Bond investors review dealers amid illiquidity

The continued decline in Asian fixed-income trading volume and liquidity is having a noticeable impact on relationships between institutional investors and their dealers, with both sides reviewing the counterparties they work with, according to Greenwich Associates. 

Trading volumes among fixed-income investors fell 9% from 2014 to 2015 for corporate bonds, while interest rate trading was roughly flat, noted a new report from the US-based research house. 

Deep reductions in sell-side inventory levels and the exit of some dealers from the market altogether have made it harder for investors to execute trades, as reported by AsianInvestor. This was top of the list of issues cited by institutional investors in Greenwich’s 2015 Asian fixed-income survey*.

For their part, dealers are consolidating client coverage and capital commitment by targeting large or otherwise high-priority accounts, noted the report. These shifts are coming at the expense of smaller investors and clients that represent smaller potential profits. 

As dealers implement these changes, a large share of institutional fixed-income investors – from 20% to 30% across various products – say they plan to re-allocate business away from one or more of their current dealers, said Greenwich. 

Meanwhile, as part of their search for reliable sources of inventory and liquidity, institutions are forming relationships with new counterparties. European and US banks such as Société Générale and Wells Fargo see the pullback of other major dealers as an opportunity for growth, and Australian banks are likewise seeking to increase their presence in the broad Asian market. 

Also competing for a larger share of their home markets are South Korean firms such as KDB Daewoo Securities and Woori Investment & Securities; China’s ICBC, Bank of China and Citic Securities; ICICI Securities and Axis Bank in India; CIMB and Maybank in Malaysia; and Singapore’s DBS, which is looking to expand across key markets in Asia. 

This makes sense as sell-side firms narrow their focus and concentrate on products in which they think they have some competitive advantage. Certain global dealers are pulling back from products such as swaps and local-currency Asian bonds and focusing on areas where they can take better advantage of their relationships with European and US customers looking to invest in emerging-market debt, noted the report. 

Meanwhile, institutions are using a larger number of dealers, according to Greenwich – the average number used rose to 8.4 in 2015 from 7.6 last year, with the largest increase coming in credit products. At the same time, they are still channelling a big share of their overall volume to their biggest and most important dealer relationships. On average, institutions in 2015 allocated 73% of total Asian fixed-income trading volume to their top three dealers; the figure was 76% in 2014. 

Greenwich consultant Jim Borger said: “The market’s biggest dealers are generally the ones still offering liquidity, so the reality is that many institutions feel they have no choice but to consolidate trading business with their top counterparties in order to become important clients deemed worthy of consistent coverage and capital commitment." 

As a result of these trends, the biggest dealers may be trading smaller volumes, but they are consolidating their position in terms of market share. 

HSBC has established itself as the clear leader in Asian (ex-Japan and Australia/New Zeland) fixed-income trading (including derivatives) with a market share of 11.8%, retaining top spot from last year. Citi is number two at 8.9%, followed by Standard Chartered at 7.1% and Bank of America Merrill Lynch at 6.3%. 

HSBC also remained top in domestic-currency Asian bonds with a share of 12.8%, followed by Citi and Standard Chartered (tied at 8.1%–8.2%), Bank of America Merrill Lynch at 5.0% and Deutsche Bank at 3.6%. 

However, when Australia and New Zealand respondents are included as part of the overally Asian fixed-income survey, Citi ranks top with 9.7% market share, followed by HSBC with 8.8%.

* Between May and July 2015, Greenwich Associates conducted 890 interviews with fixed-income investment professionals at domestic and foreign banks, private banks, investment managers, insurance companies, hedge funds, corporations, central banks and other institutions in Asia (ex-Japan).