29409.pdf

Fixed income industry Benchmarking survey 2014

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The fixed income market is on the verge of going through a radical industrial change with regulatory drivers pushing electronification and changing the market structure. Regulations are forcing banks to reduce capital and access to balance sheets so buy side are looking at alternative means to access platforms and liquidity.

With the fixed income market evolving we decided to undertake a survey with senior fixed income professionals from the top buy side firms in Europe. This survey was designed to offer an industry benchmark, looking into their current challenges, spend priorities and strategies the buy side are using to overcome liquidity issues.

Conducted in July 2014, this senior-level survey was tasked with identifying the key challenges, opportunities and industry trends related to fixed income trading in Europe, focusing on the key selection of broker selection, European regulations and evolving technology.

The survey was completed by over 90 senior fixed income professionals made up primarily of Heads of Trading, CEO’s and senior management from leading Asset Managers and Hedge Funds.

The survey concentrated on the following areas:

vThe biggest challenges facing fixed income professionals in 2014

vThe areas of business impacted the most by the regulations

vThe priorities and skills the buy side look for when selecting their brokers

vStrategies the buyside are using to overcome liquidity issues

vTechnology spends over the next 12 months

vHow businesses are utilising technology and third party platforms/services

vThe amount of trading now being conducted electronically over bilateral trading

executive summary:

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Industry regulations are not having the desired effects. With the desired effect of increased transparency and a more stable market from regulators, the two biggest effects are negative, with the biggest effect coming in the from of raising business costs (71%), followed closely by reduced market liquidity (67%). Notably, just 4% feel the regulations have led to a more stable market.

The biggest buy side headache is sourcing liquidity (73%). This will come as no surprise to anybody who has any kind of connection to a trading desk. The capital constraints on banks have reduced the access to liquidity for the buy side, so in response to this the buy side are having to look at alternative strategies to source liquidity.

Regulation and Compliance (61%) was by far the second biggest challenge, with the on-going reform combined with regulatory uncertainty meaning adapting trading strategies, both internally and externally, has proved to be a constant (and costly!) headache for the buy side.

Buy side traders want to have their cake and eat it too. The single most important factor for the buy side when choosing their broker is the bottom line, with 44% of respondents believing ‘Cost Effectiveness’ is the most important criterion when choosing a broker.

Interestingly however, with liquidity being harder to come by, 48% of buy side traders intend to overcome difficulties with liquidity by undertaking more buyside to buyside trading. Are we seeing a radical shift in the fixed income landscape and a change in the role of the broker?

Fixed income technology is on the up. Just like equities, and more recently the FX asset class, it appears that technological innovation is beginning to take a grip in the fixed income market. The majority of buy side firms are now looking to invest in new technologies over the next 12 months (62%) as the strive towards more efficient, faster trading and the evolution of fixed income E-trading continues.

OMS/EMS systems are the biggest growth area. Interestingly, the biggest growth area will be on OMS/EMS systems, with 33% planning to invest, followed by Risk Systems (31%) Data Pricing Systems (21%) and Post Trade/TCA (20%). However, despite these findings, technological innovation may be happening slower than the press may have you believe, with the majority of respondents still trading less than 50% on electronic platforms.

headline Findings:

“We have looked at the report and it further reiterates our view that liquidity is the biggest issue for fixed income markets right now, especially credit markets. This further emphasises that we should be looking at new fixed Income trading technologies, especially buy side to buy side platforms. We also see from this report that risk management is a key issue for buy side firms and again is an area we have increased our budget recently”

– Bryn Jones, head of Fixed income, rathbones

of respondents feel that ‘Sourcing Liquidity’ is the biggest challenge they are currently facing in their primary trading medium

of respondents will be investing in OMS/EMS systems in the next 12 months

of respondents do not use post-trade Fixed Income TCA or execution analysis

of respondents will be spending less than £500,000 of their budget on new technology

of respondents neither agree nor disagree that TCA analysis is the most important technology to improve execution in Fixed Income

of respondents believe ‘Cost Effectiveness’ is the most important criterion when choosing a broker

of respondents intend on investing in new fixed income technologies over the next 12 months

of respondents said less than 25%of their derivatives trading takesplace using cash

of respondent’s said ‘Raising Business Costs’ are the main way in which new market regulation will effect their organisation.

intend to overcome difficulties with liquidity in Credit Markets by undertaking more buyside to buyside trading

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Q1 Q2What are the top three challenges you are currently Facing in your primary trading medium?

please select the top three Ways in Which neW market regulations Will aFFect your organisation in the FolloWing areas:

ySourcing liquidity 73% yRegulation and compliance 61% yFragmented trading platforms 50% yReporting and transparency 45% yTransaction cost analysis 36% yAccurate risk analysis 35%

yRaising business costs 71% yReduced market liquidity 68%yImproved transparency 40%yWasted time 36%yIncreased risk awareness 30%yReduced off-exchange trading 23% yImproved data quality 20% yStream lined processes 9% yMore stable market 4%

‘sourcing liquidity’ was the biggest challenge with 73%, while ‘regulation and compliance’ followed with 61%. Where as, ‘transaction cost analysis’ and ‘accurate risk analysis’ were less common challenges. 71% of respondents said ‘raising Business costs’ were the main way in which new market regulation will

effect their organisations. Followed by ‘reduced market liquidity’ at 68%. however only 4% of respondents feel the new regulations with create a more stable market.

almost three quarters of the respondents see the biggest challenge in the fixed income industry to be sourcing liquidity. With Basel iii tightening its grip, capital constraints on the sell side are clearly having a big influence and affecting their ability to sufficiently provide liquidity to the buy side. interestingly, this leads into the second biggest challenge for the industry being regulatory compliance. trading, reporting and clearing requirements mean there is more of an emphasis on internal and external legal and compliance issues, and with constant changes and updates from regulators, buy and sell side traders continuously have to adapt and change their operations. this is a clear sign that the regulatory pressures relating to Basel iii, emir and miFid ii are having a greater haul than ever before and shaking the foundations of the industry.

interestingly, with regulations aiming to improve the market, the two biggest effects of the regulations are having a negative effect on the industry. this highlights the fact that regulations are not having the desired effect on the market and the buy side have to overcome additional obstacles to trade.

“Since the financial crisis of ‘07-’08, liquidity has become more and more of an issue for the buy-side. With the sell-side inventory levels collapsing, and their ability to put their balance sheet at risk severely limited, the industry will need to find a new way of matching buyers to sellers”

– carl James, former global head of Fixed income, Bnp dealing services

“Regulation has so far failed to address the issues it had intended to address and has generated a series of undesirable side-effects, fragmentation of liquidity being undoubtedly the most evident one”

– gianluca minieri, global head of trading, pioneer investment management

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Q3 Q4When deciding Which Broker to Work With, What is your most important selection criterion?

hoW do you intend to overcome the increasing diFFiculties With liquidity in credit markets?

yCost effectiveness 44% yBreadth of coverage 29% yAccess to platforms 9% yOther 9% yQuality of research 8% yRisk Management 3%

yUndertake buy side to buyside 48% trading

yImplement new technologies 34%

yChange your broker 19%

44% of respondents chose ‘cost effectiveness’ as the most important criterion when choosing a broker, followed by ‘Breadth of coverage’ at 29%. While ‘risk management’ was seen as the least important.

48% of respondents intend to overcome difficulties with liquidity by undertaking buyside to buyside trading, whereas 34% believe they can overcome the issue by implementing new technologies. only 19% think that

changing their broker will solve the problem.

By far the most important factor to the buy side when choosing their broker is the bottom line. could this be from the increasingly important need for belt tightening, where value is the most important critical success factor in the buyer-seller relationship, or could this relate to a deeper underlying issue relating to the increase in technology within fixed income? new technologies are allowing the buy side to measure the performance and cost effectiveness of their broker, meaning that performance measurement is as important as the relationship itself with the broker. time will tell as technology advances whether performance measurement of brokers will be more essential than the traditional relationship factor which has been the case in the past.

as the search for liquidity goes on, this shows that the buy side are looking for alternative means of trading away from the broker to source liquidity. linking back to the previous question, this is highlighting the shift in market structure and the way buyers and sellers interact. is this an outlook into the future as to how fixed income will be traded? With improving technology, this may open the door for buy side to buy side transactions in the fixed income market.

“Brokers are a critical source of market information, which is of paramount importance to stay on top of the game in today’s crowded trading environment”

– gianluca minieri, global head of trading, pioneer investment management

“With the FCA looking closely at equity dealing commission (DP14/3 - published on 10 July 2014), the criteria for the use of brokers is going to become more and more an issue that will come under scrutiny. It will be interesting to see how the responses to this question change as the focus from the FCA becomes more intense”

– carl James, former global head of Fixed income, Bnp dealing services

“There is clearly change happening in the way fixed income is traded. It is interesting to see that the buy-side want to undertake more trading with each other”

– carl James, former global head of Fixed income, Bnp dealing services

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Q5 Q6are you planning on investing in neW Fixed income technology over the next 12 months?

hoW much oF your Budget are you planning on spending in neW technology?

y<£500,000 68%

y£500,000 - £999,999 18%

y£1,000,000 - £1,999,999 9%

y£2,000,000> 6%

62% of the respondents will be investing in new fixed income technology over the next 12 months, whereas 39% will not be.

68% of respondents intend to spend less than £500,000 on new technology, whereas just over 6% intend to spend over £2,000,000

technology is very much a growth area within fixed income at the moment, with more tailored solutions becoming available, and the need to keep up with market trends making new technologies essential. it is interesting to note that the majority of buy side respondents will be looking at investing in new technology over the next 12 months, placing increasing importance, and budget, on new innovative trading methods as we see a shift to the next generation of fixed income trading.

it is very interesting to note that the majority of buy side firms are looking into new technologies to improve their trading capabilities, as seen on the previous question. however, despite capital constraints lessening the influence on banks and the market opening up to new technologies and providers, budget spend on technology still remains relatively low. this may increase over time as more specialist fixed income tech becomes available in the market, however the majority of spending at this moment in time will go towards the sell side.

“Investing in technology is today the most effective way of building that level of scalability of trading operations needed to compete in the next generation of financial markets”

– gianluca minieri, global head of trading, pioneer investment management

”With 68% of the respondents spending less than £500,000 on new technology, this may be indicative of the goal budget they have to spend, rather than the how much they are willing to spend on new technology”

– carl James, former global head of Fixed income, Bnp dealing services

Yes61%

No39%

68%

18%

9% 6%

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Q7 Q8do you agree that tca analysis is the most important technology to improve execution in Fixed income?

do you use any type oF post-trade Fixed income tca or execution analysis?

64% of respondents do not use any type of post-trade Fixed income tca or execution analysis.

tca is still being implemented for the fixed income industry and is not as established as it is in the foreign exchange and equities asset classes. the majority of respondents do not use any type of post trade analytics.this may change with regulation opening the door to new technology providers and with the squeeze on liquidity and profits tightening, tca may prove to be a growth area for performance management.

“I would suggest that we get nearer to MiFID II, the number of buy-side dealers using some post-trade analysis will rise. There will be a similar take-up of TCA as there was in the equity world 15 years ago”

– carl James, former global head of Fixed income, Bnp dealing services

YES 36%

NO 64%

yIndifferent 43%

yAgree 35%

yDisagree 14%

yStrongly agree 5%

yStrongly disagree 4%

42% of respondents neither agree nor disagree that tca analysis is the most important technology to improve execution in Fixed income. Whereas 5% strongly agree it does and just under 4% strongly disagree.

5%

35%

43%

14%

4%

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Q9 What technology Will you invest your Budget on over the next 12 months?

yOMS/EMS 33% yRisk systems 31% yData pricing 21% yPost trade/TCA 20% yAlgos/SORs 19% yMatching engines 13% yOther 11% yRequest for Quote 10%

of the technology organisations are investing in, ‘oms/ems’ systems are top of the list at 33%. Followed by ‘rsik systems’, at 32%. however only 10% of respondents said they will be investing in ‘request for quote’.

By far, the biggest spend and priority for technology according to our respondents is with oms/ems systems. this will reflect the need for regulatory compliance, with an emphasis to track the progress of orders throughout the systems. so whether the buy side use a traditional broker or an alternative trading system, managing and tracking orders has never been so vital or so complicated. interestingly, the second biggest spend area for technology will be for risk systems, over tca and algorithms.

“Investing in technology is today the most effective way of building that level of scalability of trading operations needed to compete in the next generation of financial markets”

– gianluca minieri, global head of trading, pioneer investment management

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Q11 What percentage oF your derivatives trading takes place over cash?

y<25% 74% y26-50% 18% y51-75% 5% y>76% 4%

74% of respondents said less than 25% of their derivatives trading takes place using cash, followed by 18% trading between 26-50% by cash. Whereas just under 8% use cash for over 51% of their trades.

Q10 What percentage oF your Fixed income trading takes place on electronic platForms over total trading?

y<25% 39% y26-50% 29% y51-75% 16% y>76% 16%

39% of respondents trade less than 25% on electronic platforms, whereas 33% do use them for over 51% of trade

the majority of respondents outline that less trading takes place on electronic platforms over total trading, with 39% trading less than 25%. this outlines the fact that the fixed income market is still a principally driven market. as the fixed income industry develops it will be useful to see the change and uptake with electronic platforms.

“Electronic trading will increase over time as the platforms become more sophisticated, and fixed income markets move further away from a principally driven market to an agency model”

– carl James, former global head of Fixed income, Bnp dealing services

Fixed Income Future Leaders Summit is an unmissable event which will bring together over 120 fixed income specialists from the buy and sell side to discuss challenges including; regulatory uncertainty, trading electronification, cost reduction and fragmenting liquidity.

It is the ONLY conference where you will get a 360º perspective on the changes shaking the foundations of the fixed income world.

Taking place in Barcelona on the 5th - 6th November, at Fixed Income Future Leaders Summit you will be able to solve your biggest fixed income challenges:

vHear from Chris Rice, Global Head of Trading, State Street Global Advisors on best practices to combat global regulatory challenges.

vUncover best practice case studies on how to structure your desk and redefine your trading strategy to make a smooth transition from secondary to primary market trading.

vLearn from Patrick Fleur, Managing Director, PGGM and Juan Landazabal, Head of Fixed Income Trading, Deutsche Asset Management and others on how electronic trading is reshaping the fixed income landscape.

vView panels and debates and sit on interactive roundtables with industry leaders to discover strategies on how to overcome increased trading costs and lack of liquidity.

vDiscover what the future holds for fixed income and uncover key trends to look out for in the medium to long term.

Find out more at www.fixedincomeleaders.com

We study, research, painstakingly try to understand the movements, relationships, challenges and motivations behind the people, businesses and industries we serve.

vEvents are all we do. We don’t have any other vested interests like an association or a magazine. That allows us to dedicate approximately three months into the research and development of each conference more than 3 times that of any other event company.

vOur conferences are living, breathing global communities – annual, bi-annual, east coast, west coast, international, regional, onsite, online.

vWe are dedicated to raising standards of professional advancement for companies that refuse to stand still and isolated in their ever evolving industries, companies that are committed to a high standard of business practice and learning.

vThat’s our key objective; to establish a foothold in the market, so that we can identify the key issues across the entire industry, so that every year we deliver fresh content that addresses the “pain points” of top executives in the most influential companies.

aBout Fixed income leaders aBout WBr

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