Moves to encourage central clearing for government bonds trading may end up boosting all-to-all trading in these assets according to a recent bulletin from the Bank of International Settlements (BIS). The U.S., whose Treasury market is the biggest and most liquid in the world, is set to go live with clearing for cash trades in December 2025 and repos in June 2026.
The rise of all-to-all trading has been on the rise for some time, a trend Celent noted in our 2020 report “The Future of Fixed Income Technology”, and is currently widely available in the corporate bonds markets with trading solutions from market entities including Bloomberg, Bonds.com (a Tradition company), Liquidnet, MarketAxess, Tradeweb, Trumid, and UBS Bond Port.There have been setbacks too, with innovative tech startup LedgerEdge closing in August 2023, after three years.
The BIS report examines the broader question as to whether central clearing in government bond markets is keeping assets safe. The report states that the need to intermediate sovereign debt will continue to grow, as has the total volume of sovereign bonds outstanding, increasing from $26 trillion in 2008 to $64 trillion in 2023. Projections suggest this trend will persist.
The report discusses several direct benefits central clearing might bring and then highlights the promotion of all-to-all trading, which further reduces the need for dealer intermediation, as one possible indirect benefit.The BIS states all-to-all trading is encouraged in two ways:
- The benefits of trading with well-capitalized large banks are lowered given traders would ultimately face the CCP
- The advantage of inter-dealer brokers, who can maintain clients’ anonymity by clearing trades on their own book, and so “morphed over time into de facto clearing houses for participants on their platforms”, is eliminated
The report notes that removing the advantage of inter-dealer brokers would also remove an obstacle to all-to-all trading and an increase uptake in all-to-all trading could result in a less fragmented and more resilient market. The latter is due to more diverse traders willing to step in as liquidity providers in times of stress.
There are numerous challenges however when it comes to broadening use of all-to-all trading in the U.S. Treasury market. A report by the NY Fed published October 2022, noted that while less liquid parts of the market may have greater need for this approach, trading protocols offering this access can be limited to trading on-the-run or near-on-the run notes and bonds.It also found that Treasury market trading platforms offering these protocols are often legal counterparties to the trades executed over their platforms. This can create unclear and complex clearing and settlement risks with the platform itself and, the report adds, “contribute to broader financial stability risks in the market”. Examples of trading protocols include request for quote (RFQ), central limit order book (CLOB), price streaming and match auctions.
Celent research has found that while technology change in fixed income markets is often focused on regulatory change, increasingly financial institutions are concentrating on value creation, with relatively low-cost incremental innovation achieving the highest risk -weighted value.
Relevant Celent research, to learn more about trading technology trends, includes:
Future of Fixed income Tech: The Allure of Small Steps
Future of Fixed income Trading Technology, Part 3, Part 2 and Part 1
Transforming Trading in a Converged World: Survey Based Report
Dimensions: Capital Markets, Sell Side IT Pressures & Priorities 2024