Tradeweb: Delivering faster and easier access to China’s bond market
Li Renn Tsai
Head of Asia, Tradeweb
Approaching its first anniversary, how successful has Bond Connect been in reaching its key objectives?
Launched in July last year, the primary aim of Bond Connect was to provide international investment institutions with a more attractive and efficient access channel to the world’s third largest bond market. As well as facilitating existing demand for Chinese bonds, it would stimulate new inflows by meeting a key criterion for their inclusion in international indices. As a pioneer of electronic markets for 20 years – and both a design partner and operator of the first trading platform to link to Bond Connect – we at Tradeweb believe it is well positioned to meet these objectives.
Today, a wide range of international investors are already accessing the Chinese Interbank Bond Market via Bond Connect: more than 300 overseas institutions from almost 30 jurisdictions have registered since launch. Total foreign bond holdings have risen from RMB842 billion in June 2017 to RMB1.305 trillion in March, albeit still representing just 2-3% of market share.
Through May this year, more than 5,000 transactions in Chinese cash bonds have been executed on Tradeweb, as global institutions leverage our end-to-end electronic workflows to access liquidity for all instruments tradable in the CIBM.
What practical difference has Bond Connect made to international investment institutions interested in buying Chinese domestic bonds?
Bond Connect has enhanced access to the domestic Chinese bond market in two key ways.
First, it has shortened and simplified the onboarding process, by reducing the due diligence and operational infrastructure required by foreign investors. With Bond Connect, rather than selecting and connecting to onshore custodians, investors can use their existing ones, thus removing the need for detailed understanding of domestic market structure and legal processes.
Second, as a purely electronic channel, Bond Connect allows international investors to trade Chinese bonds using familiar standardised and automated protocols and workflows. This was achieved by tapping into Tradeweb’s deep experience and expertise in operating electronic markets across multiple asset classes. Furthermore, Bond Connect offers trading multi-dealer request-for-quote, proven over time the most efficient mechanism for price discovery in OTC markets. Not only does RFQ identify and place the most suitable counterparts in direct competition, thus guaranteeing best price, it does so in an automated, transparent and operationally robust framework.
How has the launch of Bond Connect facilitated the internationalisation of the Chinese Interbank Bond Market?
As seen with Stock Connect, ease of access for investors is critical to index inclusion. The success of Bond Connect is reflected in the announcement by the Bloomberg Barclays Global Aggregate Bond Index that it would phase in RMB-denominated government bonds from April 2019, upon implementation of required operational enhancements. When complete, Chinese domestic bonds will be its fourth largest component.
Other benchmark providers are expected to follow suit, opening the door to a large-scale reallocation of capital to Chinese bonds, as passive investors adjust their weightings and active investors look to ensure they beat their benchmarks. Tradeweb is well placed to accommodate a surge in investor demand for Chinese debt thanks to our market-leading infrastructure and global network of more than 2,000 institutions.
However, Bond Connect’s significance for China’s domestic bond market goes beyond foreign investors. To win business from international institutions, Chinese liquidity providers have been adjusting their voice-brokered processes to respond effectively to electronic RFQs, leading to improved access to liquidity, transparency and efficiency for all. Indeed, Bond Connect has driven the evolution of the CIBM structure to comprise both dealer-to-client and dealer-to-dealer segments, thus aligning it to more mature international bond markets.
As the first trading venue to link to Bond Connect, does Tradeweb have a competitive edge over other platforms looking to connect to the scheme?
Tradeweb has gained a deep understanding of the Chinese bond market since it became the first and only platform to link to Bond Connect at launch. Not only have we established deeply entrenched relationships with onshore market makers, investors, regulators and market infrastructure operators, but we have been intimately involved with the feedback loop on how to evolve Bond Connect to increase its utility to users and how to diversify its service offering.
For example, Tradeweb is working closely with the China Foreign Exchange Trading System to facilitate block trades via Bond Connect. Besides being a key condition for index inclusion, allocation of block trades is important to institutional investors, enabling them to trade large orders without suffering adverse market impact.
We’re also working to further improve transparency through the introduction of indicative pricing. In most markets, a key advantage of electronic trading is the ability to easily identify potential counterparties for RFQ inclusion, thus supporting effective price discovery.
Moreover, the implementation of Delivery-Versus-Payment settlement, which will reduce counterparty risk for investors, and the clarification of tax collection policies will be the catalyst for further adoption of Bond Connect by international institutions, helping it reach its objectives even more effectively.
What other emerging markets can learn from the success of Bond Connect?
As pioneers of electronic markets for 20 years, Tradeweb sees Bond Connect as a case study of how investor access can be enhanced by leveraging our network, deploying innovative technology and established best practice. Our experience tells us that Bond Connect can be a blueprint for other emerging markets wishing to enhance international participation. The proven combination of direct interaction with counterparties, price competition via RFQ, and highly automated workflows will extend its benefits globally in the coming years.