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Garbi: “JPMorgan and Morgan Stanley |
MTS, the European interdealer bond trading platform, is planning to create a new index for euro sovereigns.
The move looks set to give rise to a range of new derivative products. But the quality of the platform’s data alone will not be enough to ensure success for the index, and some banks, including MTS shareholders, are reluctant to support it.
The product will initially give daily closing prices and reference prices for sovereign bonds from all 11 eurozone countries. A little later, updates will appear hourly. They could later be transmitted in real time.
MTS will use algorithms created by the French bond index provider CNO to feed out prices. Those prices will then be sent to a third party that will create and disseminate the index. The identity of that third party is likely to be announced this month.
The key advantage that MTS has over the rival index providers is the quality of its data. Gianluca Garbi, chief executive of MTS, says: “All MTS prices are tradeable. What you see is what you get.” This is because the trading platform demands mandatory market making from its dealers, so no matter how wide the spreads there is always a price available on all of its euro sovereigns. And it is those dealable prices that will make up the index.
Garbi says: “Today, JPMorgan and Morgan Stanley have their indices. These are well done but a fund manager cannot replicate it. You can see securities but they are not really tradeable.”
And the platform certainly has enough data to be meaningful, with monthly trading volumes of around e80 billion.
Other points count in the favour of MTS. For example, trading rules for all bonds on the platform are homogeneous, making it easier to produce consistent prices.
Also, MTS itself does not take positions, so it is independent, and the ability of one dealer or a small group of dealers to influence index levels is constrained.
So the new index will stand a good chance of, at the very least, showing accurate prices. It will also offer some analytics services.
And on top of that, it stands to make good revenue from licensing out its intellectual property and enabling banks that do not run indices to create derivative products based on the MTS index.
That will give those banks the chance to build a business out of these products without the expense and complication of managing an index themselves.
But that development is at least two or three years away, and, sadly for MTS, that is where its natural advantages end.
Once fund managers find an index to follow, they are generally reluctant to switch, unless the provider makes a significant mistake. Fund managers do rotate the indices they follow but when they select a new one, every two or three years, they normally pick another index from the original provider. So established index providers such as JPMorgan probably have little to fear.
Sales and marketing gap
On top of that, without the sales and marketing support that banks’ own indices enjoy, the MTS index will struggle to gain a foothold with fund managers.
Added to that, the problem of index prices being unavailable for trading is less significant in this liquid market.
Lee McGinty, vice-president of quantitative strategy at JPMorgan in London, says: “I would agree that pricing is a big issue, especially in credit. But in government bonds I would challenge anyone to say they will be very far away from us on price.” What’s more, unless any dealer can create a range of index-based products, the value of that index in itself is limited.
JPMorgan, for example, offers a range of instruments to give investors exposure to government bonds such as options floors and derivatives products.
These are generally traded over the counter, and at that point it is the quality of the traders that makes the difference to clients.
The bank also offers related services such as performance attribution reports, index monitors and historical data. Again, those services can outweigh the advantages of super-accurate data for clients. Nonetheless JPMorgan plans to continue adding products to that benchmark.
McGinty says: “We are not going to sit on our laurels. We are always adding new services and analytics.”
So not only will the MTS index be competing against its shareholders’ own indices – it will also challenge an index based on data from a group of those shareholders.
That means that some board discussions have been strained up to now. And without shareholder support, the project cannot go ahead.
