BNY Mellon and HSBC are partnering with bond trading technology provider Algomi to expand corporate bond trading opportunities for their custody clients and the wider market.
The initiative aims to shore up ailing liquidity across the fixed income market by allowing custody clients to make select bond holdings available anonymously on the Algomi Honeycomb network. The network aggregates dealer data to help money managers find buyers and sellers of corporate bonds.
The ability for dealers to tap databases of large global custodians on behalf of their buyside clients and find buyers or sellers for a specific bond in real-time, without compromising data privacy, is a breakthrough development for fixed income markets, according to Stu Taylor, CEO of Algomi.
“Working with two of the largest custodian banks will open up new avenues for price discovery and alert market participants to relevant signal data that indicates market activity, price and depth,” said Taylor.
Data stemming from the multi-trillion dollar pool of custodian corporate credit holdings is perceived by some as the holy grail of inventory in corporate bond markets, where dealer holdings have plummeted to just 0.5% of the market in response to Basel III capital rules that hiked the cost of warehousing securities.
Net holdings of corporate bonds by US primary dealers has fallen over the last decade to just US$20bn from US$286bn, according to data from the Federal Reserve Bank of New York. Over the same period, outstanding corporate debt has expanded by 75%.
According to a recent study from the UK’s Financial Conduct Authority, the number of corporate bond trades stemming from orders and request-for-quotes has fallen to just 20%-25% in 2017 from 65% before the financial crisis.
Counterparties on the network will be able to query anonymous bond holdings from custody clients that have opted in to the service. That will alert the custody holder and give them the ability to instruct their dealer to trade on their behalf, while protecting the client’s identity.
“By enabling the market to access potential trade matches with our custodial clients, we can play a significant role in not only increasing our clients’ access to liquidity, but in improving the infrastructure of the entire market,” said Michelle Neal, CEO of BNY Mellon Markets.
The partnership will have broad global coverage by combining HSBC’s presence across Asia, Europe and the Middle East and North Africa with BNY Mellon’s extensive US custody operations.
“By collaborating with a cutting-edge fintech firm, in parallel with a leading US custodian business, we can use digital innovation to create a multi-trillion dollar bond pool that spans the globe,” said Niall Cameron, global head of corporate & institutional digital at HSBC.
MUTUALLY BENEFICIAL
Data privacy requirements have up to now prevented custodian information from being used to its full potential, and those involved in the latest initiative say that proven data security will be crucial in bringing clients onboard.
“A permission-led approach that gives custody members the power to only reveal their data if they wish to interact with trade enquiries from the market provides a mutually beneficial model that enhances liquidity across the ecosystem,” said Mark Ledwards, head of the sellside division at Algomi.
The initiative will go live for BNY Mellon and HSBC custody clients early next year, with the potential to expand to other custodians in the future.
“Connecting buyside and sellside in this manner benefits both, and is sign of how fixed income markets continue to transform in the digital age,” said Mehmet Mazi, global head of credit trading at HSBC.
