Trading in US Treasuries requires significant structural change – but the transition won’t be without its challenges.
The complex structure and highly regulated nature of trading in the largest and most important debt market in the world has traditionally impeded its evolution, but for the first time in a number of years, adoption of new trading technology likely to deliver real benefits for end-users is on the horizon.
The US Treasuries market has always lagged behind other markets such as equities and FX when it comes to electronic trading, however the emergence of a handful of innovative trading platforms represents a turning point for the industry.
This need for innovation has been driven by the significant liquidity challenges participants in the USD 13.4tn market have faced in recent years. As non-bank liquidity providers have emerged as major players and counterparties have become more diverse across the board, the bifurcation of trading between the dealer-to-dealer and dealer-to-client markets enforced by the current market structure has become unfit for purpose, stifling liquidity and growth.
In response to this challenge, a cluster of start-up US Treasuries trading venues such as LiquidityEdge have sought to deliver a choice of trading models that lower the barriers to entry and enable all types of institutions to participate in the market in a manner that suits their individual trading strategy.
However challenges persist, particularly in the clearing arena. In today’s market, FICC acts as a central counterparty for its membership. However, non-bank firms often don’t qualify for membership and if they do, find FICC membership costs prohibitive, opting instead for bilateral settlement outside the CCP model.
FICC volumes have decreased as non-bank firms have become more active in the market, and so the market has become vulnerable to the risks associated with trading outside of a centrally cleared environment.
While vendors deliver innovative technology solutions to the US Treasuries market’s various challenges, the relevant authorities must also play their part in addressing structural and regulatory issues such as these. Only this combined force can drive the changes required to fix one of the world’s largest and most important financial markets.