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Fixed Income and Rates Trading in 2020: What Does the Future Hold?


Pontus Eriksson | Wednesday, July 6, 2016

The world of trading – and particularly fixed income and rates trading – is moving so fast, it’s hard to remember to slow down once in a while and take a breath. But those moments can also be so valuable. Lately I’ve been using that time to think about the future. Even as firms try to keep up with all of the changes, how can they turn them to their advantage? Can we look beyond today’s tactical activities to think more strategically and anticipate what lies ahead?

I believe the answer is yes. And I’m willing to make two predictions about what fixed income and rates trading will look like in 2020.

Firstly, banks will consolidate their front-office and risk management systems, and the most advanced firms will migrate to a single platform. Yes - single multi-asset platforms for both front office and risk management exists already.

I’ve talked about the value of system consolidation for a long time. With a single platform, you can get a holistic view of your activities, risk, exposure, etc. and therefore increase transparency, uncover opportunities and reduce your IT total cost of ownership (not to mention reducing the burden of vendor management). Many banks, however, have seen these benefits as nice to haves rather than must-haves.

That’s changing thanks to the Fundamental Review of the Trading Book (FRTB). Under FRTB, banks will be penalized if their front-office P&L differs from their risk P&L. So the bottom line will immediately suffer if there is a mismatch, which is all too likely with multiple systems. Running multiple front-office and risk systems will now incur hard dollar costs beyond the less tangible costs that I’ve talked about before. This will be a monumental change that will drive banks to finally consolidate onto a single trading and risk system.

Secondly, the relationship between the buy side and the sell side will be electronified. Now, let me apologize for perpetuating jargon like electronified. But it’s the closest term we have for what is happening in the fixed income market, where trading is still mostly by phone or a simple affirmation platform.

So today, if an asset manager or hedge fund wants to trade a bond or an OTC derivative, they have to call the bank or the broker-dealer. What if they could issue an RFQ to say, I want to “buy” this vanilla or tailor made interest rate swap? What if the RFQ pops up in a central venue or directly to the sell side and the sell side pics up the requested swap with customized nominals, cash flows, dates etc., and then just quotes it electronically? The RFQ process in the future will be a combination of external incoming inquiries and internal RFQs initiated by the sales desk.

Reduced telephone activity and less shouting across the internal desks. You can see the whole value chain from the sell side to the buy side. Just imagine the benefits – faster execution, fewer errors, enhanced internal transparency around customer activities and quoted prices. All this will hopefully generate more liquidity within the own organization and at the same time enable the traders to focus on the more profitable deals and automate or reject parts of the flow. Enhanced technology will enable a sell-side bank to make more efficient decisions such as what price to quote and to who – but also as a tool that allows you to incorporate collateral, funding or liquidity implications into your decision-making.

In my next blog, The Macro Outlook for Fixed Income and Rates Trading in 2020, I’ll be taking a look at the macro outlook for fixed income and rates trading in 2020.

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