J.P. Morgan has completed the first fully electronic standardised total return swap (TRS) based on IHS Markit’s iBoxx USD Liquid High Grade Index, through the Tradeweb Swap Execution Facility.
A TRS allows corporate bond portfolio managers and traders to express an immediate macro opinion on the direction of an index.
In exchange for receiving exposure to an index over a set duration, clients (the index receivers) pay a counterparty (the index payer) a financing rate.
This makes the TRS a capital-efficient tool for both adding risk or hedging exposure, Tradeweb says.
While a TRS can be executed on custom baskets of bonds, liquidity is generally concentrated around major indices.
This environment is conducive to electronic trading, which helps to make price discovery more efficient, and streamlines the end-to-end trade lifecycle.
While credit default swap (CDS) indices remain the most liquid credit derivatives, use of a TRS is growing because they mirror an index precisely, without tracking error or deviation, says Tradeweb.
Tradeweb Markets is a global operator of electronic marketplaces for rates, credit, equities and money markets. Tradeweb says its global clients can now trade TRSs on every iBoxx index.
In 2020, approximately $100 billion in iBoxx standardised TRSs were traded.
Chris Bruner, head of US institutional fixed income at Tradeweb, says: “We are focused on building an electronic market for every credit trade.
With the addition of TRS trading, we have rounded out a comprehensive suite of directional products including CDS, exchange-traded funds and portfolio trading that allow our institutional clients to express a macro credit view.
“We already operate one of the most complete credit trading platforms in the global fixed income market, and are excited to collaborate with our customers to expand optionality and liquidity once again.”
Trading volume in global cash credit has more than quadrupled over the past four years at Tradeweb, and in February 2021, Tradeweb handled more than 19 per cent of US high grade TRACE volume and more than 7 per cent of US high yield TRACE volume each day.
CDS volume on Tradeweb has tripled since 2017. Tradeweb also facilitates bond ETF trading, handling more than $260 billion of institutional volume globally in 2020.
Frans Scheepers, head of US fixed income indices at IHS Markit, adds: “As we continue to see a growing demand for liquid credit index derivatives, electronification is the natural next step in the evolution of standardised total return swaps, and it supports the market’s growth and adoption of these products.”
Will Haber, head of North America macro credit trading at J.P. Morgan, further states that the iBoxx TRS product set “offers compelling advantages for investors and we expect adoption and volume growth to increase following this first electronic trade”.
