By Andrea Sbalchiero, IRS Product Manager, Asia at Tradeweb
Electronic trading is on the march in Asia. One example is Japanese Government Bonds, where automation adoption on our platform grew from 9% of total tickets in Q3 2021 to 32% in the same quarter this year.
The latest frontier in the electronification of financial markets in Asia is interest rate swaps (IRS), where a rising tide of electronic execution is improving pricing and liquidity. Electronically traded volumes have increased noticeably in the last 12 to 18 months; one of the biggest drivers was the transition from the London Interbank Offered Rate (Libor) to alternative risk-free reference rates (RFRs), as it shifted from Europe and the U.S. to Asia.
Singapore has been ahead of the curve in terms of shaping the migration roadmap for financial institutions operating in the country. Under the mandate from The Monetary Authority of Singapore (MAS), all financial institutions had to switch from SOR – the Swap Offer Rate discontinued at the end of September 2021 – to SORA (the Singapore Overnight Rate Average). By April 2022, 97% of reference rate trades were executed via SORA on the Tradeweb platform.
The new regulatory mandate for RFRs across Asia, coupled with a broader digitisation trend in other asset classes, underpinned a steady shift from voice to electronic trading in emerging markets IRS. This process has been helped along by the fact that institutional traders were already trading G10 currency IRS electronically, and thereby already enjoying the efficiencies in best execution and post-trade inherent in straight-through-processing (STP).
So, with the workflow already in place, we are seeing increasing numbers of traders expanding their electronic execution capabilities into emerging markets IRS currencies, including the South Korean won, Indian rupee, Chinese renminbi and, in the last couple of months, Thai baht and Taiwan dollar.
This is, of course, not an isolated or unforeseen trend. In many ways, it’s an extension of what we observed during the pandemic, as market participants turned to electronic trading for its ability to facilitate the execution of trades efficiently and effectively, while seamlessly managing emerging markets risk and maintaining access to liquidity in the process.
A second factor spurring the adoption of electronic trading has been on the sell-side. Dealers are now telling us they would prefer to receive enquiries electronically, because they can price and handle orders faster than via the time-consuming manual workflows of voice execution.
We’ve seen many instances of dealers asking buy-side clients to trade electronically because of the STP benefits, the seamless flow into each other’s books, and the “low touch” experience in terms of salespeople covering the client.
Typing an order into a chat, waiting for a response to come back executing the trade – all of this takes valuable time and is prone to errors, such as inverting numbers or even putting the right comma in the wrong place. With digitisation, everything gets clearly displayed on traders’ screens, from the enquiry to the pricing stage. Once trades are done, they then feed into order management systems without any manual intervention.
COST-EFFECTIVE LIQUIDITY
There’s an important final element here: the effect on pricing. Traders not only save time – they can also rely on an increased competitive dynamic between dealers to help them achieve the best pricing. The outcome: buy-side clients find access to good, cost-effective liquidity.
Such has been the appetite for electronic trading as a result of these factors that we very recently launched electronic government bond trading in Asian currencies, including Singapore dollar, Thai baht, Indonesian rupiah and Malaysian ringgit. As the first platform to provide electronic access to the local Chinese bond market, we are constantly looking at ways to innovate and expand access to new global markets, so it made sense also from the perspective of helping clients to take advantage of the correlation between swaps and bond markets.
We developed this new capability because existing clients were already experiencing the efficiencies of trading swaps electronically on Tradeweb, and so building in government bonds and emerging markets capabilities made sense. Our clients already had STP pre-trade integration in place for other products, so for us it was the logical next step in allowing our users to trade everything they want in one place.
A key part of our offering is our Automated Intelligent Execution (AiEX) tool, a rules-based solution that allows clients to pre-programme the release of orders into the market. For more than ten years, AiEX has allowed clients to scale, to automate ever-growing flows, and better deploy limited trading resources, focusing instead their efforts on trades where their skills are most valuable.
Today, we are seeing a wide spectrum of IRS clients participating in the electronification trend. And, as we’ve seen in other markets, the more institutions come together to trade this way, the more beneficial is the effect on overall market quality. In Asia specifically, we see participation from hedge funds, asset managers, pension funds, sovereign wealth funds and other government entities, while regional banks are now also stepping up to use our platform.
As electronification of markets gets more entrenched in Asia, a further push is likely to come as local regulators start to finalise approaches to their respective domestic markets. We witnessed first-hand how this played out in other regions a decade ago, with the emergence of trading and clearing mandates in swaps markets, and the subsequent launch of multilateral trading facilities (MTFs) in Europe and swap execution facilities (SEFs) in the US.
There was some scepticism two years ago, when I was talking to liquidity providers in Asia about trading emerging markets IRS electronically. But there’s been a snowball effect in the interim that’s generated greater volumes and transparency across the whole swaps business, which we think is a very natural development. We’ve been bringing greater efficiency and transparency to the swaps marketplace for more than 15 years, and we are proud to have been at the forefront of change in Asia more recently. We look forward to continuing that journey in this fast-paced region – the next frontier in the evolution of electronic trading.
