Open access in fixed income: the clear choice

By Bruce Kellaway, Global Head of Rates and Securities at LCH

Transparency and customer choice. These two concepts underpin the principles of free markets. The fixed income space is no exception. It is widely acknowledged that competition ultimately benefits end-customers, driving innovation, efficiencies and customer service.  In fixed income, this translates to market participants having a choice of where to trade, clear and settle their bond and repo activity. In clearing, CCPs (central counterparties) offer their members enhanced counterparty risk management, increased operational efficiency and greater capital benefits, thanks to the lower risk weighting of centrally cleared trading activity and netting benefits. Open Access allows the clearing model to operate as efficiently and effectively as possible.

It’s a common misconception that Open Access equates to greater complexity. In fact, in the European fixed income market, an Open Access approach has fuelled the development of deeper liquidity and netting pools. These deep pools of liquidity allow banks and market participants to benefit from greater capital efficiency as well as robust risk management. For example, in 2019, LCH’s RepoClear service reported a peak gross nominal of outstanding of €3.8 trillion across its services. This concept of robust risk management contrasts with the risks that have been concentrated via artificial barriers and siloes in other areas of the market.

Open Access ensures non-discriminatory access to trading, clearing and settlement infrastructures. This allows investors to trade on alternative platforms benefitting from lower trading fees, while retaining the opportunity to access a compelling pool of cleared liquidity. And while Open Access may be considered by some to be complex, clearing in fact removes many operational challenges, and the choice it involves ultimately results in more efficient markets.

In the fixed income market, we continue to see demand from our customers for a broad range of cleared products spanning multiple debt markets. As such, LCH has continued to expand its coverage in recent years to cover 14 sovereign debt markets, spanning all the largest European markets. It has also diversified the types of market participants through initiatives such as Sponsored Clearing, which enables buy-side firms to access clearing by getting a bank to sponsor their fixed income clearing activity.

Another priority for the market is retaining true choice, in terms of where to execute and where to settle their debt portfolios.

Competition between trading venues encourages greater efficiencies. Meanwhile, the choice of settlement venues available in Europe encourages an element of healthy competition between central securities depositories (CSDs). It’s important to many customers to continue to have an open choice of where to settle their trades. For example, LCH is directly connected to multiple settlement venues. This choice enables end-users to derive the greatest possible benefits from netting – whereby participants can offset appropriate positions to achieve savings for their balance sheets and in turn, execute more business.

It’s our belief that the fixed income market operating under the principles of Open Access are more efficient, more innovative, and importantly, more customer-centric. This tallies not only with our own experience but with the conversations that we have with members and other market participants.

Transparency and choice will continue to provide compelling benefits for the financial markets, driving innovation and efficiency. Open Access continues to be the clear choice for the fixed income market, both now and for the years to come.