By Dr. Christian Zimmer, Head of Quantitative Portfolio Management, Itau Asset Management.
Brazil is a tropical country with fruits that can’t be found in most other countries in the world. The jabuticaba is one of these fruits. The thing that makes the jabuticaba interesting is that it grows on the trunk of the tree and not on the branches.
This fruit is often used to represent an interesting part of Brazil’s culture when it comes to IT and financial solutions: things are done differently than in other main international markets. And sometimes the jabuticaba analogy is used to justify a status-quo. Change is never easy, and we can see this in the fixed income markets in Brazil.
The actual fixed income market is obviously more liquid for government bonds than corporate bonds. The average daily number of transactions from Jan/14 to Oct/14 of government titles was 2,680. This is equivalent to an average daily financial volume of ca 22.5Tri BRL. Compared to the same period in 2013, this represents a decrease of around 13.5%
All public papers are cleared at Selic, a unit of the Brazilian Central Bank. Private titles are not registered at Selic although private entities may receive permission to do so. However, corporate bonds are registered with Cetip, the local depository for OTC, private securities and derivatives, which as of Sept 2014, housed 5Tri BRL, representing 97% of the Brazilian market. The BM&FBovespa is their biggest competitor.
When it comes to trading, actual liquidity represents only a small fraction of overall volume. With the use of the Delivery for Payment principle, it is fundamental to have access to the registration of the paper’s owner. This explains why, contrary to the equity market, the electronic platform for bond trading of the BM&FBovespa does not show any liquidity. As alternatives, one might trade public and private bonds either on the 2013 created Cetip Trader platform, or the TSOX interface from Bloomberg.
Cetip’s platform has mainly flow from local Brazilian players. Regulation for Brazilian funds demands publishing trades of private bonds at the REUNE system from Anbima, the local fund regulator. The objective is to obtain more transparency on prices. Cetip Trader is, right now, the only trading platform certified for direct integration with REUNE.
Bloomberg’s TSOX solution has a better insertion in the international market and thus shows mainly north-south flow. Most of their clients are not subject to Anbima regulation so the integration with REUNE is not an issue for them.
Throughout 2013, starting from March when Cetip Trader went live, 100Bi BRL were traded at this facility. During the first nine months of 2014 93BiR$ were traded, thus showing signs of stability. Observe that this is not daily volume, but accumulated, thus representing a very low fraction of the overall market. Trading activity with the Bloomberg interface is higher, showing about 60Bi BRL in the last three months – equivalent to an estimated 180Bi BRL for nine months.
Curiously, the FIX Trading Community (FTC) best practices document for cash bonds – as of version 5 from May/2014 – interprets Brazilian bonds, as well as venue to buy-side connection as out of scope. Why is this so? Having Brazil not on the global landscape is not surprising, but the communication between venue and buy-side is a relevant practical issue in Brazil.
The trading situation in Brazil, until now, has been characterised by direct buy-side interactions. This is partially caused by the fact that a big part of the volume is traded by bank-held asset managers and moved via their own treasury firms. Within this universe, individual counterparty restrictions apply. The typical broker task of facilitating access to the exchange is thus not obligatory. The setup is more like in an FX market where the final counterparty is exposed. The possibility and necessity to define which counterparties can be traded with is a functionality that should be configurable within the platform.
The Cetip platform shows the dealers’ offers and not the final counterparty. This is an expected behavior. But, how can the buy-side be convinced to use a dealer when the actual buy-side to buy-side trading avoids any kind of brokerage fees? The flow at Cetip Trader is mainly caused by manual entry on Cetip screens giving the buy-side direct access.
Recently, Cetip released a FIX interface. It is expected that this helps to get more flow from electronic trading and portfolio management systems. The solution for Cetip Trader uses FIX 4.4 and is based on the ICE technology also used for Creditex Realtime and ICE Swap Trade. The two latter platforms are actually on FIX 4.2. For trading at Cetip, the custom tag 9883=IDB can be specified. The 4.4. FIX connection for bonds allows us to trade different instruments, identified by the custom tag 9802 for the trading sector: Brazilian Bonds (9802=BZD), Brazilian Casadas (CSD), Brazilian Corporate Bonds % DI (DDI), Brazilian Corporate Bonds DI+ (DIS), Brazilian Corp. Bonds price traded (DPU), inflation linked corporate bonds (IDI), prefixed corporate bonds (PFA), inflation indexed Brazilian Govt. Bonds (PIC), indexed Brazilian Govt. Bonds Long (PIL), prefixed Brazilian Govt. Bonds Long (PPL) and Short (PPC), and post-fixed Brazilian Govt. Bonds (PUP).
The 9801 tag defines the code of the instrument type, thus should be “B” for bonds. Finally, the 9701 tag has an interesting feature that might be used for contemplating the necessity of direct buy-side accesses versus dealer-intermediated trades. It is used to represent the trade source and can have, among others, “K” for block trade, i.e. an already arranged trade between two buy-sides.
As a result of low liquidity in the secondary market, position adjustments are often made by direct fund transfers. One possibility to achieve this is with RFQ, message type R. The quote request type would be “FundTransfer” (303=99).
In general, it can be observed that the Cetip FIX solution is making massive use of the custom tags in order to specify all the details the bond market has to offer. As this FIX interface is still new and now being promoted in the local market, it is this flexibility of custom tags that can and should be used to further promote liquidity. For example, it may be of help to converge the different interests of dealers to be the intermediator at the trading venue versus the buy-side interest to work on pre-defined counterparty position transfers.
With the help of the international standard from FIX, based on the ICE FIX-engine used for other markets, expectations of the local participants are that fixed income trading will not result in a new Jabuticaba tree. During the 2014-FIX Trading Community conference in São Paulo, it became clear that the strong and focused local community is highly inclined to plant something more like a coconut tree.