GREENWICH, Conn. (HedgeWorld.com)–In an efficient bond trading world, where price discrepancies between dealers have shrunk to the point of near insignificance, asset managers and other institutional investors are spending more time examining other ways fixed-income dealers can add value, and using their findings to choose which dealers get their business.
According to a study by Greenwich Associates and The Asset Managers Forum, half of U.S.-based asset managers said operational capabilities play some role in deciding whether to do business with a particular bond dealer, and 60% of respondents said back-office factors are taking on greater importance in their decisions, according to a news release from Greenwich Associates.
Asset manager and institutional investors who participated in the study said they had begun meeting regularly with their fixed-income dealers to discuss things like service levels, standards and escalation procedures. They have also been meeting internally to rank and assess the service they’re getting from their dealers using scorecards and other procedures. This information is then being used to review dealers and allocate trades, according to the study.
“In U.S. government bonds, price differentials between dealers have largely disappeared, and even in investment-grade credit bonds the transparency created by TRACE [the NASD's Trade Reporting and Compliance Engine] has caused prices across different dealers’ trading desks to converge,” said Tim Sangston, a consultant at Greenwich Associates, in a statement. “With pricing becoming more consistent, asset managers and other institutional investors are increasingly able to direct business to those dealers that provide value away from the sales desk. In this environment, operational capabilities and other qualitative measures are taking on a much higher profile.”
Among those capabilities are post-execution processes, client service, technology and a commitment to working on partnerships with asset management firms, according to the study.
Julie Warren, chairman of the Asset Manager Forum and a managing director at New York Life Investment Management LLC, said the information collected as part of the study will help the forum and the Bond Market Association improve operational processes and work with vendors to develop technology. The Asset Manager Forum was formed in cooperation with the Bond Market Association. Its genesis was the need for buy-side and sell-side professionals to pursue work together on industry-wide securities processing and operations projects and enhancements. Its main mission is to give voice to the buy side in addressing securities operations initiatives.
“The increased use of e-trading platforms provides new opportunities for automation of the trade communication, allocation, and confirmation processes,” Ms. Warren said in a statement. “These efforts support the ever-important need to manage costs, enhance controls, improve operational efficiency, and ultimately service our clients. While best execution will always be the key driver in counterparty selection, the role of operations in effectively managing post-execution activities will play an increasingly important role.”
Contact Bob Keane with questions or comments at email@example.com.