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Net Spotting:
A technology-led hedging
and spotting solution for
corporate bonds
Chris Bruner, head of US credit at Tradeweb, dives into the firm’s Net Spotting solution
which aims to reduce costs and risk associated around trading US corporate bonds
How are corporate bonds hedged
with US Treasuries and what are the
current risks?
For US corporate bond investors
and dealers, hedging to offset
interest rate exposure with US
Treasuries adds a whole new
layer of complexity in executing
a corporate bond transaction.
These markets are intrinsically
linked with the majority of
corporate bond trades requiring a
corresponding US Treasury hedge
trade. Roughly 90% of US High
Grade credit trades on Tradeweb
are executed with a corresponding
Treasury hedge.
Costs associated with spotting
and hedging are the result of
Treasury bid/ask spreads and
inefficiencies that have long been
embedded in workflows. When
the trade is spotted, there is often
a delay as the trader on the dealer
desk calls the Treasury desk to
get a price before execution, and
up to a fifteen-minute time lag
is common. Not only does this
take time out of a trader’s day, but
48 // TheTrade // Winter 2019
it affects the all-in price of the
corporate bond, which eats into
returns.
What challenges are traders
facing when looking to safely and
efficiently hedge their corporate
bond trades?
At a time when swathes of credit
trades are going electronic,
the stuttering manual spotting
process is increasingly outdated.
It’s operationally clunky, as firms
are trading multiple bonds and
spotting for different benchmarks
throughout the day, and every
trade requires its own set of
workflows. This can impact
execution quality and trading costs.
When facing the challenges
around spotting, buy-side firms
can consider mitigating measures,
such as trying to achieve the
same exposures through fewer
individual bonds. But this would
be the tail wagging the dog. Clients
clearly prefer to expand their
options for tailoring corporate
bonds exposures, not minimise
Chris Bruner, head of US credit,
Tradeweb
them.
Technology, however, provides an
alternative approach.
How is technology addressing the
inefficiencies and risks here?
The Tradeweb Net Spotting
solution has been a multi-stage
evolution through partnership