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Single Name CDS: RFM is Next Frontier for E-Trading in Emerging Markets

| Credit
By Christopher Basler, Director, U.S. Credit, Tradeweb and Tannia Munroe, Director, Emerging Markets Product Manager, Tradeweb

Last month, Tradeweb became the first electronic trading platform to deploy the request-for-market (RFM) protocol to facilitate a fully electronic single name CDS trade. The two-way market, for which BNP Paribas acted as liquidity provider, involved an emerging market sovereign CDS product, and was executed on Tradeweb’s institutional credit platform.

This trade marks an important step forward in the electronification of our markets in many ways. On the evolutionary scale of electronic fixed income and derivatives trading, U.S. Treasuries and European government bonds were the first asset classes to walk upright in electronic markets. Moving relatively quickly along the continuum from the moment the first trade executed over the internet in 1998, the majority of government bond trades are now executed electronically. In comparison, single name credit default swaps (CDS), which are derivative contracts between two parties tied to the credit risk of a single borrower such as a corporate or sovereign issuer, have moved at a slower pace. While underlying corporate bonds and even CDS indices have seen significant electronic trading volumes for many years, single name CDS have lagged behind this growing trend.

Anatomy of an Electronic Single Name CDS Trade

Each of those details offer important insights into the future of electronic CDS trading. First, there is the protocol. RFM, an electronic tool Tradeweb pioneered in the interest rate swaps market, differs from the widely used request-for-quote (RFQ) protocol. Through the RFM protocol, clients ask dealers for a two-way market rather than a price based on direction. RFM has gained traction over the last several years because it does not disclose the client’s trading intentions, preventing potentially sensitive or strategically valuable information from being revealed.

That RFM protocol, with its ability to deliver transparency while simultaneously preserving client intent, is a natural fit for the single name CDS market, where positions are often taken defensively or as part of a larger trading strategy that market participants would not want telegraphed to the broader marketplace. Over the last five years, the RFM protocol on our interest rate swaps platform has gained significant adoption.

RFM Opens New Doors of Liquidity in Emerging Markets

The other important detail in the trade was the fact that it was for an emerging market CDS product. Following the path taken in more established G10 markets, many emerging markets derivatives trades have started to migrate to electronic trading over the last few years. Starting with the interest rate swaps market, emerging markets trading desks have found significant opportunity in embracing electronification, perhaps more so than in more developed markets. This is because electronic trading protocols, like RFM, address major challenges associated with emerging markets trading such as geographic fragmentation, less transparency in pricing and language barriers.

Overall, emerging markets trading desks have experienced efficiency and workflow gains accessing liquidity electronically versus picking up the phone to find the other side of a trade across several different languages and time zones. We’ve seen this trend take place on our platform as well, with emerging markets single name CDS volume growing significantly over the past 5 years and volumes doubling over the last year alone.  

The Electronic Trading Maturity Curve

Last year, for example, emerging market interest rate swaps volume on the Tradeweb platform grew 73% as compared to the prior year. We are beginning to see emerging market CDS take a similar path, with market participants starting to find more transparency and liquidity on electronic markets.

The introduction of the RFM protocol and its application in emerging markets CDS is part of Tradeweb’s ongoing pursuit of workflow enhancements to improve liquidity and efficiency. We continue to be encouraged by the volumes we’re seeing and we look forward to supporting the evolution of fixed income and derivatives markets with the adaptations they need to thrive in every environment.


Market and Industry Data

This post includes estimates regarding market and industry data that we prepared based on our management’s knowledge and experience in the markets in which we operate, together with information obtained from various sources, including publicly available information, industry reports and publications, surveys, our clients, trade and business organizations and other contacts in the markets in which we operate. In presenting this information, we have made certain assumptions that we believe to be reasonable based on such data and other similar sources and on our knowledge of, and our experience to date in, the markets in which we operate. While such information is believed to be reliable for the purposes used herein, no representations are made as to the accuracy or completeness thereof and we take no responsibility for such information.

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