Zornitsa Todorova is head of thematic fastened revenue analysis at Barclays.
After years of regulatory throat-clearing, the EU earlier this month lastly picked Ediphy to construct its long-promised consolidated tape for bonds. The pitch? One display, all of the trades. Quicker, fairer, extra environment friendly markets.
Sure, we’ve heard all of it earlier than — however this time, it’s really occurring. As Esma’s government director Natasha Cazenave, mentioned in a statement:
With as we speak’s choice, we’re taking a decisive step in the direction of organising consolidated tapes within the EU. This step constitutes a key contribution to constructing the Financial savings and Funding Union (SIU) and to the additional improvement of capital markets in Europe.
Market contributors will profit from a consolidated view of market exercise for bonds within the EU, with a wide range of use instances to the good thing about all contributors within the EU’s fastened revenue markets.
The brand new tape will scoop up every part: corporates, sovereigns, convertibles, coated bonds — even the dusty off-the-runs that haven’t seen daylight since QE was cool.
The aim is a single stream of costs, volumes, and timestamps from each buying and selling venue within the bloc. That’s no small feat. In spite of everything, there are greater than 40 of them. Proper now, monitoring costs throughout Europe is like doing a jigsaw puzzle with half the items lacking and the remaining intentionally smudged.
Actual-time bond reporting is about to go from area of interest to norm. At the moment, fewer than one in 5 trades present up in actual time — and that’s if you happen to’ve managed to sew collectively information from all of the totally different venues the place bonds really commerce.
The brand new EU tape guarantees to seize over 90 per cent of trades by rely. The remaining will present up with a delay, wherever from quarter-hour to 4 weeks. The principles are complicated, however the gist is easy: the larger the commerce and the much less liquid the bond, the longer the wait.
In consequence, value discovery in European bond markets is about to get a complete lot easier and sooner.
Systematic buying and selling desks are clearly watching intently. With real-time information flowing, their algos could have extra to chew on. Buying and selling is about to get cheaper, too. Our analysis exhibits that for the median company bond commerce — sub-€500k, liquid, and really a lot the bread and butter of digital platforms — transparency cuts transaction prices by round 10 per cent.
That would begin the subsequent wave of electronification. At the moment, about half of Europe’s investment-grade credit score buying and selling is digital. However when 90 per cent of trades mild up in actual time, the screens are solely going to get busier.
And it’s not simply credit score that advantages. Sovereign debt could also be extra liquid, however Europe’s markets are nonetheless a patchwork. Not like the US, with its single benchmark, Europe has many issuers, many bond curves and loads of opacity. Transparency gained’t repair fragmentation, however it’ll assist. Particularly for smaller sovereigns and illiquid off-the-runs that hardly ever see daylight.
The advantages might be enormous. Because the European Stability Mechanism noted in a blog post final yr:
Digital buying and selling performs an important position in ESM and EFSF bond markets, accounting for a majority of the traded volumes and enhancing liquidity within the secondary markets by bettering value discovery and making main market transactions extra environment friendly, particularly in difficult market situations. These benefits enable the ESM to subject bonds extra successfully, benefiting its mission to help euro space monetary stability.
The US has lengthy worn the crown on bond market transparency. TRACE — or the Trade Reporting and Compliance Engine — has been working for company bonds since 2002. However zoom in on authorities debt, and issues get murkier. TRACE solely just lately began displaying on-the-run Treasuries. The off-the-runs are nonetheless at the hours of darkness. This time, Europe’s casting the broader web — off-the-runs included.
Sadly, transparency cuts each methods. The dream is that post-trade transparency ranges the taking part in area and sharpens execution. The worry is that it makes life more durable for sellers and institutional traders making an attempt to maneuver large chunks of deb with out shifting markets. In different phrases, block trades may not love the flood of sunshine when Europe flips the change.
Small trades get cheaper, however block trades are a distinct beast. Bonds don’t commerce in large dimension all that usually, and after they do, it’s normally a supplier stepping in, warehousing the chance. That’s an important service, particularly when an investor wants to dump a chunky place quick. However with extra transparency, that job will get more durable. Giant trades will get delayed reporting. However in some instances, the delays is probably not lengthy sufficient.
Take a €10mn commerce in a liquid investment-grade company bond. Underneath the brand new guidelines, the worth hits the tape the subsequent day. That’s not loads of time for a supplier to quietly unwind the place earlier than the market catches on. In consequence, block trades may get pricier — by 10—15 per cent in response to our estimates. In choppier markets, some sellers would possibly simply step again altogether.
So how do you sling dimension with out lighting up the tape and alerting everybody to it? Portfolio trading.
Portfolio buying and selling is when traders bundle up a big basket of company bonds and hearth it off in a single go. The overall notional is likely to be chunky (€40-50 million), however the person line objects sometimes sit within the €500k —€1mn vary. That’s the transparency candy spot: sufficiently small to print, not sufficiently big to maneuver the market.
About 14 per cent of investment-grade credit score already will get performed this manner. With the tape, that quantity’s solely going up.
After which there’s the Brexit bonus. The EU and the UK are every rolling out their very own model of a consolidated tape. The UK’s is less complicated, extra versatile, and comes with longer deferrals for block trades and illiquid bonds. Take that very same €10mn commerce — if it prints within the UK, it gained’t hit screens for two weeks. In different phrases, a softer touchdown for sellers.
That clearly opens up the door to regulatory arbitrage. In the event you’re making an attempt to maneuver dimension with out spooking the market, why not route the circulation by means of the UK and hold the print off the radar?
One factor’s sure: the bond market is becoming increasingly equity-like. Quicker, nimbler, extra environment friendly. However equitification comes with trade-offs. Chew-sized trades, vanishing indicators, algos locked in arms races, and a market that strikes at machine velocity.
Within the US, TRACE is so baked in it’s develop into a verb. Merchants don’t ask is that this bond clear? They ask does it TRACE? Now the EU will quickly have its personal model: fairCT — brief for truthful consolidated tape. Does it fairCT? doesn’t precisely roll off the tongue, however we’ll learn how nicely it features in 2026 when the system goes dwell.
And if it really works? One tape to rule all of them, one tape to search out the prints, one tape to trace all of them — and within the information, bind them. The algos will find it irresistible. Block trades may not.
