Different Pathways, One Destination for IRS Electronification in APAC

A related article appeared in FOW here.

Financial markets are global in nature, so the transference of new trends and innovations from one region to another is inevitable. This is true even for incredibly complex products, such as interest rate swaps (IRS), where the adoption of digital trading workflows has been spreading from the U.S. and Europe to Asia Pacific (APAC) at an increasingly faster pace. Tradeweb’s Andrea Sbalchiero, Head of EM Interest Rate Derivatives, reflects on the agents of change for IRS electronification in a region that advocates technology and tradition in equal measure.

How advanced is the adoption of e-trading across APAC, specifically in IRS products?

Andrea Sbalchiero: As anyone would expect from a region as large and diverse as APAC, e-trading adoption levels vary from one country to the other. Take Australia, for instance. Local platform Yieldbroker, which Tradeweb acquired last year, has been an integral part of the country’s financial market for more than 20 years, providing digital price discovery and execution in Aussie and Kiwi rates products.

Then there is China and its Swap Connect initiative launched last year. Just like its Bond Connect sibling, it only supports digital workflows, proof that Chinese regulators are firm believers in the power of electronification to streamline and connect markets. And let’s not forget Singapore, which was my home for nearly five years. I had the privilege of witnessing first-hand its evolution into a major investment and e-trading hub, particularly during the industry’s transition from the London Interbank Offered Rate (Libor) to alternative risk-free reference rates (RFRs). Meanwhile, Singapore’s Derivatives Trading Obligation (DTO) received equivalence with the European Union and the U.S., helping it join other global participants supporting both clearing and trading IRS on venue.

In other markets, regulation and technological innovation were the main drivers behind IRS electronification. Was it the same in APAC?

AS: APAC policymakers delivered a very serious response to the G20’s commitments to make derivatives markets more robust and transparent in 2009. Similar to Europe and the U.S., the ensuing rules helped spur IRS electronification across APAC.

Aside from Japan, local policymakers rolled out clearing mandates in a host of jurisdictions, including Australia, China, Hong Kong, Korea and Singapore. Singapore already has a DTO that has been adapted to the local market, so it covers the dealer-to-dealer space and a smaller subset of instruments. Hong Kong looked at implementing one, but then decided to assess the DTO impact on jurisdictions with live regimes before making a final decision. Furthermore, Hong Kong and Japan were among the first to introduce trade reporting requirements more than 10 years ago.

Another key driver was the transition from Libor to the new RFRs. Singapore really stood out in terms of its ability to shape the transition roadmap for financial institutions moving away from SOR (Singapore Offer Rate) and starting to use SORA (Singapore Overnight Rate Average).

However, it was the search for liquidity and efficiency that turned the tables for e-trading adoption. For institutional clients, cost- and time-savings are top of mind, as well as scalability, straight-through processing (STP) and best execution. Electronic trading ticks all of these boxes and much more, so it is a no brainer which trading method they should choose.

We should also consider that Asia is a huge continent comprising multiple financial markets, each with its own characteristics and maturity levels. This creates fragmentation and liquidity issues, which e-trading can help address. Certain IRS currencies like the South Korean Won, Chinese Yuan or Indian Rupee tend to have strong liquidity, but this is not necessarily the case for Taiwan Dollar or Thai Bhat, for example. We are also speaking with Central Counterparty Clearing Houses (CCPs) and dealers to start supporting Malaysian Ringgit, when it becomes cleared. E-trading can help solve the inherent liquidity challenge, as well as execution inefficiencies for many Emerging Markets (EM) currencies.

Besides automation, are there any other e-trading tools or protocols that are popular with clients?

AS: Automation is a global phenomenon. We were the first dealer-to-client platform to launch a solution back in 2012, initially for U.S. Treasuries before extending it to other products and geographies. AiEX stands for Automated Intelligent Execution, and it truly does what it says on the tin. It streamlines the entire transaction experience, especially when executing systematic trading strategies. We see clients trading swaps with multiple line items within seconds, while minimising operational risks associated with voice trading. AiEX has helped change attitudes to electronic workflows in APAC, where manual execution has been the norm for years. This is true not just for asset managers, but also for new types of users, such as sovereign wealth funds and hedge funds. We have, actually, been seeing more and more hedge funds opening systematic pods in recent years.

Then there is our asset swaps functionality, which is available for EM IRS too. Because we are a multi-asset platform, we are able to connect different liquidity pools in a way that others cannot. So, we facilitate the execution of contingent trades between swaps and cash legs; this is a Tradeweb exclusive and what rates trading is all about.

Recoupon is another new feature that is getting lots of traction. It enables buy-side clients to first send an inquiry on a rate, agree with the best dealer, and then make amendments post-execution. This means they can match the details of the previous trade, in order to offset or add to an existing position. Clients like recoupon because of its reduced information leakage, speed-to-market, cost-saving and STP benefits.

Next year, Tradeweb will be celebrating 20 years of electronic IRS trading. What are your plans for the region going forward?

AS: EM in general is a huge growth area for Tradeweb, and we recently opened an office in Dubai to service our local clients on the ground. We are the only electronic platform that offers a complete solution covering all asset classes, and our goal is to keep adding more currencies and extending synergies available in other markets to IRS customers around the world. Without a doubt, automation will continue to be a big theme in APAC, as clients are taking AiEX use cases to the next level, particularly hedge funds. We are also enhancing our Swap Connect link in China by adding unwinds, after successfully implementing International Money Market (IMM) swaps in May. Last but not least, we see clients paying more attention to dealer streams, so we will work closely with liquidity providers to offer even better pre-trade transparency for buy-side customers.