Mohit Bhargava: Hi, I'm Mohit Bhargava. I look after the global credit structuring team here at JPMorgan.

David Rademeyer: And I'm David Rademeyer. I lead America's equity structuring.

Mohit Bhargava: So, David, what do you think equitization of credit really means?

David Rademeyer: Well, over the course of my career, I've seen a starting point where equities and credit really had very different market dynamics where credit kind of traded by appointment or point-wide, equities were trading on exchanges. They were already decimalized by the time I started. And what I've seen over the last 10, 15 years, and I imagine you've seen much more closely, is a lot of convergence with daily trading volume, market debt for market completeness, really converging the ways that people trade. My sense where it really started was the ETFs, which obviously being an equities person, we were looking at very closely and we were users of in the derivatives business going back to 2010. I remember having conversations in the early 2010s with EM traders, we were asking if you wanted to trade the EM bond index, how much could you trade in a day in like $25 million?

And I was like, "How would you do $100 million?" And looked at me, startled and said, "Well, there's a price for everything." But little did he know we had strategies that were trading $600 million of the EM bond ETF in a day, and we were able to do that for six bips of slippage. Obviously, the credit trade has caught on pretty quickly.

Mohit Bhargava: Yeah.

David Rademeyer: Obviously you've seen that. Love to hear from your side.

Mohit Bhargava: Yeah. And I think it's been a journey, as you said. I started in 2007 at JP in London, and the way we used to trade credit back in the day was through dealer chats. You would engage with multiple dealers, try to find the best price and execute. That's obviously evolved massively. I think it started with what I would call electronification of credit, not so much equitization to start with because when it came to derivatives, we started moving away from those dealer chats and we went on to SEF, which is swap execution facilities. And we started clearing those trades, especially indices like CDX iTraxx. When it came to bonds, we have APIs and electronic trading platforms from dealers and other parties that are out there to trade cash bonds more easily than through chats and so on. So, it became more sort of a, how can I make it more sort of an electronic platform and make it more efficient that way? But it's now taken a shape of its own.

And I think with the growth, as you said, of ETFs, which has led to the growth of portfolio trading and vice versa, because portfolio trading leads back into ETF growth as well. And customers have become used to trading long lists. We've seen more and more volumes going through credit, which has meant lower costs, more liquidity, and ultimately a more efficient market, which arguably is now attracting more different types of investor clients who were not part of the credit market before.

David Rademeyer: Yeah, absolutely. I think when you look at equities, electronification happened on the derivative side in the 80s, happened on the cash side in the early 2000s, around the time of the peak of the dot-com bubble. And by the time I joined already, people were executing through algos because the people that they were facing were algorithms themselves and you had to keep up. But also they had different ways of being able to trade. You could trade a portfolio of equities where you're really just targeting aggregate statistics in terms of average market cap and other factor concentrations, and banks were able to show a price. And obviously the credit ETFs created a lot of price discovery on the credit side, which were really helpful, but also they created a need amongst the market makers and the credit ETFs to be able to trade bonds the same ways in order to be able to satisfy the create/redeem.

And although I was observing this from a distance, really saw our colleagues in credit trading step up to be able to facilitate that so that the market makers could find a basket that fit the dealer's inventory and also fit the ETF provider's requirements. And that was technology that wound up being incredibly useful, not just for the market makers, but also for a lot of credit portfolio managers, a lot of insurance companies and other clients that I've spoken to. As a specialist, I'm curious, what did that look like up close?

Mohit Bhargava: I think there are two factors with technology in credit. One is when it comes to making markets on bonds, we don't have a single ticker. We have even take Apple, for example, it has a single stock that you can trade. Whereas on the bond side, you have more than 50 bonds of Apple itself. To make markets on those many bonds, to be able to see the two sides of the market, to be able to anticipate whether you can exit that risk or not, was really, really difficult. Technology helped in that. We are able to build those platforms that can cross these flows. There's algo trading, which is coming to help market makers take position on one bond and maybe sell a different bond, which is highly correlated and take that, extend that from bonds to lists and portfolios. Similarly, with the advent of ETF and the expansion of ETFs, market makers were able to expand the growth of portfolio trading and hedge with ETFs and that ecosystem. So, the whole continuum between algo trading, electronic trading, all the way to portfolio trading and ETFs has been enabled by technology.

David Rademeyer: So, we've already touched on ETFs, but the next front in the centralization of liquidity in these standard products has been in futures contracts and some of the corporate bond index futures. Can you tell us more about that?

Mohit Bhargava: Sure. So, I think the corporate bond index futures, I have been there for a while, but they really came into popularity sort of 2023. So, last three, four years, we've really seen the volumes increase. The advantage of those is that you don't need an ISDA. You can trade with the exchange, you post an IM, which is generally fairly efficient, and you can net that against other trades. So, what that's doing is basically bringing a lot more participants into the credit markets, which has been difficult in the past because of these huddles.

David Rademeyer: So, we've talked a lot about the centralization of liquidity that the ETFs have created, but another really interesting product that's grown up in the last few years has been the credit index futures. Could you tell us a little more about that?

Mohit Bhargava: Yeah. Credit index futures have been around for a while, but they grew in volume over the last three or four years. The advantage of credit index futures is basically they trade on the exchange. So you don't need an ISDA to trade. You post an IM, which is fairly efficient. So, it's attracting a lot of people into the credit markets to express their views in this manner which they couldn't before. So, David, from your perspective, now that we've talked about what equitization means, how do you think from a, let's say an outsider's perspective or client's perspective, how do they see the credit markets today?

David Rademeyer: I think it's pretty different. Obviously there's been a growth in the number of issuers, number of issues, but also I think the market really used to be one where the dominant strategy was to try to buy new issues and then hold them to maturity. And so, building up a portfolio could take a really long time. We were at a conference which we co-hosted with Vanguard talking about their new actively managed bond funds. And the head portfolio manager there was talking about how seeding a fund used to take a month and now you can just identify what the characteristics are and you can just trade that with very low turnover. You're much more able to source secondary market liquidity and really trade it like an asset class as opposed to by appointment.

Mohit Bhargava: And I think even from the issuer's perspective, it's probably much more efficient to issue in the public markets because some of that risk premium is probably going away with more liquidity. So, David, we've talked a lot about how credit is becoming closer to equities in terms of higher volumes, better liquidity, lower costs. Where do you think that goes? Do you have any blue sky ideas around where it could go in the future?

David Rademeyer: Yeah. So, in equities, we started out with SPY, then we got the Qs, and then we've seen a real proliferation of the different types of trading tools that people can build with ETFs. And I think we've seen similar things on the ETF side. I think 15 years ago, credit ETFs meant HYG and LQD, maybe JNK, a couple of others. And obviously there are a lot of ETFs that are trying to compete directly with that, but we've also seen liquidity moving into more targeted, more tailored products. So, the short-term, medium-term, long-term credit ETFs, some of the target maturity ETFs. And I think the next evolution is probably going to be in terms of things like sector ETFs or maybe even for some names, single issuer ETFs to allow people to express more tailored positions, factor ETFs and such, which have been very popular on the equity side.

Mohit Bhargava: Yeah. And I think that probably makes sense to talk a little bit more about the different products on the structures. So, given you from the equity structuring, I'm from credit structuring, what kind of products do we think are things that we should be working on and or are working on already?

David Rademeyer: Yeah, so we're always kind of the flea on the dog of the market. And so, we really rely on the liquidity and the underlying categories. But on the pure derivative side, it's really exciting to see these increases in liquidity because it allows for a lot of different kinds of derivative products to be created that would be impossible in less liquid markets. There are a lot of volatility derivatives, different types of option payoffs which have existed for a really long time on the equity side, 25, 30 years, barrier options. Options that knock out if the volatility goes up, which can provide cheaper protection for a specific view, which really were the domain of the most liquid equity indices. And increasingly we're starting to see clients trading those on credit ETFs.

Mohit Bhargava: I agree with you. I think on the payoff side, there's a lot of innovation that we can achieve in credit now. There's obviously been a lot of innovation so far on the derivative underlyings with iTraxx, CDX indices, and now we are seeing more on the bond side as well.

David Rademeyer: Yeah.

Mohit Bhargava: And a lot of what we look at on my side, when we look at new payoffs, we look at what was done in equities before, because for many years, you just had so many variables to play with and we had limited. So, as we get more and more liquid points around different parts of our market that are tradable, I feel it gives us more on different payoffs.

David Rademeyer: Yeah.

Mohit Bhargava: Apart from payoffs, though I also think there is things like relative value between credit and equities where credit is sort of considered as a similar to a put option on a stock, right? So, take a single company, for example, you could either buy a CDS protection or you could do a put. Do you think that is becoming, from your perspective, more of a dynamic in terms of relative value now that credit is in the same category as equities in terms of liquidity?

David Rademeyer: Yeah, absolutely. I think definitely a lot of macro hedge funds now have a derivative expert who is thinking about, "Well, given the house view on what is going to happen in markets, what is the most efficient way of expressing that view?" And so that could be an actual outright relative value trade, but also it's just that there was a point in time where if somebody had a view, even if it was a credit cycle view, they would've had to express it through foreign exchange or interest rates or an equity option. And increasingly they're able to just directly express it through credit, which is very interesting development.

Mohit Bhargava: Yeah. And as you said, it not just lends itself to relative value, but also looking at different asset classes to see which is the cheapest option, for example, like if there was a war hedging against the next economic cycle and so on. In terms of developing strategies, systematic strategies, I think there's a lot of... So, talking about my experience in credit, because when we started, I was still back in London in 2013 when I looked into, or we started looking into QIS strategies in credit. And at that time it was very difficult to create something which was a systematic algo in credit because you really had only few points that were tradable and had an observable third party price. And those were just the main CDS indices. Now that we have more points along the tenors, along different points on the curve in CDS indices, and also for single-name CDS and bonds ETFs also, it lends itself to a bigger space in the credit QIS and systematic space, right?

David Rademeyer: Yeah. I mean, I think one of the things which I'm watching with great interest, which is on the pipeline, is that we're seemingly very close to being able to bring to market swaps on indices of actual corporate bonds for clients who want to express specific sector factor or just hedge out aggregate beta in a more cost-effective manner. It's not just the ETFs or the futures now. How far away do you think that is and what do you think are going to be the most popular ways of using that technology when we have it?

Mohit Bhargava: So, again, we've taken the equity playbook on this one. Equity Delta One has been very, very successful. We've taken that playbook in credit. We have thematic baskets or basket which are essentially sleeves of the indices and that are out there already today on Bloomberg. So, you can actually go and trade those standardized baskets on the click any day, anytime. What we plan to do is build on those baskets because right now they're designed as sleeves of the broad index or fairly topical baskets. And the next step in this evolution is going to be systematic strategies along the lines of what's happening in equities using these baskets.

David Rademeyer: The other thing that we've seen in terms of convergence is one of our most successful products and one of our top priorities on the equity structuring side going back a decade has been our Nexus platform, which is used for a lot of different applications for clients who want to be able to manage their own strategies and absorb them synthetically. But one of the products that is called Nexus Prime RMAR, which is a product that allows you to create a managed account that clones your master strategy and then deliver the performance of that account synthetically, very useful for liquid alt strategies, for example.

And one of our first clients, I believe our first client with the US hedge fund as allocator, was a client who wanted to be able to do a relative value strategy, equities and corporate bonds. And we were able to deliver that in a single managed account, deliver that as a single swap, which is obviously a trade that we were very excited to work on because we love to be able to solve our clients' problems, but also very exciting to be an innovator in terms of being able to straddle different asset classes.

Mohit Bhargava: Absolutely. And I don't think that's a one-off, right? Because we see a lot of pods on the buy side that are looking at credit and equities together now because you have in credit similar indices and similar platforms as well like Nexus you mentioned where you can exercise your strategy and the building blocks are very similar to equities. So, combining different building blocks and putting them together in Nexus is becoming easier and easier.

David Rademeyer: Yeah. So, obviously this is all really exciting and as structurers, we're always thinking about how could things go more right? But I'm curious, where do you see the limitations? What is as far as we can get based on the current trends?

Mohit Bhargava: So, in my view, and I think you and I have talked about this before and you might disagree with me, but I think in my view, there is a limitation to how far this can go. Naturally, credit has a lot of... Like for each corporate, there are lots of different bonds with different terms, different maturities, coupons and so on. And that just makes it harder inherently. We can help with technology, ETFs have helped and portfolio training have, but that inherent nature of the credit market will remain. So, there is a limit to how far we can take this.

The second thing in my opinion is the liquidity on the ETF, credit ETF market in particular, has not been tested many times. It was tested during the crisis that we just went through in April, we saw the crisis during COVID. In both of these crises, what we saw is that it was a very useful tool for hedging if you are hedging on day zero, but after that, it was trading at a very large basis to NAV.

David Rademeyer: Yeah.

Mohit Bhargava: So, it is a very useful tool to have, but you want to have other tools in your arsenal as well that you can deploy based on where the ETF ends up versus the rest of the credit market.

David Rademeyer: Yeah. And I think that that gets... Ultimately, the disagreement is the credit guy thinks that NAV is reality, the equity guy thinks the ETF price is the one that's real. And that I think is going to be the thing which is going to be the challenge here is as credit markets become more liquid, I mean, it's possible that it's just the ETFs went up trading closer to NAV with the same volatility as NAV has. But my bias is to think that it's more likely that just as prices become more transparent, as they become more real time, we're just going to see a lot more volatility in the credit market in the same way that we do in the equity market. And as you and I know, that's not always what clients want. They say they love transparency, they say they love liquidity, but then when their portfolio marks to market 10% in their face, they look wistfully at the private markets and think, "Isn't it nice that this price goes down so little and so slowly?"

I'm curious, even though it hasn't equitized per se, but obviously the big story in credit these last few years, other than the equitization is private credit, do you think that there's any overlap between those two things?

Mohit Bhargava: So, if you think about equitization as making things more liquid and more transparent, then definitely private credit is just the opposite. But the way I think about equity markets, and again, maybe this is from an outsider's perspective, is equity markets have two parts. One is the deeply liquid equity markets that have been around for so long, and there's also a private equity market that has been around for a very long time. So, the growth of private credit is not a contradiction to equitization of credit markets, it's just completing that there are two parts of the market.

And again, private credit has been there for a while, it's not new, but is growing. And what the two phenomena of making public credit markets more liquid, what we started off by saying that's the equitization of credit. And the other phenomena of the growth in private credit markets is basically giving you this sort of a barbell for both investors and issuers in terms of two very different options to exercise for the investor's perspective, they could trade the public markets much more efficiently to have that view, or they could go to the private credit markets for an extra premium if they can understand the companies and have a longer term views. And similarly for the issuers, it's about getting a much more efficient execution in the public market because of the compressed premium arguably, or they could go to the private credit markets where they get customized terms or speed of execution.

David Rademeyer: So, Mohit, we've talked about why there's more participation, there's more different types of strategies that people are implementing. Why didn't people do this before?

Mohit Bhargava: I think pre-GFC, there was a focus around derivatives. And a lot of my people in my seat were building complex CDOs and other structured products on the back of corporate credit, and that was actually big volumes. That was selling a lot. It was reaching the retail clients as well. After the Global Financial Crisis, I think was a reset in view of how should we think about credit. Now, the CDS and CDS indices exist, but from a mass acceptance perspective, there was a desire to have a more cash-based product and focus more on cash liquidity than just synthetic derivatives. So, over the last 15 years or so, there has been push in that direction, but a lot of this is up to the acceptance from investors at large. And once they accepted ETFs as a way to express their credit views and list trading, portfolio trading as ways to express views on credit in large sizes, that just sort of snowballed into a big phenomena.

And now we see the structural change in the credit markets. There was a bit of a reset in 2007, 2008, and it took a while to get back to a different approach. And I feel like with the cash market, both on the single bonds, ETFs, portfolio trading, that whole continuum is now complete with algo, and now there are more and more hedge funds who are looking into the high frequency trading in credit, which was something which is only a domain on the equities side in the past.

David Rademeyer: I mean, I'd say from my vantage point, it feels like the credit markets have always been around, they've always been really big, but historically they were really an investor's market just because with the lower liquidity, if you tried to be more tactical, bid-offer would eat all of your alpha. And now with all of these different tools, it feels like there's actually scope for an actual trader's market for people to be able to generate alpha net of transaction costs and have much more dynamic strategies. Would you agree with that?

Mohit Bhargava: Absolutely. There are two things that come to mind when you ask me that question. One is the absolute level of cost itself. And we've seen data where the costs have actually come down tremendously, in some cases, 20% to 25%. The other thing that's happened is what we look at is the cost-to-VaR ratio. And I'm not saying that credit markets have become more volatile, but necessarily, but I think you're able to go in and out more easily and the cost that you pay versus what you can achieve by just the movement in the underlying prices makes it much more palatable for our customers to come in as a tactical view rather than just a long-term hold to maturity sort of view.

David Rademeyer: Is it also easier with the technology to actually screen for ideas to express a view as opposed to just having to look at what are the bonds that your dealer has an inventory and wonder if they fit what you want to do?

Mohit Bhargava: Definitely. Like I said, previously, we had a situation where you would look at prices from dealer runs, and if you go to the dealer and ask, "Where does this bid or offer?" It would be very different to where the run was sent just a minute ago. So, it was not possible to have a screening of all the prices real time to look at where the arbitrage was or look at where you can go in and out and try and have some sort of short-term views. With a lot of this going into the e-trading platforms and click to trade, even for JPMorgan, the platform on algo trading has increased massively. We have now larger and larger size tickets that are going through e-trading rather than having an actual trader pricing that. So, that parsing of bond data and trace and all the other data that's now available makes it easier for customers to have a holistic view on what's going on in the market, better pricing transparency, and therefore they are transacting more.