MarketAxess takes bond trading modernisation to private banks

MarketAxess, an electronic marketplace bidding to modernise the way bonds are traded, is building its presence in the staid world of European private banking in its latest push to vanquish the telephone.

Electronic trading, long the standard in many financial markets, including virtually all equities trading, is making a steady advance into one of the final redoubts of buying and selling via telephone: the market for corporate bonds. But voice-broking, as it is known, remains common practice for bonds at many banks.

MarketAxess is now targeting private banks in Europe and Asia in a bid to strengthen its hand in those regions.

The push follows MarketAxess’s hire of Erik Tham from UBS in November 2018 as its head of private banking for Belgium, the Netherlands, Luxembourg and Switzerland.

Key to the initiative is developing software designed especially for private banks to buy and sell bonds. MarketAxess already has around 1,500 companies transacting on its platform globally.

Tham worked at UBS Wealth Management for more than 12 years until his departure last year. The former Accenture consultant is based at MarketAxess’s office in Amsterdam, which was opened as part of the bond venue’s Brexit planning.

Christophe Roupie, head of Europe and Asia at MarketAxess, said: “MarketAxess’s aim is always to improve liquidity access and trading efficiency for our clients, regardless of their sector, product needs or what side of the trade they are on.

“Our private banking clients are no different. In bringing on Erik Tham from UBS, and tapping into his knowledge of their particular needs and liquidity challenges, we have the opportunity to enhance and evolve the electronic trading model for private banks across both Europe and Asia.”

Greenwich Associates, the Connecticut-based consultancy, said in a report in January that electronic trading is gaining ground in bond markets. By volume, electronic trading accounted for 26% of total US corporate bond trading volume in the third quarter of 2018, up from 19% in the first quarter.

Greenwich predicted that consolidation is on the way for electronic corporate bond trading platforms.

According to a September 2018 report by McKinsey, the consultancy, private banks in Western Europe recorded record high profits of €15bn in 2017. The report said that private banks have benefited since 2013 from positive returns in the financial markets.

MarketAxess, which was founded in 2000 by chief executive Rick McVey, recorded trading volumes of $131.2bn in December. Its third-quarter revenues rose 6.1% year on year, to $101.4m. The company is set to publish fourth-quarter results on January 30.

Stock-Exchange Veteran Chris Concannon Moves to Bond Platform

A pioneer of electronic stock trading is moving to the bond market.

Chris Concannon is joining bond-trading venue MarketAxess Holdings Inc. as president and chief operating officer, the company said. He comes from Cboe Global Markets Inc., CBOE which operates stock, options and futures exchanges, where he held the same positions.

A spokeswoman for Cboe declined to comment.

An advocate of electronic trading since the 1990s, Mr. Concannon, 51, is making the move in the relatively early days of the corporate bond market’s transition to automation.

While stock trading has become nearly automatic, taking place primarily in central online markets, corporate-bond trading remains a largely manual process. Bond traders still negotiate deals over the phone or via electronic messages.

Yet the market is changing quickly, driven by regulation, upstart platforms and new technology. A recent survey by Greenwich Associates, an industry consulting firm, found that 26% of corporate bond volume was traded electronically in the third quarter of 2018, up from 19% in the first quarter.

“I see the corporate-bond market evolving, and it’s following a pattern I’ve seen before in my career,” Mr. Concannon said in an interview.

A lawyer by training, Mr. Concannon joined Cboe in 2017 after it acquired electronic stock exchange firm Bats Global Markets Inc., where he was chief executive. Mr. Concannon also served as president and COO of Virtu Financial Inc., a high-frequency market-making firm that trades stocks, currencies and other assets.

Mr. Concannon said he expects the move to electronic trading to accelerate as rising interest rates continue to roil the markets. “We’re approaching the end of a 10-year bull market,” he said. “There will be active trading in fixed income while the volatility of the transition occurs.”

About 85% of electronic corporate-bond trading by institutions in the third quarter was on MarketAxess, Greenwich’s survey found.

MAS to double individual limit on Singapore Savings Bonds, allow purchases via SRS funds

THE Monetary Authority of Singapore (MAS) will double the individual limit for holding Singapore Savings Bonds (SSB) and allow investors to buy the instruments using their Supplementary Retirement Scheme (SRS) funds, the financial sector agency announced on Monday.

The maximum amount of SSB that an individual can hold will be raised to S$200,000 from the current S$100,000, MAS said. Both changes will take effect from Feb 1, 2019.

The SSB programme has garnered about S$3.7 billion of investments from close to 100,000 individual investors since its launch in October 2015, MAS said. During this time, the authority has received requests from the public to allow the purchases of the bonds using SRS funds, which are voluntary retirement savings contributed by Singapore workers above the national CPF scheme.

"Taking into account public feedback, MAS has worked with the banks to enable SRS funds to be invested in SSB. This will expand the range of products available to SRS members and help them save and plan for retirement," MAS said in a press statement.

To apply for SSB using SRS funds, investors may apply through the internet banking portals of their respective SRS operators, which are the local banks – DBS, POSB, OCBC Bank and United Overseas Bank. As with cash applications, the minimum application amount is S$500, and a S$2 transaction fee deducted from the SRS account for each application.

The new increased individual limit on SSB holdings will apply to SSB purchased with cash and with SRS funds.

MAS will also launch a "My Savings Bonds" portal in March for investors to view their consolidated SSB holdings via the SSB website.

Hong Kong may hand tax breaks to woo hedge and private equity funds to its shores

[HONG KONG] Hong Kong has proposed widening tax breaks to include hedge and private equity funds that are domiciled in the city in a move market watchers say should encourage more of them to move there.

Locally domiciled vehicles that can only be sold to qualified institutions and wealthy individuals - such as hedge and private equity funds - will be eligible for an exemption from a 16.5 per cent profits tax for the first time, according to a council brief posted on the website of the city's legislature. Lawmakers are scheduled to have a first reading of the bill on Wednesday, and the government has recommended the change take effect on April 1.

Hong Kong has long been locked in a battle with Asian peers such as Singapore and Shanghai for the title of the region's premier financial center. The proposed change came after many years of lobbying by Hong Kong's local asset management industry, and after the European Union labeled the city's current profits tax regime for funds as "harmful."

This would "put us on a level playing field with Singapore," Paul Ho, Ernst & Young's financial services Hong Kong tax market leader, said in a telephone interview. It may also "attract more overseas asset managers to consider setting up their platforms here in Hong Kong," he said.

Hong Kong's asset management and fund advisory industry totaled HK$17.5 trillion (S$3.07 trillion) at the end of 2017, up 23 per cent from a year earlier.

Under the current rules, locally and overseas domiciled funds that are authorized for sale to retail, or individual, investors in Hong Kong are eligible for a profits-tax exemption, as are funds that have been established in offshore centers such as the Cayman Islands and that are only available for sale to institutional investors and wealthy individuals.

Even when they're ultimately run by managers in Hong Kong, most hedge and private-equity funds have their legal home in an offshore tax haven for economic reasons. There are conditions that locally established funds will have to meet to qualify for the proposed tax exemption, such as managers having a license from the local securities regulator, or a minimum number of investors.

Sovereign wealth funds also could be covered by the proposed change, Ernst & Young's Ho said. The loosened regulations will also likely be a boon for tech startups in the city trying to attract capital from money managers, he added.

Currently, offshore private funds cannot claim a profits-tax exemption for their investments in privately held, Hong Kong-domiciled companies, such as technology firms.

StanChart private bank sees future in price transparency

SOME private banks are more open than others - and a top executive at Standard Chartered's private bank thinks the time has come for clients to demand more pricing transparency from private banks.

Speaking to The Business Times in an interview, Didier von Daeniken, global head of private bank and wealth management at StanChart, noted out that few private banks offer an "open architecture" model.

This model is grounded in the promise that private-banking clients get the best-possible quotation on a forex or equity derivative based on quotations from a range of banks, rather than an inhouse quote from the bank's trading arm.

Many private banks may claim to offer an open-architecture model, but Mr von Daeniken said the litmus test comes only when clients can openly compare prices. And when that is done, he thinks few private banks would pass the test, despite their claims. Based on internal checks, he believes StanChart to be one of the few private banks that would."

"For me, it leads to the question, in the future, should we enable the clients to have that price discovery for himself or herself? And why not?"

Right now, clients who want to buy a forex or equity derivative - say a swap agreement to borrow one currency and lend another currency, or an option for the right to buy a stock six months from now - would usually call up the private bank to get a quotation, without having a full view of the range of quotations available.

So long as private banks can anonymise the name of other banks behind the prices being quoted on trades, then offering transparency of price ranges is something the business should embrace, he said.

"I quite like the idea."

A future of greater openness comes as regulators are raising their watch over pricing transparency and conflicts of interest within the bank. The transparency is driven by the tone behind the reforms written into a set of rules under the Markets in Financial Instruments Directive (MiFID) II out of the European Union.

Private banking clients are increasingly making their own trades for equities and bonds, but that is far less so for derivatives, which are mainly quoted via over-the-counter (OTC) trading. OTC trades, which are done between two parties, remain much more of an opaque market, when compared against a more open price discovery with various parties as is done on an exchange.

Given the broad lift in regulatory scrutiny, pricing transparency is a matter of course for the private banking industry, said Mr von Daeniken, who pointed out that while the private banking business is siloed in dealing with rich clients, it is, at its essence, managing the wealth of individual customers.

Given this, it is better for banks to step up than to wait for regulators to come a-calling.

"It's like with little children: it would be good sometimes if they do something before their parents tell them," he said, noting that banks need to work better with regulators, especially as financial crime remains the top risk for private banks such as StanChart.

"You get upset with the police when they tell you to buckle up. But then you get into an accident."

StanChart's private-banking business has fully de-risked its clients after some 21/2 years, said Mr von Daeniken.

He said StanChart's anchor in Asia, and particularly in China via Hong Kong, gives it a clear competitive advantage. When asked about the risk behind operating in China following the recent detention of a Singaporean UBS private banker in Beijing, he said that broadly, banks need to understand the regulatory environment in markets and to mind certain "idiosyncratic" risks.

With the bank's chief executive Bill Winters anchoring private banking as a core part of the bank's business strategy, the bank has been able to attract senior bankers in a tight job market. Close to half the bank's new hires are either executive directors or managing directors.

While StanChart private bank's assets under management (AUMs) globally as at last year of about US$65 billion does not put in among the bulge players, the unit's play as a key priority for the bank means staff "don't have to worry about our existence every year", said Mr von Daeniken.

The bank does not break down its AUMs out of Asia, but StanChart overall derives much of its business from emerging markets. The bank's annual client survey found that more than half its clients would like to do more business with the bank.

Mr von Daeniken noted that the bank is open to options to scale the ranks, but is focused on being among the top three private banks of choice for clients.

"We have a fair chance," he said, but declined to offer a target.

Asked more broadly about any new wave of consolidation in the private banking space in Asia, he said thus far, just two large transactions have significantly changed the complexion of the industry in Asia.

The more recent transaction was in 2012, when Julius Baer bought Bank of America-Merrill Lynch's non-US wealth-management business.

The second occurred in 2009, when OCBC snagged ING's Asian private banking business. The rest of the deals over the years have been smaller or appear to have been more bolt-on in nature.

But he noted that valuations are unlikely to come down, even amid any new wave of consolidation, as a private-banking business remains attractive to universal banks in particular, for the business unit's small appetite in capital and high return on equity.

"There has been competition in private banking since forever," he noted. "It's here to stay."

'Look at where debt has gone’: MAS chief warns of 3 shifts in global financial risks

SINGAPORE: While the fault lines of the last global financial crisis have been mostly addressed, risks remain and have shifted in three ways over the past 10 years, said the Monetary Authority of Singapore’s (MAS) managing director Ravi Menon on Wednesday (Nov 7). 

These can be seen in the build-up of leverage in emerging market economies, the shift of leverage from banks to non-banks and an increase in corporate bond issuances globally, said Mr Menon as he warned of the possibility of another global financial meltdown.

“There will be another financial crisis. We have not banished financial crisis, but it’s going to look very different from the last one,” he said at a panel discussion held on day two of the Bloomberg New Economy Forum in Singapore. 

Moderated by Bloomberg Opinion columnist Clive Crook, the 40-minute long discussion also included Indonesian Finance Minister Sri Mulyani Indrawati and former US Federal Reserve chair Janet Yellen giving their takes on monetary policy-making and how to manage the spill-over effects of these policy moves. 

Describing financial market risks using a physics dictum, Mr Menon said: “Energy is never destroyed, it just gets translated into other forms. One can almost say that for risks in financial markets – it just goes to different places.” 

“Follow the leverage. Look at where debt has gone.” 

The MAS chief pointed out that while advanced economies have weaned off high levels of debt, the opposite has occurred in emerging markets amid loose financial market liquidity conditions. 

Meanwhile, the extension of credit has shifted from banks to non-banks – one of the areas that have not been given enough attention, said Mr Menon. 

“Because of tighter regulations, lending by banks have been more responsible although there are still gaps in underwriting standards in some parts of the world. But by and large, a good part of lending have shifted to non-banks, subject to various degrees of regulation, and this is something we need to watch very closely.” 

He raised the example of the United States, where more than half of all mortgages issued now are done by non-banks – a “huge shift” from the 9 per cent seen prior to the 2008 financial crisis. Similarly in China, credit extension has moved out of the regulated banking sector in the form of peer-to-peer lending. 

The third shift comes in the form of rising corporate bond issuances across both advanced and emerging market economies, with an added dimension of risk for the latter given that “a good part” of these borrowings are US dollar-denominated. 

“Risk is going to keep shifting around and our job is to be very alert and watchful where that risk and leverage is shifting because they go together quite well and (can) ignite crises,” said Mr Menon.

Agreeing, Dr Yellen said while she has a “glass half full” mentality when it comes to financial stability, she is worried about the migration of risks to other areas within the system. 

Pointing to the emergence of new risks, such as the build-up of non-financial corporate debt, she added that regulators still lack sufficient tools. Even in the case of the US, it remains unclear whether appropriate tools are in place.

She also raised concerns about the ongoing sentiment moving in the direction of deregulation. While she is “sympathetic" to concerns about regulatory burdens, the former Fed chair said she is “worried” as it is “too soon to be moving in that direction”.

Former US Federal Reserve chair Janet Yellen attends a panel discussion titled "Managing the next financial shock" on Nov 7, 2018. (Photo: Bloomberg New Economy Forum)

COORDINATED COOPERATION OR GLOBAL SAFETY NET?

During the panel discussion titled “Managing the next financial shock” held at Capella Singapore, Ms Indrawati also raised the point of how the US central bank must pay attention to the spill-over effects of its policies on other economies.

Raising the example of her country, the finance minister said despite Indonesia doing well with strong growth and benign inflation, its central bank has had to raise interest rates to keep pace with the US Federal Reserve. 

“For emerging countries, are monetary policies really local? It is not,” she said. “They look at the environment which is becoming a bigger threat, rather than domestic agenda.” 

Ms Indrawati, who built up a reputation as a technocrat and economic reformer during her previous tenure as finance minister from 2005 to 2010, also did not mince her words when she mentioned how the global shift in capital away from emerging markets, prompted by the tightening cycle, has sent the Indonesian rupiah sliding in recent months. 

Referring to Indonesia’s modest current account deficit that remains around 3 per cent of gross domestic product, she said: “It is not a sin to have a current account deficit, specifically a responsible current account deficit.”

Nonetheless, with rising financing costs and tightening liquidity, the minister said Indonesia will now have to be “very careful” and be “even more disciplined” when assessing its development goals.

When asked by the moderator if there can be an “institutional fix” or even scope for international cooperation to manage such spill-over effects, Mr Menon said ongoing “informal” discussions about global regulatory coordination, as well as recognising the knock-on effects of one’s monetary policy on other countries, may help.

The MAS chief also mooted the idea of a “global financial safety net” – something that is “sorely lacking” today.

“Even if everything is done to (keep the house in order), you are still subject to the vagaries of international financial flows which can be erratic and irrational,” he said, echoing Indonesia as an example of how a country can run its affairs well but still get influenced by external factors.

“Bad things happen to good countries,” said Mr Menon, while adding that the world needs to have “mechanisms to provide emergency facilities” in situations of dollar shortage in the current “dollarised” world.

Expanding on that, he cited the example of the Federal Reserve’s dollar swap lines, which was rolled out at the height of the 2008 financial crisis.

“They were not used but its … existence calmed markets. We need a similar mechanism.”

To that, Dr Yellen agreed that the swap lines were “extremely important” during the previous financial meltdown and in the event of a similar crisis, the US central bank would “look seriously again” at extending swap lines. 

However, she stressed that the International Monetary Fund (IMF) would be a more “logical” organisation to take on the role of supplying global liquidity, given that the US laws do not mandate the Federal Reserve to be a back-up liquidity provider to other economies.

“When the Fed plays that role, it really needs, in defending that role to Congress, to explain why it is in the US’ interest," said the former US central bank chief.

"I think that was easy to do during the global financial crisis when problems stemming from the US were creating global problems with spill-back onto the US. But on a regular basis, it’s hard to justify it so I do think the IMF is the right organisation to be doing that.”

Technology is shaking up the financial industry and big banks are struggling to adapt

  • Rapid changes in financial technology, or fintech, are shaking up the global banking industry.

  • Banks must adopt new technologies to survive an ongoing “extinction phase” wrought by such tech, according to Stephen Bird, Citi’s global consumer banking CEO.

  • While new technologies cannot be ignored, bankers say the primary aim is to use them to provide the best service to customers.

Pedigrees, some stretching back centuries, are of little use to global banks unless they aggressively adapt to new financial technologies.

That's long been true, but the pace of innovation means financial juggernauts now face what one top executive likened to a mass extinction event.

A revolution in financial technology — often shortened to fintech — has propelled an explosion of new entrants who are shaking up the sector. Established giants, for their part, are fighting to adapt, emphasizing that technology may be changing fast but banking fundamentals are not.

Stephen Bird, CEO for global consumer banking at Citi, said the current changes may be happening on an unprecedented scale, but his bank — established in 1812 — is set to make the transition.

"The benefit of being 200 years old is that we have a survival reinvention DNA and that is core to who we are," Bird said during a panel discussion Wednesday at the annual Hong Kong FinTech Week conference.

"We think of it as we are living through an extinction phase," Bird said. "It is not an incremental thing, it's an epochal shift."

Given the explosion in new financial players, he said, established banks will need a "tense and deep re-engineering" of processes to enhance speed, convenience and trust and get at what is most important: the customer.

Bird said Citi in the United States, for example, has gained an edge by developing new ways of doing things by actively listening to its customers through "co-creation." Citi had 20,000 such sessions, which Bird credited with helping Citi achieve what he described as the most rapidly growing mobile base in North America.

Hard figures on how much the new wave of technology has disrupted retail banking are hard to come by, but analysts have stressed that the challenge is real.

"The rise of digital innovators in financial services presents a significant threat to the traditional business models of retail banks," consultancy McKinsey & Company said in a 2016 report.

So far, at least, global banks are holding up, based on their most recent reporting periods. Citi, Standard Chartered, Bank of America, HSBC and Credit Suisse, for example, all reported third-quarter profit increases from the same period last year. Deutsche Bank's earnings, however, slumped.

Ben Hung, regional CEO for Greater China and North Asia at Standard Chartered Bank, which has roots going back more than 150 years, said that one constant in the sector has been what customers seek at a basic level.

"It's all about how they want to manage their money, tend their money and grow their money and that fundamental need I don't think has changed," Hung said during the same Wednesday panel in Hong Kong.

What has, he stressed, is the pace of technological development now necessary to meet those requirements, which he acknowledged can be intimidating.

"It's about how to address some of these needs through technology in different ways, but equally it can be quite daunting given the uncertainty and speed by which technology happens," he said.

"It's all very exciting, very, very daunting," said Hung, who also serves as his bank's CEO for retail banking and wealth management.

Bird, meanwhile, said that the pace of investment flows into financial technology suggests an attention-grabbing shift away from incumbents toward new players.

"We take that provocation as very, very real because it's the economics of what's happening," he said.

He said that Citi has hired people from companies such as PayPal and Amazon who possess the "mindset" needed to aid the bank's transformation.

Also crucial, he said, is for the bank to be where its customers are. That increasingly means social media platforms such as WeChat as well as Instagram and Facebook.

"So we must fintegrate," he said.

AI and machine learning spell radical changes for traders, asset management

ARTIFICIAL intelligence and machine learning are set to shake up traders' jobs by enabling them to generate their own alpha, boosting fund managers' returns in today's asset management industry, currently under pressure to justify fees with outperformance.

That's according to Seth Merrin, founder and chief executive of Liquidnet, a dark pool trading platform with more than 930 asset managers as members, across 46 markets.

Dark pools were originally designed for institutional investors to trade large blocks of shares without having to disclose their identities, volumes or prices, unlike traditional exchanges.

Members of Liquidnet manage assets totaling US$15 trillion.

In a recent interview, he said fund manager performance is the biggest problem in asset management today.

Seth Merrin, founder and chief executive of Liquidnet, says active managers have undershot their benchmarks over the last 10 or 15 years.

"You don't have to go very far to read that the active managers have underperformed their benchmarks pretty consistently over the last 10, 15 years.

Asset management in Asia in 'hyper-growth' mode

"We've seen massive amounts of money leave active management and go into passive management and exchange-traded funds (ETFs). Quite frankly, it's accelerated and if our members don't perform better, it's going to continue to accelerate."

What could help change the game is tapping the power of artificial intelligence and machine learning to analyse and generate insights from data.

"There are some hedge funds that are performing incredibly well because they were very early on in understanding the power of this technology. Most active managers have not."

Now, the change will take place in the asset management industry, starting with the trading side.

"Traders today are looked at as a cost centre. It's an amazing amount of technology, expense, time and effort that goes into simply implementing their portfolio managers' orders.

"We've created all this technology that actually helps the trader implement and find liquidity so much better than just a human being can," said Mr Merrin.

Liquidnet is introducing a new analysis tool called Discovery, that uses artificial intelligence and machine learning technology to analyse market information and alert traders and fund managers if there are market events that may impact the portfolio.

It helps traders take advantage of short-term stock movements in the market to generate their own performance, or trader alpha, alongside fund managers.

On the amount of upside fund managers would be able to generate above what they were previously, the company said it was too early to say definitively.

Lee Porter, Asia-Pacic head of Liquidnet, said the tool has currently been introduced to 100 members in the US and Europe, with 20 across Hong Kong, Singapore and Sydney on pilot.

In Singapore, Liquidnet was recently approved for a capital markets licence by the Monetary Authority of Singapore, which would allow its approximately 30 members here access to their full range of offerings, including Discovery when the tool is officially rolled out, aside from block trading.

Mr Merrin strongly believes the asset management industry needs to embrace technology to continue surviving.

"This whole industry has been very manual and very analog", he said. "They need this technology, they need this evolution, they need this value-add to help their RMs succeed and do better."

"I think most industries have continued to do things the way they've always done until there is a company or companies that can think differently and change the industry.

"This industry needs a little disruption."