Tradeweb Bolsters China Bond Market Access with Electronic CIBM Direct Trading Overlay

Fixed income trading platform Tradeweb has launched a new electronic mechanism for accessing Chinese bond markets, in a bid to further open the markets to participation by more foreign institutional investors.

China has made major inroads in opening up its bond market to foreign institutional investors over recent years, notably with the 2017 launch of Bond Connect, a joint venture between the China Foreign Exchange Trade System (CFETS) and Hong Kong Exchanges and Clearing to promote overseas investment in domestic Chinese securities. The country has also included Chinese government bonds in indexes like the Bloomberg Barclays Global Aggregate Index and, more recently, JP Morgan’s Government Bond Index Emerging Markets suite, which have also fueled investor access and appetite.

Investors can currently access the onshore bond market via four channels: qualified foreign institutional investor (QFII), RMB qualified foreign institutional investor (RQFII), China Interbank Bond Market Direct (CIBM), and Bond Connect. But, as previously reported by WatersTechnology, more enhancements are still needed to attract more foreign institutional investors. 

One such enhancement is a new electronic trading overlay that Tradeweb has added to its northbound access China Interbank Bond Market (CIBM Direct) channel, allowing foreign institutional investors to use the disclosed request-for-quote (RFQ) system. Previously, Bond Connect was the only way foreign investors could access China’s bond market through an electronic trading platform. 

Currently, foreign institutional investors can access CIBM Direct and Bond Connect either through Tradeweb or Bloomberg. 

Tradeweb CIBM Direct Link offers users functionality, such as Tradeweb’s automated execution tool, AiEX. It also provides investors with improved price discovery and allows them to submit and execute orders via disclosed RFQ, as well as have access to pre- and post-trade processing functions directly on CIBM. 

Li Renn Tsai, managing director and head of Asia at Tradeweb, tells WatersTechnology that Tradeweb has seen more participation from investors.

“Our first-half 2020 versus first-half 2019 numbers in terms of average daily volume increased by 10.6%, from RMB 5.94 billion ($860 million) to RMB 6.57 billion ($950 million). So, in fact, we’re getting more participation from investors. The new participation has been partly due to index inclusions like Bloomberg Barclay Global Aggregate Index, which has been in place for a while, and then recently to JP Morgan’s Government Bond Index Emerging Markets suite. So, that’s certainly helped take activity up by quite a bit,” he says.

Tradeweb provides fully electronic access to the two most popular northbound entry channels into China—CIBM Direct, which was implemented in 2016, and Bond Connect, which was rolled out in 2017. 

“CIBM Direct is a voice-traded access channel, but what we’ve done is launched an electronic trading layer on that channel. As a consequence, we’re the only trading platform that gives investors the choice of using two electronic access channels into China,” Tsai says.

The key difference between accessing through CIBM Direct and Bond Connect is the settlement infrastructure, he adds. Using Bond Connect, investors can essentially keep their funds offshore, whereas in CIBM Direct, they need to establish themselves with a local onshore custodian, which is the “more traditional” way to access these markets.

“It could be more complicated to set up, so there’s a balance, and investors have to make a decision based on what they think they want to do. If they go through CIBM Direct, it means that they become a domestic participant in the China interbank bond market, because they buy onshore,” he says. “In theory, this gives them access to all the instruments in the China interbank bond market, not just cash bonds, but also repo and interest rate swaps, and so on. As an institutional investor, you have to make that decision. There’s obviously a lot more involved if they want to access repo and interest rate swaps, so it’s not a straightforward decision, but fundamentally the difference is with Bond Connect you’re offshore and CIBM Direct you’re onshore.”

Tsai said that Tradeweb will continue to work with China Foreign Exchange Trading System (CFETS) to enhance both channels.