Erste Group: Adding valued regional trading expertise to your execution capabilities

The uncertain rate environment and inflation picture combined with the search for better investment returns and optimal hedging is driving investor interest for swaps as well as cash markets for fixed income. Goran Hoblaj Head of Group Fixed Income Securities Markets at Erste Group Bank AG provides insights into how clients can benefit from working with regional traders.

 

Access to regional market makers has increased significantly due to the use of electronic platforms. We have seen a real uptick in activity across fixed income including cleared interest rate swaps as the rulebooks of electronic platforms such as Tradeweb and Bloomberg have captured everything necessary to cover cleared swaps trading. Their rule books cover all parts of the cleared derivatives execution agreement (CDEA) which means the CDEA contract is not needed anymore between counterparties if they trade electronically as everything is covered in the rulebook of the venue.This was a barrier in the past for regional market makers to reach big asset managers. 

 

Going through this documentation process was historically a difficult part for regional players like us.For investment managers connecting with us directly this gives them access to a dedicateddealer team who are very experienced. For example our trading desk team has an average of 17 years’ experience in trading and sales.

 

Experienced traders have gone through several challenging situations already and they know when and how to take risk. That said on the other side we also have the support of younger quants and programmers to maintain the way we can trade electronically. Getting a specialist knowledgeand also language skillset with on-the-ground understanding of local and regional markets allows access to better pricing and liquidity. Taking a more intermediated route via global players adds circuits to this when they use regional banks as well so this model reduces intermediation and therefore both cost and complexity in trading.

 

Having native speakers is a simple and key advantage. In my team we have for example a Hungarian trader for Hungary Romanian traderfor Romania Czech and Polish for the Czech and Polish markets Austrians for Austrian govies and credit Croatians for Balkan countries and moreso. They can read the market more effectively than non-native speakers and as a result they are able to assess risk and process information more rapidly.

 

What does that mean practically for traders?
You’re getting very detailed, granular information with nothing lost in translation. At the same time, by accessing us via an electronic platform, you’re taking the economics of multilateral liquidity and pricing access. That enables you to get access to the best liquidity efficiently.

We are facilitating the flow between clients who are present in the CEE region and those trading out of UK, Western EU, Middle East or Asia. One of the key risks international investors face from not being based in the region is, that local culture and communication may be misunderstood. When you are talking about ministries of finance or central banks’ announcements, that can have a significant impact.

How are those risks affected by stressed markets?
For example, one of the world’s biggest asset managers pointed out that during the Covid volatility in March 2020 we continued to support the market liquidity, when it generally dried up. It was key for us to continue supporting liquidity in CEE bonds, as this directly impacted clients’ ability to service end investors and cash flows.

In facilitating the flow between different counterparties, we have the support of the balance sheet as the bank always must hold locally issued bonds. Erste Group is the bank with overall biggest balance sheet exposure to the CEE region.

What is the current focus on inflation having upon market activity?
Some asset managers and pension funds are even more active in the derivatives than the bonds of local currency markets, because they might find better liquidity there. We see firms combining both derivatives and bonds to get the exposure they want, for example, with overlay strategies.

Even with the currently slowing inflation, it is still quite high on the agenda and is impacting assets in different ways. The uncertainty around the future direction means that asset managers and analysts have very different views on positioning and investing. Those very divergent views on whether there will be a continuation or slowing inflationneed to be expressed and the perceived risks to be identified and mitigated.

 

So using the greater capabilities for hedging via both derivatives and cash bond markets is very useful. We support a range of products including international money market (IMM) forward swaps and facilitate quarterly roll-overs within our swaps quoting service, as well as list requests.