Market structure, technology, and constraints are reshaping EM debt
Emerging markets (EM) are becoming central to where growth, issuance, and risk transfer occur in global capital markets. Asia alone accounted for close to 60 percent of global GDP growth in 2024, according to International Monetary Fund (IMF) estimates, while EM sovereign debt ratios have risen materially over the past decade, from roughly the low-40s percent of GDP in the mid-2010s to above 70 percent today in aggregate.
That combination matters. More issuance, from a broader set of countries and in more varied formats, increases the importance of how efficiently markets function beneath the surface. Funding costs are no longer driven solely by credit fundamentals or macro policy, but by whether markets can intermediate risk reliably at scale. In that sense, market structure has become part of the cost of capital.
The environment in which EM capital markets operate is also changing. Global finance is becoming more multipolar and more regional, with stronger intra-EM flows and a gradual, uneven diversification away from dollar-centric models. Liquidity provision concentrates among fewer, more technologically-capable players, while buy-side institutions are growing in size and influence and increasingly accessing EM exposure through derivatives rather than funded cash positions. Electronification, greater data availability, and improved post-trade infrastructure are lowering barriers to participation, but not uniformly. The result is a two-speed market, where some issuers and instruments benefit from better pricing and resilience, while others remain constrained by thin liquidity, legal fragmentation, or underdeveloped plumbing. Understanding how these forces interact is now essential to understanding EM debt itself.
This piece takes a deliberately practical lens. It is less about whether investors should like the asset class and more about how the pipes are being re-laid while the train is still running. Technology is part of that story, although not always in the way vendors would like. Efficiency is not an absolute goal in credit markets. Execution quality still matters more than process elegance.
Digital adoption is selective for a reason
The asset management community is adopting digital tools selectively rather than wholesale. This is often framed as resistance to change, but in practice it reflects a focus on execution quality rather than technophobia. Different parts of the workflow place different demands on judgment, signalling, and discretion. Treating them as interchangeable can undermine outcomes rather than improve them.
The primary market is a useful example. Large and repeat issuers increasingly prefer investors to place orders digitally. Automated order books and allocation tools save time and reduce operational friction for syndicate desks, particularly in large sovereign, supranational and agency (SSA) transactions where demand is deep and well understood. Digital rails help with straight-through processing, clean audit trails, and fewer avoidable errors.
That logic weakens as issuance moves into EM credit. Pre-deal dialogue often matters as much as the order itself. Portfolio managers may have strong views on governance, policy credibility, or past issuer behaviour, and those views feed directly into pricing and allocation decisions. Communicating that context is often best handled through the syndicate desk, which can frame the message constructively and protect the broader relationship.
Relationship-driven markets can be sensitive to blunt written feedback. A sharply worded message that feels routine in London can be perceived as disrespectful elsewhere, particularly when it is memorialised in writing. The consequence may be reduced allocations, weaker access on future deals, or a subtler penalty, such as being placed at the back of the queue when books are tight. In that environment, the syndicate desk remains a critical intermediary, even as other parts of the process become more digital.
The broader point is that digitisation in EM debt is not a binary switch. It is a sequencing problem. Automation works best where information is standardised and outcomes are not shaped by nuanced dialogue. Human intermediation remains valuable where information is contextual, reputational, or culturally mediated.
Portfolio trading shows where the limits still are
Several large asset managers diversified portions of their USD exposure into other hard currencies during 2025. In developed rates and credit markets, this was often executed efficiently through portfolio trades. The structure is well suited to markets where issue sizes are large, liquidity is deep enough to warehouse risk, and dealers can price baskets with confidence.
Portfolio trading in EM is more complicated for structural reasons that have little to do with technology. Geography is one constraint. LatAm, EMEA, and East Asia sit in different time zones, often managed across separate trading books, which complicates synchronised execution. A portfolio trade is never one trade in practice. It is a choreography of hedges, timing, and risk limits. Time zones turn that choreography into a relay race.
Issue size is the second constraint. Many EM credit positions are sub-benchmark in size. Limited float, fragmented ownership, and inconsistent two-way pricing make it harder to build a reliable exit path at scale. Portfolio trading depends on the ability to transfer risk efficiently. Smaller lines and discontinuous liquidity turn basket pricing into an exercise in confidence rather than math.
The conclusion is that the threshold conditions in EM are different. EM portfolio trades require more judgment, more co-ordination, and more tolerance for execution risk. This is another reason asset managers deploy digital tools selectively rather than universally. In EM markets, efficiency gains must be balanced against the realities of liquidity, geography, and market structure.
Regulation is quietly steering real money toward derivatives
An important but often under-appreciated force shaping EM participation sits outside markets altogether. It is regulatory. For many real-money investors, particularly those operating under Europe’s UCITS regime, the decision to access EM risk through derivatives rather than funded cash positions is not tactical. It is structural.
UCITS does not impose a simple cap on derivatives usage. Instead, it tightly constrains counterparty risk. Exposure to a single over-the-counter (OTC) derivatives counterparty is limited to 5 percent of NAV, or 10 percent when the counterparty is a regulated credit institution. In parallel, funds must comply with global exposure limits and collateralisation requirements. In practice, this framework rewards capital efficiency and penalises balance-sheet-intensive positions that are difficult to fund, hedge, or exit under stress.
The result is a quiet shift in behaviour. Increasingly, real-money investors are accessing EM local currency risk synthetically, using FX derivatives and non-deliverable forwards (NDFs) rather than holding funded bonds outright. This is not about leverage. It is about control. Derivatives allow investors to separate currency risk from cash management, reduce settlement friction, and operate within regulatory constraints without tying up balance sheet. For funds that need to remain liquid, benchmark-aware, and operationally robust, synthetic exposure often dominates funded exposure on purely practical grounds.
This matters for market structure. When exposure migrates from cash to derivatives, the mechanics of liquidity formation change. Price discovery shifts upstream, toward the instruments used to express risk. Liquidity does not disappear, but it relocates. The traditional illiquidity premium embedded in local currency bonds begins to reflect not just issuer fundamentals, but the availability and resilience of hedging and risk transfer mechanisms.
Where offshore hedging markets are shallow or non-existent, and where commercial banks cannot intermediate risk efficiently, pooled risk transfer becomes the enabling infrastructure. In that sense, derivatives are not an overlay on EM markets. They are increasingly the access point.
The implications are mixed. Synthetic access lowers barriers to entry and broadens participation, particularly for institutional investors that would otherwise be constrained by settlement, custody, or funding limitations. At the same time, it raises new questions about resilience. Markets where cash liquidity is thin but derivative volumes are growing may behave differently under stress. Understanding that distinction is now part of understanding EM risk.
Benchmarks, dollars, and why inertia matters
While there is growing interest among institutional investors in diversifying away from the dollar into other hard currencies, the practical constraints are often underestimated. For most EM debt funds, performance is judged relative to a benchmark, and in hard currency markets that benchmark remains overwhelmingly USD-based. JP Morgan’s EMBI and CEMBI families continue to anchor portfolio construction, risk limits, and performance evaluation across the industry. These indices are deeply embedded not just in reporting, but in mandates, marketing materials, and governance processes.
Building a credible track record takes time. Asset managers are typically assessed over a full cycle, with three years often viewed as a minimum. Changing a benchmark midstream is therefore not a cosmetic adjustment. It fundamentally alters the investment strategy and breaks continuity with past performance. Peer comparison becomes difficult, and attribution analysis loses coherence. For a portfolio manager, switching benchmarks can turn a defensible relative performance story into an apples-to-oranges comparison overnight, even if the underlying investment rationale is sound.
Regulatory and mandate constraints reinforce this inertia. Many EM bond Société d’investissement à Capital Variable (SICAVs), open-ended investment vehicles, explicitly prohibit FX hedging. Even where documentation allows a small allocation to EUR, JPY, or GBP-denominated bonds, the inability to hedge currency risk actively limits how far portfolios can deviate from USD exposure without taking on unwanted volatility. In practice, this anchors funds to the dollar if they are to remain benchmark-aware and competitive.
The consequence is a slow-moving equilibrium. Dollar dominance in EM hard currency markets may be eroding at the margin, but it is doing so within tight institutional boundaries. Diversification happens incrementally, often through marginal allocations or parallel mandates, rather than wholesale benchmark changes. The dollar’s role persists not because investors lack imagination, but because the architecture of benchmarking, regulation, and peer comparison makes abrupt change costly.
This is where market structure intersects with incentives. As long as benchmarks, mandates, and reporting frameworks remain USD-centric, portfolio behaviour will follow. Technology can lower friction at the margin, but it cannot override governance. Understanding that distinction is essential when interpreting shifts in EM capital flows. What looks like conservatism is often simply institutional gravity.
Technology, liquidity, and the two-speed EM market
Taken together, these dynamics point to a simple conclusion. Emerging market debt is not being transformed by technology in a uniform or linear way. It is being reshaped unevenly, with clear winners and laggards, depending on where market structure, regulation, and incentives align.
Digital tools genuinely help where information is standardised, liquidity is repeatable, and risk can be transferred with confidence. In those segments, automation lowers friction, improves transparency, and compresses funding costs. Execution becomes more resilient because markets are easier to navigate under stress. This is where parts of EM are experiencing something close to an invisible rate cut. Spreads tighten not because policy has eased, but because the plumbing works better.
Elsewhere, technology meets its limits. Thin liquidity, fragmented legal frameworks, small issue sizes, and relationship-driven market dynamics still require human judgment and discretion. In those markets, forcing digitisation too aggressively risks degrading execution rather than improving it. The result is a two-speed EM market. Issuers with scale, clarity, and access to modern infrastructure benefit from lower risk premia and broader participation. Others remain constrained, paying a premium for friction.
For investors, this has practical implications. Portfolio construction increasingly depends on the mechanics of access. Whether exposure is taken through cash or derivatives, whether liquidity sits in bonds or in hedges, and whether benchmarks reflect investable reality all shape outcomes. Regulation, benchmarks, and technology interact in ways that are not always visible in headline performance but are decisive over time.
For issuers and policymakers, the message is equally clear. Improving market structure is not a cosmetic exercise. Legal certainty, repo eligibility, settlement reliability, and transparent price formation directly affect the cost of capital. Markets that invest in these foundations attract more stable, patient capital. Those that do not risk being bypassed, regardless of macro narrative.
Emerging markets sit at the centre of global growth and issuance. As that weight increases, the distinction between credit risk and market structure risk matters more. Technology will continue to play a role, but selectively and unevenly. The real story is not digitisation for its own sake, but whether markets can intermediate risk reliably when it matters most. In EM debt, that is increasingly the difference between access and exclusion, resilience and fragility, and ultimately between paying the market rate and paying a premium for friction.
©Markets Media Europe 2025
