Viewpoint | Luigi Campa
“What we at EuroTLX have learnt in more than ten years of running fixed income e-trading venues is that an increase in transparency actually increases trade numbers and volumes.” Luigi Campa, EuroTLX
“The Italian retail-size bond market is very similar to the equity model”, says Campa. “Trades on venues such as EuroTLX all run on a central limit order book, with full pre-trade transparency on a five-level depth, with price and time priority, anonymous and continuous, and with complete post-trade transparency”. Campa adds, “of course, in a world made up by hundreds of thousands of bonds, most instruments are structurally illiquid and thus are not suitable to be traded on an exchange, but on a subset of fixed income securities, such as govies, supranational, corporate and banking bonds, it is possible to have a very liquid market.” The efficiency of the whole system also depends on how the post-trading works. “This is entirely straight-through processing, with settlement instructions automatically sent in real time to the CSD, ICSDs or CCPs, and with a daily reconciliation report provided to each market member.” The CCP feature, in particular, is becoming
more and more appreciated by market participants, since it also guarantees anonymity in trading and lowers the tied-up capital required by regulators. “With the Capital Requirement Directive (CRD IV) and Basel III imposing capital constraints to European banks, holding inventories of corporate bonds on their books will become extremely
Best Execution | Autumn 2012
expensive – the development of electronic order books enables these bond stocks to move more freely from investor to investor, without banks to have to act as risk absorbers. Flow and electronic bond-trading business are clearly the future.” Campa expands, concerning the highly debated issue of transparency versus liquidity, “what we at EuroTLX have learnt in more than ten years of running fixed income e-trading venues is that an increase in transparency actually increases trade numbers and volumes. Besides, even the US can be taken as an example, with most academic papers arguing that liquidity was not hindered by TRACE, the corporate bond market post-trade reporting system that was introduced in 2002.” “The electronification of cash fixed income in
Europe has, however, still a long way to go. If about 60% of government bonds are traded electronically in the dealer-to-client market, on non-govies this percentage goes down to 20%”, says Campa. “And there is lot that has to be done on the entire value chain. For example, interoperability for all financial instruments on the CCP side, and a consolidated tape on the post-trading side. But we are quite optimistic, and by leveraging on the experience gained on our home market we want to play an important role in the current reshaping of the European fixed income scenario”. ■
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