Broker-dealers in cash bond standards push

Twelve of the world’s largest broker-dealers are looking to develop technical standards for electronic trading of cash bonds in a bid to cut the heavy information technology costs they face from sweeping new regulations.

The group, which includes UBS, Barclays Capital, Goldman Sachs and JPMorgan Chase, is to build on output from an industry working group defining open technology standards on illiquid assets that have hitherto usually been traded bilaterally. The broker-dealers aim to standardise the computer language for pricing and trading government bonds and sovereign credit instruments, among others.

Widespread agreement on standards for computer language is a key issue to increase market liquidity and cut rising IT costs. An accord is necessary as broker-dealers prepare for incoming regulation that will transform trading in over-the-counter derivatives and credit.

The Group of 20 leading economies wants to safeguard financial markets by pushing more of the vast but opaque $6tn OTC market on to electronic trading platforms. Sweeping financial regulations such as the Dodd-Frank Act in the US and the impending review of Mifid, or Markets in Financial Instruments Directive, in Europe are set to create approved electronic venues for fixed income trading – called “swap execution facilities” in the US and “organised trading facilities” in Europe.

The changes will spark a fierce fight for business among up to 40 trading venues, with new entrants vying against established interdealer brokers such as ICAP and Tullett Prebon. However, each trading venue historically has had its own proprietary protocol, or software language, requiring broker-dealers to have a custom-built platform to connect to each venue. An industry standard cuts the amount of specialist software coding while it costs roughly five times more to connect to a bond market platform than to an equity trading platform.

The move could also help open electronic trading in fixed-income markets to new entrants. Some regulators have worried high IT costs could dissuade brokers from using new venues.

The working group, known as the Fixed Income Connectivity Working Group, wants to define the protocols for government bonds such as US Treasuries, eurozone government bonds, UK gilts and Japanese government bonds, as well as other major credit instruments like sovereign debt, high-yield debt and corporate debt.

The work has been carried out by Etrading Software and Expand Research, two London-based financial markets consultancies. The standard is based on the Fix protocol that is used for carrying data and trading messages around the world’s equity markets. FICWG has already defined standards for trading interest rate swaps and credit default swaps. It has also received backing from many of the interdealer brokers likely to become Sefs and OTFs, including MarketAxess, Tullett Prebon and GFI Group.

The other broker-dealers in the group are Bank of America Merrill Lynch, Commerzbank, BNP Paribas, Morgan Stanley, Nomura, Royal Bank of Canada, Royal Bank of Scotland and Société Générale.