The first blog in this two-part series was titled Fixed Income and Rates Trading in 2020: What Does the Future Hold? I took a look at how fast the world of fixed income and rates trading is moving. As we look ahead to 2020, we can’t lose sight of key macro trends for fixed income and rates trading. In terms of regulation, beyond FRTB, MiFID II is having a huge impact on the fixed income and rates market.
MiFID II essentially forces firms to keep an audit trail of all of their interactions. If a customer trades with you, you need to store that data and know what price you offered, what the trade was priced at, and so on.
Not only does that have technology implications – because you need a system that can actually keep that audit trail – it has implications for the trading model itself. In theory, you could continue to rely on voice trading. But then how do you store the data? It makes more sense to use a system that can handle both the trading and the tracking. In fact, I would argue that MiFID II is a compelling event for expanded electronification. This would have an important side effect of automating fixed income and rates operations – which would benefit firms that are beyond the remit of MiFID II.
There’s also a cost pressure, mostly coming from regulation, so while hedge funds are still doing well, it is getting more expensive to run a bank, an asset manager or an insurance firm. Firms are facing lower margins and increased competition, both of which are making customer retention even more important. You have to have superior service and product innovation.
What does this all mean? For banks, there’s increased risk awareness. Different types of risks are becoming intertwined – credit risk and market risk are coming together, for example, as are market and liquidity risk. You can no longer manage risk in silos. You have to manage risk across the different desks.
Firms are looking for system consolidation for other reasons, too. Driven by cost pressure and lower margins, firms want fewer systems that do more, lower the TCO and simplify their IT infrastructure. Yet they also need more infrastructure because they have to electronically trade a lot of products that they would have otherwise done by voice. So there’s a real conflict at play.
Hosted solutions can help because they reduce costs and let firms hand off the administrative burden of maintaining systems. Platforms that can handle multi-asset trading and multiple types of risk are another key tool – better yet would be a single platform that can do both. And they need a system to adhere to regulatory change.
It’s a tall order. But that’s what will be required to thrive in the fixed income and rates market of the future.
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