Standard Chartered and Bloomberg have introduced an electronic trading workflow for Korean Treasury bonds (KTBs). The tool allows investors to access global and domestic sources of liquidity for those bonds on the Bloomberg Terminal.

Investors can stage, monitor, trade, process, and allocate KTB orders through a fully-electronic workflow via Bloomberg’s electronic trading offering. This process was previously cumbersome and challenging due to the setup, capture, and conveyance of investment registration certificates (IRCs) that Korea’s regulators require.

According to Korea’s Financial Supervisory Service, foreign investors need the IRC to trade locally-listed stocks or other securities, and the IRC must be quoted whenever a trade is placed.

If you’re an asset manager sitting somewhere in the West, and you want to invest in Korea, there is quite a significant process that needs to occur before you’re set up to actually access that market.

Sharad Desai, Standard Chartered

Standard Chartered is one of the largest international primary dealers in Korea Treasury bonds, which allows it to participate as an underwriter and market-maker in the secondary market. KTBs are the largest issued in volume among other Korean-issued government bonds. As of 2019, it made up 60.7% of total issued government bonds valued at 101.7 trillion won ($90 billion).

Sharad Desai, global head of sales and structuring for financial markets at Standard Chartered, says the process of trading KTBs is not as simple as dealing with US Treasuries or G-10 bonds.

“If you’re an asset manager sitting somewhere in the West, and you want to invest in Korea, there is quite a significant process that needs to occur before you’re set up to actually access that market,” he tells WatersTechnology.

Take, for example, an asset manager that has a strategy across 15 different sub-accounts. For best-execution purposes, they would need to ask for pricing to multiple dealers for the different bonds they were looking to source. They will need to say which of the 15 sub-accounts they were looking to put those bonds into.

“Now each sub-fund has to have, for every trade, an IRC number associated with it. So if you’re an asset manager, putting all of this together and then shooting it out independently to 15 different people with these IRCs—with all of these people needing to actually check if those IRCs are registered—it is quite a challenge,” Desai says. “If you have multiple sub-accounts who are dealing in this market, you’re almost forced to actually reduce the number of participants you go out to get pricing from.”

With the electronic workflow, the process for trading KTBs is streamlined. Desai says clients can send a request-for-quote (RFQ) to Standard Chartered, and they will get a price back in seconds since all the underlying IRC data is already embedded into the RFQ process.

“You would have to ensure that when you create all of those sub-account IRC numbers, they are cross-referenced with whichever dealer you’re dealing with. Here, that data is pre-loaded. We are in a position where all of this can be done electronically without having to constantly have a back-and-forth with your provider. You’re probably saving at least a 10- to 15-minute execution window. Obviously that depends on the number of sub-accounts you’re dealing with. This is massively beneficial to large global investors who typically would be dealing across 50, 60, 70 different sub-accounts,” he explains.

This workflow also removes potential human errors in an individual trade transaction between a client and a trader.

“We’re able to perform automated pre-trade IRC checks. And this is the key here,” Desai says. “The whole point is before you trade, you need to confirm those IRCs. Before the trade happens, we’ve checked the IRCs, and even before the price is returned to the client for the RFQ, we can also book the allocations on the post-trade basis when the trade is executed, and then seamlessly report the trade.”

For its part, Bloomberg engaged with clients on both the buy side and sell side to understand the market demand for improving the KTB trading workflow. William Oberuch, global head of emerging market trading at Bloomberg, says KTBs are especially important to investors managing emerging market fixed-income portfolios, as the indices they track are typically weighted toward Korean and Chinese government bonds.

“When developing a new workflow, it’s important to understand the needs of the end-user. Standard Chartered is one of the leading primary dealers in KTBs and played an important role in helping us define the key requirements for the workflow,” Oberuch says. “We then made enhancements to our solution so it fulfilled Standard Chartered’s needs, and can be deployed to support any other dealer.”  

The electronic way

Bonds have long been a laggard in the move to electronic trading, mainly due to the opaque market structure and the extent to which traders prefer dealing over voice and chat—but that is slowly changing.

As the Covid-19 pandemic forced many people to work from home, the major electronic bond platforms, including Bloomberg, MarketAxess, and Tradeweb, have all seen an increase in electronic trading and demand for solutions that support efficient electronic workflows and straight-through processing (STP).

Access to data and information to help inform decision-making around trades can still be improved, and we’re focused on incorporating the breadth of our data and pricing into the trading workflow to provide greater pre-trade transparency.

William Oberuch, Bloomberg

Oberuch says this trend is unlikely to be affected even if people start to return to their offices, which will also vary between the types of firms. “Access to data and information to help inform decision-making around trades can still be improved, and we’re focused on incorporating the breadth of our data and pricing into the trading workflow to provide greater pre-trade transparency,” he says.

In the fourth quarter of last year, Bloomberg added new functionality and tools to its portfolio trading solution to support “RFQ to many” for both the buy side and sell side. Bloomberg’s BVAL pricing tool, which firms use to mark their end-of-day books, and as an intraday price source, is incorporated into portfolio trading tools for RFQ, as well as execution tools for electronic trading.

Oberuch says another tool gaining traction is Bloomberg’s Rule Builder, which allows traders to break down incoming order flow for fixed income, foreign exchange (FX) and exchange-traded funds (ETFs), into discrete “high touch” and “low touch” functions and create rules to facilitate fully-automated trading on Bloomberg venues. Bloomberg also plans to release a Basket Builder tool to provide clients trading a basket of securities with pre-trade intelligence through liquidity scores and other analytics.

Desai says Standard Chartered is looking to use its technology as a differentiator and extend the solution built for Korea to the rest of its presence across Asia, the Middle East, and Africa, where it can tweak the solution and adapt it to local requirements.

“The less homogenous and more illiquid a government bond market is, the greater the chances that it would remain bespoke, and trades will continue to be negotiated [via voice] or Bloomberg chat,” Desai says. “We have, however, seen an uptick in electronic trading volumes on the back of the situation we found ourselves in with Covid-19 in 2020, which has definitely accelerated the shift to electronic trading, as all these various platforms [allow traders to] execute their trades working from home.”

Within Asia, Desai says Korea, China, India, and Malaysia are the most liquid bond markets, whereas markets like Vietnam and Sri Lanka are less liquid.

“It’s inevitable that the electronification or digitization of the bond markets will follow the most liquid markets, which is really where we are. We will work with all of the other countries in terms of liquidity and increased utilization. All of them have some form of digitization, but not to the same extent as the liquidity would suggest in some of the bigger markets,” Desai adds.

Aside from Bloomberg, Standard Chartered also works with MarketAxess and Tradeweb to provide liquidity to clients. Desai says the bank constantly has open conversations with all its providers on adding electronic trading workflows. “As we’ve shown with our partnership with Bloomberg, I think this is something we’re very good at doing,” he says. “And frankly, it’s something we will look at from a partnership perspective with other providers as well.”