Tradeweb is the first technology company to provide global asset managers with the means to trade in China’s interbank bond market electronically.
Asset managers like AllianceBernstein (AB) and UBS Global Asset Management worked with Tradeweb to initiate the first trades into the China Interbank Market via CIBM Direct (the scheme allowing such access via Hong Kong). They now connect with Chinese banks and brokers onshore.
Making markets go electronic is just the start, though. Using vendors such as Tradeweb will allow foreign fund managers to automate execution in the interbank bond market.
This sets the stage for further developments, with algorithm execution on the horizon, says Jeremy Son, fixed-income trader at AB in Hong Kong. That could happen within a year or two.
Changes inside and out
Li Renn Tsai, Tradeweb’s managing director and head of Asia, says bringing foreign asset managers into China impacts how the domestic market operates.
“When we put our e-trading pipe into CIBM Direct, it drives changes in the onshore bond market,” he said, just as it has in BondConnect, an older channel via Hong Kong Stock Exchange.
This is not because China’s market is in need of automation. On the contrary, the interbank bond market almost all trades over a single electronic platform operated by the People’s Bank of China. Global asset managers, even if they operate at China’s T+0 settlement system, need at least one extra day because of time zones. Therefore they have to pre-fund trades, which leads to voice workflows with domestic brokers (over the phone or instant messaging).
Our e-trading pipe drives changes in the onshore bond marketLi Renn Tsai, Tradeweb
Allowing foreigners to trade electronically in the local market means domestic firms have to meet global standards of service.
Until now, China’s bond market is entirely dominated by banks; it lacks a dealer-to-client model that exists overseas – what Tradeweb is essentially exporting to the mainland. These institutions now have to make markets for offshore customers that aren’t locally licensed banks. “It’s a learning process for Chinese banks,” Tsai said.
This wasn’t the case with BondConnect, which is a sort of “China lite” for global asset managers. It’s a channel via HKEX that allows foreigners to custody and settle in Hong Kong, rather than in the mainland market.
CIBM Direct, which only went live in August, exposes global firms to onshore delivery versus payment and custody arrangements. Technology providers like Tradeweb, which is the first to allow access to both BondConnect and CIBM Direct, create the layer to allow seamless connectivity.
We wanted to get ahead of the gameJeremy Son, AllianceBernstein
Already CIBM Direct is seeing up to Rmb500 billion ($74 billion) a month in volumes, similar to BondConnect, says AllianceBernstein.
With the inclusion of Chinese bonds in global indexes such as the Bloomberg Barclays Aggregate, global demand for Chinese securities is on course to grow.
From access to algos
Son at AB says the firm was among the first to execute an electronic bond trade in China’s interbank market using Tradeweb’s service. “We wanted to get ahead of the game,” he said. “The onshore bond market is already mostly electronic, but for foreign asset managers investing under CIBM Direct, it’s been voice-execution only.”
Bringing electronic trading to foreign managers open the door for other possibilities, such as automated execution, just as in the U.S. Treasury and European government bond markets.
Electronic markets are more transparent, so quotes and prices are instantly available. This leads to the potential for pricing trades using algorithms, and eventually executing trades via computer – although Son says smart algo execution is several years off in China.
AB has already introduced a robot for trading corporate bonds in the US (called Abby). It will transact when its algorithm detects the right levels of liquidity, pricing, counterparty activity, and other factors.
Global asset managers need time and experience to have enough faith in China’s bond markets – and regulators – before they transition trading to computers. But the electronic link has put the asset-management industry on the path to automated trading in Chinese bonds.