|Pricing, Transparency And Market Access: A Roundtable|
|June 22, 2012|
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The financial crisis has had a huge impact on the business of fixed income indexing. Illiquidity in many bond market sectors during the crisis has led to demands for greater transparency and for more exchange-based trading. Pricing models have had to evolve to ensure accuracy. Meanwhile, the demand for indexed fixed income exposure continues to rise strongly.
Journal of Indexes Europe editor Paul Amery asked representatives of two leading bond indexing firms—Sophia Dancygier of Markit and Brian Upbin of Barclays—about the challenges and opportunities facing their businesses.
JoI Europe: How much of the fixed income market will end up being traded on exchanges or other electronic platforms and what’s the impact of the regulatory push towards exchange-based pricing?
As part of the European Commission’s review of its Markets in Financial Instruments Directive (MiFID), changes to permissible trading models for non-equity products are being discussed. It is likely that regulatory requirements will speed up the trend towards electronic trading, more broadly displayed transparency (both preand post-trade), and multilateral forms of trading. While this generally seems like a good thing, it is important that established trading models for less liquid instruments, such as request-for-quote mechanisms or voice supported execution mechanisms, are appropriately included in the new framework, to ensure that liquidity in these instruments is maintained.
Upbin: Even with a regulatory push towards exchange based pricing, it’s probably too early to predict how much of the fixed income market will end up being traded on exchanges or other electronic platforms. As an index provider, the responsibility of offering high-quality security prices doesn’t go away if more bonds move to exchange-based trading, especially if only a subset of the investable universe winds up on these platforms. Exchange prices will remain just one of a number of observable inputs that need to be evaluated to offer an appropriate index mark for both listed and non-listed securities.
JoI Europe: What are the pros and cons of single vs. multicontributor pricing models for bond index calculation?