support price discovery on securities that seldom trade. Independent evaluation can also support a user’s ongoing requirement to value securities for risk management, compliance, audit and reporting purposes.

IMD: What other factors are influencing demand—and what instruments are most in demand, and why? What are the challenges around sourcing and getting the most out of data on those assets?Jaswal: The continued uncertainty over European sovereign debt will have an impact on trading volumes. Also, under the new Basel III standards on capital and liquidity, banks will have to allocate much higher amounts of capital towards their fixed income operations, pushing down their returns on equity. Since equity is treated more favorably, banks are prepar-ing themselves for more equity trading and expecting lower fixed income levels. With regard to market data, the European Commission’s MiFID review includes plans to improve levels of post-trade data in fixed income markets across the region. It is expected that this could give fund managers the means to obtain reliable price discovery. However, banks are unsup-portive of the idea of an order book and any kind of a more referenced market as such measures could affect liquidity and

“The industry is consuming more historical bond data as regulators, DMOs and buy- and sell-side institutions use it for research purposes and to back-test strategies to analyze their performance against real market conditions. The accuracy of the historical data is of paramount importance to back-testing.”

Christine Sheeka, market data product manager, MTS


Christine SheekaMarket Data Product ManagerMTSTel: +44 (0) 20 7797 [email protected]



ROUNDTABLE

impact their profits. After the crisis, there has been a certain flight to safety. For example, in the US, the level of out-standing in asset-backed, money market and Federal agency securities has declined, while outstanding has grown in US Treasuries. The share of Treasuries has also grown by 5 percent in overall US market trading volumes.

Availability of historical prices is important for efficient and electronic trading. This is a bottleneck in the US market and is one of the reasons—besides a lack of streaming prices—why the market is unable to move to algorithmic trading. In Europe, both pre-and post-trade transparency is an issue, something the regulators are hoping to address soon.

Sheeka: New and forthcoming regulations are obviously hav-ing a profound effect on the market and demand for quality market data. We have seen an uptick in demand for our indexes as market participants prioritize the ability to accurately value their government bond portfolios in order to improve hedg-ing and instill shareholder confidence. MTS offers a set of indexes, based on real-time tradable prices from its regulated trading venue, that serve as one of the most accurate bench-marks available for European government bond performance measurement.

Alongside sovereign debt data, we have experienced strong demand for data from inflation-linked bonds and also wide-spread demand for corporate bond data. By their very nature, credit instruments are less liquid, as the market is larger and liquidity is spread more thinly than the sovereign market. Quality data can therefore be harder to find. We are in the process of launching MTS Credit, an environment that will include standard RFCQ (request for competitive quote), execution on single-dealer pages and an all-to-all electronic market (MTS Prime) for all non-government bonds, includ-ing corporate bonds, that will offer participants the ability to trade corporate bonds in an order-driven marketplace, similar to a stock exchange, moving towards the same level of trans-parency and efficiency as the equity market. A result of this will be the generation of rich, quality market data for a very wide variety of corporate bonds, which has not previously been available.

Sanders: As far as corporate credit is concerned, the scramble for reli-able market data is probably the greatest that it has ever been…. These days, the amount of market data and information available is ridiculous, [but] at the end of the day, the most important thing for an execution desk is liquidity.

Pricing information going for-ward will be very important—I’m keen on using a reference price and an order book, and I do think there is a need to go further down that road, and create another option for us to use. But in the interim, this isn’t necessarily as important for us to do our job. What is important is liquidity: you can only be as good as the market you’re operating in… and that data on inventory is very important to us.

We are seeing… mixed signals around the market. But we just want reliability of being able to buy or sell, and we achieved that by building our own systems. After that, any additional transparency is a good thing, though ECNs don’t always have a good relation to where the market is trading, and we can get better pricing via RFQs from the broker mar-ket. We don’t need a lot more information to do our job, and we generate a lot of that in-house from our strategists and economists.

Pre-trade, apart from inventory information, data on how other markets are reacting—such as volatility in equity mar-kets—is useful. Insight into how we think risk is going to be traded has dominated the last few months, and comments or sound-bites from regulators and governments have been important, as these can affect volatility, and we want to be able to take advantage of this, since volatility usually leads to wider bid-offer spreads. But there are a lot of things affecting the markets, so you can’t really pin down one crucial piece of information—it’s really about how you bring that all together.

Themelis: Investors’ appetite for credit has been driven by the search for greater yield and influenced by changes to the US and other sovereign debt ratings, especially in high-grade corporate debt. On the dealer side, new capital requirements from regulations have resulted in a tendency for dealers to hold less inventory on their balance sheet. This has led many dealers to look at electronic trading as a way to achieve greater client connectivity at reduced costs.

Gonggrijp: The principal driver of demand will be price trans-parency, which manifests itself in multiple ways, and is now an enterprise-wide concern rather than only a back-office need. To support their efforts, firms will require complementary sources and expanded datasets. The desire to understand how valuations are derived—and the means to assess this informa-

Lee SandersAXA Investment Managers


“Insight into how we think risk is going to be traded has dominated the last few months, and comments or sound-bites from regulators and governments have been important, as these can affect volatility, and we want to be able to take advantage of this, since volatility usually leads to wider bid-offer spreads. Lee Sanders, head of fixed income and money markets for London and Paris, and head of fixed income in London, AXA Investment Managers


tion for a large universe of often diverse assets—will require significant investment both from end-user consumers and independent evaluated pricing providers.

Jay: Whether investors struggle with corporate or sovereign debt, provided that their investment mandate permits enough capital allocation flexibility, they will need data that goes beyond the bonds at issue. In times of market uncertainty, investors will tend to gravitate to safer assets (for instance, German bunds relative to Greek bonds). In addition, inves-tors today can look to the credit default swap market to hedge their exposures without needing to short a bond; as such, CDS instruments and their attendant data are relevant today (as opposed to even a dozen years ago).

IMD: How will moving OTC derivatives onto centrally-cleared Swap Execution Facilities affect fixed income trad-ing? Could we also see other fixed income asset classes move onto exchange-style platforms, and how will this af-fect the volume and quality of market data?Sheeka: As the regulations around central clearing take shape, in the government bond space we expect to see more OTC business moving to electronic trading in both the B2B and B2C markets, starting with plain vanilla bonds. In fact, many market participants are already acting on their recognition of the need for transparency and moving to set best practice ahead of the pending regulations. A good indicator of this is the huge jump in volumes we have seen recently in the market we facilitate for French sovereign debt. Traditionally this has been a voice-dominated market, but for the first time we are seeing a major shift to e-trading.

As more volumes shift from voice to regulated electronic markets such as MTS, it is increasingly important for partici-pants to assess the data available to them as decision-making tools, and to compare the quality, accuracy and granularity provided by each of these data sources.

To this end, later this year we are launching a new tick-by-tick data service, which we believe is groundbreaking for the fixed income space in terms of the depth, quality and quantity of data it will deliver. Participants, regulators, DMOs and researchers will have access to an un-netted, tick-by-tick data-feed, comprising every price available in the market.

Jaswal: The move of interest rate OTC derivatives onto SEFs is expected to boost electronic trad-ing in the bond markets. While there would still be practical issues in terms of historical data and streaming of prices (as opposed to RFQs being used at present), there would be greater incentive for the larger market participants to encourage adoption of similar platforms, as it will help improve their trading efficiency. The vol-umes in some of the illiquid mar-ket segments might also go up, thereby creating better chances for electronic trading in such platforms. Market data volumes and quality are expected to benefit from this develop-ment as well—but with the caveat that these changes will take some time as the OTC derivatives platforms will take time to establish themselves. We do not expect the benefits for fixed income before 2013.

Themelis: Although the Dodd-Frank Act in the US will only mandate electronic trading for derivatives, increased trading volumes on MarketAxess over the past year suggest that the focus on derivatives e-trading is also having some impact on the underlying cash markets. MarketAxess expects to be one of the first firms to register as a SEF, and institutions and deal-ers can already trade both CDSs and corporate bonds elec-tronically on MarketAxess. We expect implementation of the Dodd-Frank Act—which is anticipated to take place through next year—to have a further effect of increasing electronic volumes across a wide range of fixed income products.

It’s important to note the range of trading protocols that SEFs might provide based on how swaps are ultimately regu-lated. We believe all but the most liquid CDS indexes and single names will be traded using a request-for-quote proto-col, which has proved to be much better suited for less liquid OTC markets such as corporate bonds versus a central limit order book or exchange model.

We believe the existing RFQ model provides a high level of pre-trade transparency, and we plan to augment our superior swap trading capabilities with robust pre-trade CDS analytics featuring Markit intraday index pricing. In addition, a number of dealers are today streaming live, executable markets on MarketAxess for both CDS indexes and single names, which provides a further degree of pre-trade price transparency.

Jay: It is not clear that simply forcing OTC derivatives to clear via central counterparty clearing (CCPs) will affect fixed income trading in terms of overall volumes, though transac-tions are expected to occur on exchange-like electronic plat-forms. Bid-ask spreads are expected to compress, nonetheless. By virtue of regulatory decisions, the establishment of swap


Anshuman Jaswal Celent

“Fixed income trading volumes were much lower in 2010 compared to 2009, although there has been a recovery in the first half of 2011. The demand for market data has also fluctuated accordingly, but we expect that it should improve in the latter half of 2011... as there has been some improvement in the market”

Anshuman Jaswal, senior analyst, Celent



ROUNDTABLE

data repositories (SDRs) will make certain types of market data available to market participants, although some of this is already available from industry utilities or through paid services.

Gonggrijp: It is not clear how moving OTC derivatives to a centrally-cleared SEF will affect fixed income trading. Our understanding is that not all OTC derivatives will be cleared centrally and that the emphasis will lie with the very stand-ard instruments like vanilla interest rate swaps, single-name and some index CDSs, FX forwards, etc. For providers of valuations that depend on this type of information, this should increase its availability and should therefore be expected to enhance the quality and confidence of valuations based on that information.

Sanders: There has been a lot of conjecture as to the cost of clearing. For example, you could have a 15 percent margin to clear a single-name CDS. In my book, that could be prohibi-tive and preclude people from trading… because if you need to have too much cost tied up in backing a trade, firms just won’t trade them. Going forward, I think this will push people more into cash bonds, which will probably move to exchange-style platforms. I don’t think there are many obstacles to moving to an exchange-style environment: the authorities like it for CDSs and over-the-counter assets… but it will be hard to get exotic products through the clearers, which is what would blow up an institution.

Of course, putting something on-exchange doesn’t mean there will automatically be appetite for it…. I agree that we do need transparency and to eliminate as much risk from institutions, but the EU debt crisis—which is more caused by sovereign over-spending and undercapitalized banks—seems to have taken regulators’ focus away from central clearing.

IMD: What impact do you expect MiFID 2’s regulation of OTC markets in Europe to have on fixed income trading, market transparency and market data quality, availability, and cost?Jaswal: MiFID 2 is expected to boost both pre-trade and post-trade data transparency, and will help market participants—particularly the buy side—to trade more efficiently. The banks

are predicting that pre-trade transparency might have an impact on liquidity and therefore might not be completely desirable. Market data quality is expected to improve, as is data availability. Similarly, at present it is quite costly to obtain pre-trade data for the participants, but this should change once the measures under MiFID 2 are implemented.

Themelis: Many OTC products, including corporate bonds that do not fall within the remit of Dodd-Frank, may end up being covered by the MiFID 2 regulations. MiFID 2 pro-poses to include requirements for best execution that relate to the content and format of data, as well as frequency of data publication, and as such would encourage more widespread use of electronic trading venues across a broad range of prod-ucts. In addition, as currently proposed, MiFID 2 seeks to establish a consolidated trade tape for Europe, which would bring additional transparency to the markets—much like we saw during the advent of TRACE (FINRA’s Trade Reporting and Compliance Engine) for corporate bonds and other fixed income instruments in the US.

Sheeka: MiFID 2 is a substantial and far-reaching piece of reg-ulation. It has very broad application, bringing fixed income and derivatives products into its scope. Likely impacts include: a profound increase in transparency, both pre- and post-trade; a substantial increase in regulation of execution platforms; and a reinforcement of the trend towards electronic trading. MTS, as a transparent, regulated and electronic platform, is ahead of these reforms and is monitoring them closely, engaging in discussions with users and regulators

As MiFID is implemented and more trading shifts onto regulated platforms, more market data will become available. However, market participants must prioritize the quality of data, and this hinges on the quality of the execution venue from which it is sourced. MTS data is taken directly from the MTS trading platform with prices covering the European gov-ernment, quasi- government and covered bond market. The service is already highly affordable—the real-time data feed is available for a small monthly fee—and this will continue to be the case as the regulatory landscape evolves. We also offer our


“Whether pre- or post-crisis, it is challenging to find consistent, accurate data for illiquid securities due to the nature of infrequent trading patterns. Valuation for hard-to-value assets typically relies on modeled pricing. Electronic trading across a full range of credit products allows for the history of both executable and depth of market levels.”

Nick Themelis, chief information officer, MarketAxess

Nick ThemelisChief Information OfficerMarketAxessTel: +1 212 813 6000www.marketaxess.com/data/marketdata


highly transparent government bond indexes free of charge, and often create bespoke indexes based on customer requests.

Sanders: There’s no way the fixed income market can come out of this regulation looking anything like the way it looked going in, in terms of the way OTC markets are traded and cleared. But if it becomes prohibitive to clear OTC instru-ments, then I expect more people will start trading cash—and I think the banks have caught wind of this, and that’s why they are beefing up their cash trading operations. So market data quality might pick up in cash and drop off in OTC markets.

An unintended consequence is that it may make people unhedgeable. If it is prohibitive for a firm to protect itself, it may not take the positions it needs… and banks might come up with credible alternative products. People are more and more concerned about keeping costs down. And if returns to our policyholders go down because of new expenses, maybe we’ll just return to the cash side.

Gonggrijp: Many are concerned that MiFID 2 will provide too much transparency. As defined, it’s likely that demand from market participants for comprehensive datasets will increase. Ensuring compliance with the regulation will require multiple sources of market data, so firms’ spend will probably increase.

In reality, as we all know, the fixed income market is a frag-mented OTC market where a very small percentage of outstand-ing assets trade on any given day, making it virtually impossible for market participants to have access to all transactions. The lack of data and the likelihood that a firm will not have access to all trades presents challenges under MiFID 2.

Whereas industry associations have gone to great lengths in their transparency efforts, a sizable volume of transaction data remains that is not available through any centralized industry utility. This data is available through a number of commercial sources, presenting a challenge for end-users from both an economic and processing perspective. Consequently, it may be difficult for the industry as a whole to be 100 percent compli-ant with MiFID 2 solely through the use of transaction data. Given this scenario, participants will need to spend more on independent evaluations.

IMD: Is the industry using data differently to pre-crisis—for example, for real-time risk management or evaluations across underlyings and credit derivatives? What new technologies, practices or additional datasets or analytics could aid trans-parency around illiquid and hard-to-value assets?Jaswal: Yes, the use of data for risk management has improved greatly since the crisis. Firms are much more serious about enhancing their management of counterparty and operational risk. Modeling and simulation capabilities are standard in most risk management solutions. The smaller firms have access to such solutions as well, through ASP or SaaS (software-as-a-service) models. The quality of data can be a barrier for illiquid assets, but firms are in a better position to handle their overall risk requirements.

Sheeka: Yes, there has been a definite shift in the use of data throughout the crisis. Ongoing uncertainty and volatility has made valuation of illiquid and hard-to-value securities a front-line priority. Hedging success hinges on the possibility of assigning reliable, verifiable and accurate marks to diverse portfolios, and data plays a crucial role in this.

Price discovery depends on multiple factors, such as operational and IT support, models, implementation and skill in using the models, but it is quality of data that is the most instrumental fac-tor in producing a verifiable price level reflective of the current market.

The industry is also consuming more historical bond data, as regulators, DMOs and buy- and sell-side institutions use it for research purposes and to back-test strategies to analyze their per-formance against real market conditions. The accuracy of the his-torical data is of paramount importance to back-testing—it must give a true reflection of the interdealer market at any given point. Understanding the risks and opportunities of a particular strategy before trading is more critical than ever when managing complex products in a market with increasing reporting requirements and regulatory oversight.

The market has also experienced a rise in investors turning to government bond ETFs as an efficient means to express their views during uncertain market conditions. The rapid rise in exchange-traded fund assets has resulted in a surge in new products and, inevitably, more competition between providers. Against this competitive backdrop, it is more important than ever


Roderik GonggrijpDirector, European SecuritiesS&P Capital IQTel: +44 (0)20 7176 7453roderik_gonggrijp@standardandpoors.comwww.standardandpoors.com

“The principal focus of the industry will be on obtaining greater insight into the methodology and data employed in the derivation of each price. This requirement is driving incremental spend on market data and independent evaluations. Enhanced systems, processes, and reporting capabilities will require investment as well.”

Roderik Gonggrijp, director of European securities, S&P Capital IQ



ROUNDTABLE

before that European government bond ETFs retain an edge to remain popular with investors, and this edge is almost entirely dependent on the quality and transparency of the bond indexes tracked by the ETFs, and the subsequent underlying data.

The most accurate indexes are calculated in real time using prices sourced from a very wide and diverse number of financial institutions actively quoting and trading in the European govern-ment bond markets. If indexes are based on less frequent market trades from a smaller number of data providers, stale pricing on index holdings can very easily become an issue. In short, with multiple data providers comes better pricing, meaning the index will provide a better reflection of the underlying marketplace.

Gonggrijp: The credit crisis forced participants to evaluate their policies and procedures from an enterprise perspective, in terms of valuation, price defensibility, risk management, and internal oversight functions such as compliance and audit. Traditionally a back-office concern, valuations are now monitored across the entire organization, from front to back office. Consistent pricing data must be used across the organization—and in some cases, across multiple organizations. This is most obvious when discuss-ing swap counterparties and external auditors.

The principal focus of the industry will be on obtaining greater insight into the methodology and data employed to derive each price. This requirement is driving incremental spend on market data and independent evaluations. Enhanced systems, processes, and reporting capabilities will require investment as well. Pricing vendors need to continue to enhance their price transparency offerings and provide more in-depth views into assumptions, models, transaction data, and relationships between securities. For example, given that the majority of securities have little or no market activity during their life, evaluated pricing providers value such securities based on a relative value basis, and thus the valuation remains highly dependent on the groupings and relationships used by pricing analysts. For a client, understanding the vendor’s cross-referencing rules will provide valuable insight into relative value within and between sectors and sub-sectors.

Sanders: Risk management in every organization has become more robust and hands-on about where we have risk, how we manage it, and how we quantify it. All limits and exposures are now measured in real time, so I think people would be able to determine their exposure [to a Lehman-style event] much

quicker. You’re always valuing for a worst-case scenario, so if someone can come up with a more pragmatic way, that’s great, but until I’m sure it’s reliable, I’d rather err on the less aggres-sive side. We have experts in-house who have been in this field for a long time, so I think it’s more about making that data we have transparent, visible and easy to use, rather than bringing in a third party to monitor our risk.

Jay: The role of risk manager has been elevated since the financial cri-sis ended. As such, the demand for market data and related information is an offshoot of the need to better understand holdings, counterparties, liquidity positions, and financings. The securitized products area has seen investors take on keener interest in getting ever more granular views on collateral attributes and collateral performance in order to better value and/or hedge relatively illiquid expo-sures. Certainly, to the extent that real-time data can be employed, senior staff and risk managers will be able to track risk positions on a contemporaneous basis and take action (either planned or ad-hoc) when certain market-related conditions occur.

Themelis: Whether pre- or post-crisis, it is challenging to find consistent, accurate data for illiquid securities due to the nature of infrequent trading patterns. Valuation for hard-to-value assets typically relies on modeled pricing. Electronic trading across a full range of credit products allows for the history of both execut-able and depth of market levels. The RFQ trading protocol is flexible enough to use for both liquid and illiquid markets, ena-bling both firm and indicative prices to be available for a range of securities. The MarketAxess Service Bureau incorporates all public and system-traded data into one integrated, customizable report specific to a client’s portfolio. These reports are extremely useful in pre-trade portfolio construction and valuation. The enhanced market color provided by these reports can be used in risk management systems for improved market insight and enhanced compliance purposes.

Further, using the extensive trade data from the MarketAxess platform, our research team has developed a new methodology to measure transaction costs in fixed income. Transaction cost analysis (TCA) is a key requirement in today’s equity markets for investors to prove they have achieved best execution and satisfied their fiduciary duty. In less liquid markets such as bonds, measur-ing transaction costs in an accurate way is more challenging.

Using TRACE data in the US as a benchmark, we have undertaken extensive studies on behalf of investor clients to help them identify how they can reduce their execution costs, and have quantified the economically significant cost savings achieved by electronic trading in the corporate bond markets. n


“It is not clear that simply forcing OTC derivatives to clear via CCPs will affect fixed income trading volumes [though] bid-ask spreads are expected to compress... and the establishment of swap data repositories will make certain types of market data available to market participants.” John Jay, senior analyst, Aite Group

John JayAite Group


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