An interview with Fabrizio Testa, Head of Fixed Income Trading at Euronext.
What are the components of Euronext’s fixed income offering today?
Following the acquisition of Borsa Italiana, Euronext has reinforced its leadership position as a worldwide fixed income business. We want to strengthen Euronext’s position, by expanding the European footprint of MTS and by facilitating SMEs’ access to debt capital markets through the Borsa Italiana franchise. Euronext will broaden the offering to improve the end-to-end debt financing value chain.
MTS is the leading fixed income trading platform in Europe, number one in Europe for D2D European Government bonds trading, number one in Italian repo trading and number three in Europe for D2C European Government bonds trading. As part of its mission to finance the real economy, Euronext has also offered to the European Commission, subject to ongoing negotiations, its MTS platform as a platform for the secondary and transparent negotiation of bonds issued within the NextGenerationEU recovery programme.
Borsa Italiana has a strong franchise in the fixed income space, with the MTS, BondVision, MOT and Euro TLX platforms. Its markets have full vertical integration; listing, trading, clearing and settlement, with control of post trading via Euronext Clearing and Euronext Securities Milan. They cover Italian govies, European govies, corporate and emerging market names, in particular on TLX.
The Euronext legacy market has a retail fixed income trading system on the Continent with a single order book, a MiFID regulated market, trading credit and government bonds. Members and liquidity providers are mainly Tier 2 and Tier 3 firms, prevalently from Euronext countries. Bonds traded are issued by local issuers based in Euronext countries. It’s a cleared model, via LCH SA and the settlement is performed through Euroclear, National Bank of Belgium and Euronext Securities Porto.
In Oslo we manage a regulated market and a non-regulated platform called Nordic ABM, with members reporting institutional sizes. The core activity of our Oslo market is OBOE reporting of OTC trades by local members, with bilateral settlement, so very different but complementary models.
Could you give more detail on plans for aggregating or harmonising the offerings that you have today?
From a technical standpoint, we have started to work on the migration of MOT, ExtraMOT and TLX infrastructure, as they will be integrated into Euronext’s proprietary Optiq trading platform. Our customers will have a single access point to all these services. The Euronext legacy fixed income market was created as a copy of the equity market, whereas MOT and TLX have a number of functional features that are very specific to fixed income markets. This adds value for all members because features integrated from MOT and TLX will also benefit the Euronext model.
The second level is the model. Today we have multiple pools of liquidity, fees, and liquidity provision schemes and member roles in the market. We need to evolve the existing model with the objective of promoting cross-membership and developing execution and liquidity provision on the markets.
Now that we have Euronext Clearing within the group, our objective is to further integrate the post-trade process vertically to the benefit of members and to facilitate cross-membership, especially considering how critical post trade is to fixed income markets.
And MTS has a different plan?
MTS has a different infrastructure from a technical point of view and remains in a more independent position but that shouldn’t stop us from seeking a solution that aims to integrate our service to the customer. We need simplification, offering scalable, more cost-efficient solutions.
When we talk about the integration on the platform does that mean a single interface or more fundamental integration behind the scenes?
Members should get access to larger pools of liquidity, especially if they choose to be cross-members of Euronext and Borsa markets. Bonds will remain listed on each local market. The trading workflows will be identical because this is included in the Optiq integration, but fundamental integration will depend on implementing more consistency and ease of access across the portfolio services offered by the Euronext Group.
In post trade, we want a solution that allows customers to decide effortlessly which kind of set-up they want. In fixed income the real cost remains in post trade. The Italian model is fully integrated and fully automatic with Euronext Securities Milan (former Monte Titoli), Euroclear and Clearstream. The goal is to open the door to a solution that permits the Euronext legacy market to have the same facility so customers can trade and execute in different pools of liquidity, while having the same technical infrastructure. At the same time, we want to leverage our strengthened settlement footprint. Euronext Securities, our CSD network, registers and settles more than €4 trillion of bonds across Europe. We believe there is an opportunity for market participants in the bond market to leverage more intensively Target2-Securities, the ECB settlement platform, and Euronext Securities provides a very efficient gateway to it.
What material effect will all this have on users and members?
We want to keep our direct members and consistently admit new ones because there is value in a market with a broader and more diverse membership base. With the aggregation of European firms across the sell side and buy side it is important that we offer solutions to support local brokers to stay in the market and provide liquidity. We have a very open, interactive relationship with liquidity providers to help us understand which products are useful to put on our platform. It is fundamental to support more securities listings but also to create a secondary market.
In the past Euronext was asked by members to dual-list bonds that were primarily listed on other European stock exchanges such as the BME. Regulation on regulated markets prevented that. But now that we have a multilateral trading facility (MTF), TLX, in the group, if a member wants to trade a bond listed in Spain or Germany, we will be able to do this very easily. If we manage to develop cross-membership, customers could see a significant increase in available counterparties and unlock powerful network effects to their benefit, triggering additional flows from new liquidity providers that today are active on only one market.
How will your future model support the different elements of a trade’s workflow?
As an aggregator of different pools of liquidity, traders have a choice in terms of product trading platform, and post-trade solution. The idea will be to automatically scan the different pools of liquidity the group offers and respond with an execution almost instantaneously. Functionality tailored to specific users, increasing choice in workflow, is also high on the agenda.