MarketAxess Holdings Inc. reported its second-quarter earnings this week, and MarketAxess CEO and chairman Richard M. McVey told JLN Managing Editor Christine Nielsen during a post-earnings call that credit trading conditions remain “very favorable.” Investors are moving money as a result of the very steep yield curve and, overall, the corporate bond market is active. He said the firm’s healthy earnings were a sign of MarketAxess’ momentum in emerging market, high yield and agency debt. As of late, MarketAxess has had a big focus on credit default swaps (CDS) and the technology solutions that will meet the criteria established by Dodd-Frank.
Q: You recently released an enhanced institutional credit trading system. What does it offer that makes it significant?
A: The new enhancements to the platform were focused on adding CDS trading functionality. While CDS has been available on our platform for about five years, with these enhancements we have significantly increased the flexibility of the platform. We now have two dealers – Credit Suisse and RBS – streaming live, executable prices onto the MarketAxess platform for CDX and iTraxx. We are planning to add an additional six to eight dealers in the coming weeks.
The streaming markets provided by these dealers sit alongside our traditional request-for-quote (RFQ) auction-style protocol, giving customers greater pre-trade price transparency, as well as flexibility in their means of execution. Now customers can view the live market prices even if they trade via an RFQ. We have also increased post-trade functionality for trade affirmation and connectivity to clearing houses.
Q: Why was the system released at this point and time?
A: This technology release was originally timed to coincide with the mandated Dodd-Frank rule-making deadline, which was July 16, 2011. However, despite this deadline having been extended until the end of the year, we are still working closely with our dealer and buy-side customers to offer greater flexibility and connectivity for electronic CDS trading. We are constantly making enhancements to our system, and although this was a major release for CDS, it won’t be the last as we continuously look to improve our platform for CDS and other products.
Q: What sort of reception have you received so far to the system?
A: We’ve had very positive feedback from clients with respect to the new functionality. They feel that we have addressed many of their requirements for execution and connectivity and we are consulting with them closely as we continue to make changes. In addition, many of the dealers in the U.S. and Europe are also on board and looking to provide streaming prices to MarketAxess.
Q: Your firm has said that with this release, MarketAxess now has much of the core technology needed to meet the anticipated regulatory requirements for registration as a swap execution facility (SEF) and security-based swap execution facility (SB SEF) under the Dodd-Frank Act in the U.S. How so?
A: The new functionality is broadly in three key areas: Pre-trade: Streaming, executable prices from dealers provide increased pre-trade price transparency. The platform now also offers the ability to designate a clearing house and clearing member pre-trade. Execution: A variety of trading protocols – including RFQ and click-to-trade (streaming markets) available on the same screen – increase flexibility for clients and address the anticipated regulatory requirements from both the CFTC and SEC. We have also added functionality for single-name CDS as well as switches and rolls. Post-trade: We offer the ability to connect to available clearing houses, and enhanced functionality for trade affirmation.
Q: How does the MarketAxess offering compare with other firm offerings out there for institutional credit trading? How does this technology position MarketAxess competitively speaking?
A: MarketAxess is the leading client to multi-dealer electronic platform for trading U.S. high grade and other fixed-income products including high yield, agencies, emerging markets and Eurobonds. We currently have over 850 buy-side customers and 81 dealers live on our platform, and that number continues to grow.
We think that our extensive buy-side client and dealer network for fixed income places us in a very strong position to be a key platform for electronic trading of CDS.
Q: What will be the next steps that MarketAxess takes to prepare for Dodd-Frank? Will there be any other steps?
A: We are monitoring the progress of the Dodd-Frank rule making and will continue to develop our platform to respond to the regulatory requirements as they are finalized. We do feel that we have a lot of the key functionality to comply with the rules as we currently understand them. Obviously, until the rules are final we can’t be certain of exactly what will be required. We expect there may be additional changes needed, but for now we think we are in good shape.
Q: Is there anything that recent media reports haven’t mentioned about MarketAxess that market users should know?
A: One trend that we’ve noticed is the concurrent increase in market share for our corporate bond business as discussions surrounding electronic trading in the derivatives market have evolved. Our share of the U.S. high grade market has increased to 11.1 percent for this past quarter, up from 9.9 percent in Q1 2011, and 8.1 percent a year ago. We believe that the continued focus on electronic trading as part of the broader conversation on market structure has encouraged dealers and clients to look more closely at the ways in which they conduct their trading operations to maximize efficiency.