Earlier on Thursday, a court in Singapore had blocked the sale of Eldorado bonds to local investors, saying the firm should clarify information on its offering prospectus.
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."
The SEC has set up a special committee to look at the increased level of electronic trading in the bond market, Chairman Jay Clayton said.
Since the turn of the century the surge of bond trading platforms has made a dent in the traditional fixed income business.
Most of the trading is still done via phone call or chat services, but that is changing.
As commercial banking and trading move towards a more high-touch and personalised service while also staying in line with regulations – so financial firms will need greater insights from data. Artificial intelligence can help detect fraud in petabytes of data, while the internet of things – a network of physical devices – helps them track customer behaviour.
Buying and selling bonds, especially corporate bonds, remains a largely old-fashioned business in Asia, even as the region’s stock of debt denominated in hard currencies continues to expand, with issuance so far this year at another record high.
At present, there is in Asia more than $1.4 trillion-worth of so-called G3 debt – that’s bonds denominated in US dollars, euros, and yen – Dealogic data shows. Yet many are held to maturity and a vast amount only trades occasionally.
Bankers FinanceAsia has spoken to estimate that 90% of the Asian G3 bonds, both sovereign and corporate, trade less than five times a year.
However, things are changing; as more former price takers become price makers and demand for greater transparency grows under Europe’s Mifid II regulations, bond investors are increasingly being nudged onto online trading platforms.
“The Asian corporate bond market is following the trend of electronic trading in both the US and Europe, albeit at a more gradual pace,” said Niels Bouwman, a Singapore-based bond trader at NN Investment Partners. “Electronic trading will be increasing in the coming years. It is one of the ways for both buy and sell-side firms to reduce costs faster, better and cheaper.”
Around half of US government bonds are traded electronically, according to consulting firm Greenwich Associates. For corporate bonds the progress has been slower, with only a quarter of investment-grade bonds and 13% of junk-rated debts traded online. It’s even less in Asia, where around 5% to 10% of the market trades electronically, say bankers.
The migration onto electronic trading platforms appears inevitable, though, as more bond investors get accustomed to them. In an earlier Greenwich survey in 2016, more than 80% of US corporate bond investors said they had tried out electronic trading systems in some form – double what it was a decade earlier.
Some individual banks in Asia are also pushing ahead more aggressively. Deutsche Bank, for example, reckons about 30% of its own trading volume and 70% of tickets in Asia are traded electronically. That suggests banks are encouraging investors to use automated services to cut costs and free up traders for larger, more profitable transactions.
Manjesh Verma, Citi’s head of Asia credit sector specialists, said the “auto execution of trades is becoming a key theme for us and is likely to be transformative for the business over the next two to five years.”
“The initial focus is on improving the volumes that we trade with clients based on simple pre-set parameters,” Verma said. “But gradually we will be moving towards a system where risk-additive and/or risk-reducing trades will also be executed and prices adjusted accordingly as per trader defined instructions.”
Behind this online shift lie some deeper structural changes to the market.
Proprietary trading at major banks has declined dramatically since the 2008 financial crisis, largely due to the introduction of the landmark Dodd-Frank act and rising capital costs. Goldman Sachs, once renowned for its trading prowess, reported a precipitous decline in its core fixed-income, currencies and commodities unit (FICC) this year. In mid-October the US investment bank posted a 26% decline in its FICC net revenues for the three months to September, after a rocky first-half of the year, as customers such as hedge funds traded less through them than in the past.
As tougher regulations weigh on the ability of banks to warehouse corporate bonds and make markets, investors such as asset managers and insurance companies are increasingly taking on the role. The secondary trading model has changed from “a sell-side to buy-side” model, where bond investors are quoted prices by traders at an investment bank, to one where the buy-side is more engaged in warehousing and trading risk.
The traditional way of matching buyers and sellers is for dealers to take on the risk. The details of a transaction are often only known by the counterparties involved, so information on the price and volume agreed is not disseminated to the wider investing public. That explains why personal relationships matter in bond markets. Due to the market’s segmentation, quotes and trade prices for the same bond at the same time could vary greatly across dealers.
However, the market began changing when MarketAxess introduced a new trading model in 2012 that facilitated trading between multiple parties (including business between different buy-side parties).
The introduction of an “all-to-all” model at one of the world’s largest corporate bond trading venues structurally changed the market’s dynamics. It also allowed participants to trade across different time zones, offering new sources of liquidity (for example, by enabling European investors to buy Asian dollar corporate bonds from Asian investors).
“The all-to-all trading platform is going to blur the roles of buy and sell-side firms,” said Philipp Sterner, head of Asia sales at MarketAxess. “Buy-side execution traders will be mostly impacted by the rise of electronic trading, unless it requires a human touch to handle complex structured products or a big block of securities,”
Sterner references how technology startups such as Uber and Spotify, has fundamentally changed the way people get a taxi or listen to music.
“Like Uber and Spotify, we [found] a new way to do business in our market,” Sterner said.
The volume of emerging market bonds traded through MarketAxess, including Asia’s dollar-denominated and local-currency debt, rose by 21.8% year-on-year to $71.5 billion in the three months to September. In addition to G3 Asian debt, the US-listed company trades bonds denominated in Singapore dollar, Malaysian ringgit, and Chinese renminbi.
Another factor likely to drive change in bond trading is the looming adoption of the European Union’s revised The Markets in Financial Instruments Directive, or Mifid II, which promotes investor protection by increasing transparency in data and relationship disclosures.
“I think Mifid 2 will increase the speed of adoption of electronic trading in Asia as it will provide transparency for clients,” Bouwman said.
Mifid II, a package of regulations, is set to take effect across the EU from January 3, 2018. The changes will add administrative costs to the industry, which range from having to charge investors for research and boosting transparency in bond trading to new limits on commodity derivatives trading.
Keith Pogson, a senior partner for Asia-Pacific financial services at consultancy EY, believes EU regulators will need to be flexible when they look at how financial institutions in Asia implement the new rules when doing business with European counterparties, given their complexity.
“If you look across Asia, electronic trading flourishes in the Japanese government bond because it is a liquid and transparent market,” Pogson said. “So I think the most important factor for technology adoption is liquidity, as clearly seen when you contrast G7 and local-currency bond markets.”
In that respect, China is fertile ground for the successful development of electronic bond trading. The Chinese government appears keen too. In July, Beijing offered a streamlined channel for foreign investors to access its $9.4 trillion interbank bond market – the world’s third largest after the US and Japanese markets – without the need for an onshore account.
Given the sheer size of the Chinese domestic debt market and the higher yields on offer, the attractions for overseas investors are clear. Now, about $9 trillion of global developed-market sovereign debt yields less than zero. In contrast, the yield on the benchmark five-year Chinese government bond is 3.852%.
The market’s growth prospects also look alluring. In a June report, UBS Asset Management predicted that the size of the Chinese bond market will double in the next five years, surpassing Japan’s as the world’s second-largest bond market. In addition, it forecast that the Chinese local government bond market will expand threefold to $3 trillion in the next three years.
So it’s no surprise Neuberger Berman Group, a New York-based fund management firm, has described China as a “hot spot” for competition between global funds. It is eyeing a new private fund focused on Chinese bonds after Fidelity became the first global firm to do launch one in China in early May.
“China offers the best hope (after Japan) in the region to adopt electronic trading given its sheer volume of government and corporate paper,” Pogson said. “The Chinese market has increasingly both the depth and breadth of market, as well as improving access for foreign investors.”
MarketAxess says the trading volume of local currency bonds in Asia, including Chinese bonds, has steadily increased since the second quarter of 2016. A total of $1.7 billion of these bonds changed hands through its platform in the three months to September, up from $1.11 billion the previous three quarters.
It’s early days still, but something is happening.