Market
Structure

The impact of EMIR 3.0 on Euro swaps trading

Meridy Cleary: Hi, you're listening to Market Matters, our markets series here on J.P. Morgan's Making Sense podcast. I'm your host, Meridy Cleary, from the FICC Market Structure team. And today's episode surrounds one of the top market structure themes in the industry right now, and that's EMIR 3.0 and how these new EU clearing rules are impacting euro derivatives liquidity and trading strategies across the continent. To discuss these dynamics, I'm joined by Roxane Blanc, who is a senior rates trader based in Paris. Hi, Roxane. Thank you so much for joining me today.

Roxane Blanc: Thanks, Meridy. It's great to be here.

Meridy Cleary: So Roxane, I know that we can both agree that EMIR 3 has been quite the focus point. For our listeners who might not be as familiar, EMIR 3 is an amended version of the European markets infrastructure regulation, which in the context of the post-Brexit landscape aims to make the European Union's clearing landscape more competitive and reduce the reliance on non-EU CCPs. So to drive further euro denominated derivatives clearing activity to the EU, a key component of the rules was the introduction of an active account requirement, which has two main elements. So the first is this operational requirement, meaning that in-scope firms have to hold an open account at an EU CCP by June 24th. And the second requirement is that of representativeness. So that means that entities need to clear a portion of their in-scope derivatives through an EU CCP. So obviously this is quite a convoluted set of reforms. I think we can both agree on that. And so Roxane, from a trading perspective, why is this such a front and centre topic right now? And what does it actually mean for the market?

Roxane Blanc: Thanks for your question, Meridy. EMIR 3 has been a market structure theme for a number of years now, but as we get closer to these key implementation dates, like June 24, market participants are focused on their strategies to comply with these new sets of rules. LCH is the primary clearinghouse currently for Euro-denominated derivatives, and EUREX is the primary EU CCP, which is a key focus point right now as clients look to potentially shift their hedging and duration strategies. Since 2020, bank treasuries have increasingly used EUREX for clearing their ALM hedging strategies, with banks typically paying fixed at EUREX. Pension funds and asset managers have predominantly been receivers of EUREX swaps at the long end of the curve, and that has created an inverted curve in ULTRA's EUREX LCH basis.

Meridy Cleary: That's really interesting, and we'll definitely get into that EUREX LCH basis in a second. But maybe if we first turn to the in-scope products and firms, we know that EUR IRS, Polish zloty and EUR STIR are in-scope, right Roxanne?

Roxane Blanc: Yes, that's right. And we also know that the representativeness requirements across those classes of derivatives will vary depending on the size of the firm's derivatives portfolio, but also their structure. And in that sense, you won't be asked to start trading in an instrument that you don't already trade in. So first, firms need to run their own analysis to understand whether they need to comply and how they need to comply with regards to the particular sets of derivatives. When doing the calculations, that means that at max, the largest firms will need to clear around 1,200 trades at EUCCP per year. This, as we know, is easily achievable for the banks with large market-making desks. However, for the small or medium-sized market participants, the operational and reporting burden could play a key part in their strategies, and they could decide to shift fully away from LCH towards Eurex.

Meridy Cleary: Thanks. And of course, we're in this unique situation where market participants have to prepare to comply with the new rules without actually knowing the more descriptive Level 2 rules. So as of right now, ESMA's Level 1 rules have been finalized and have already entered into force. But we're waiting to hear back on ESMA's consultation, which closed at the end of January, on the more detailed Level 2 technical standards. So our clients listening can, of course, reach out at any point, as and when we get color on where we land post-consultation.

Roxane Blanc: Totally. As you mentioned, the final RTS could actually take a few months. The latest date that ESMA can submit the final RTS to the European Commission is June 24, but we could also hear from them earlier in practice. The main point is that market participants should not wait until this implementation date, as they will need to start to comply by June, which is just a few months away.

Meridy Cleary: Definitely. And as I mentioned, while we're waiting for this final RTS, the market has the draft RTS, which provides the direction of travel and enough for market participants to scope out their strategies. So Roxanne, the new reporting requirements have been a particular point of contention for the industry. Those in scope of the active account requirement will be subject to new reporting requirements regardless of whether they're subject to the operational, the representativeness requirement, or both. So this 85% exemption has been a key component. Could you talk us through what it means and how it might impact trading strategies?

Roxane Blanc: Sure. So it is expected that firms already clearing over 85% of their relevant derivatives at EUCCP shall be exempt from the operational conditions and the reporting requirements. This is significant as some market participants might decide to then fully move to EUCCP for their in-scope derivatives to actually get that exemption. In any case, the imbalance of flows that we have observed in the market should progressively fade as we get more participants involved.

Meridy Cleary: And of course, with these dynamics across CCPs, there's often the question as to the basis, which we talked about a little earlier. How do you see this evolving over time?

Roxane Blanc: Yeah. So this is another key question right now. Let's take the example of Eurex again. So today in EUR-IRS, you can easily trade either on LCH or on Eurex, but that might entail a difference in price. That difference or basis is actually a product that trades on its own and exists because of the imbalance of flows. Institutions that had already transitioned fully to Eurex will continue to only clear to Eurex. It was a big operational exercise for them to move a few years ago, and they are unlikely to go all the way back. Institutions that did a 50-50 approach and the rest of the markets will probably take a breather in sight of the relaxed approach that ESMA is taking. Net-net, we think that the Eurex LCH basis should trade in tighter ranges and drift towards zero as more institutions will have the ability to up the basis differences.

Meridy Cleary: Thank you. That's definitely a key topic right now. And in terms of market positioning, what are you seeing right now ahead of this regulatory change?

Roxane Blanc: Yeah, so we've observed already in the market quite a few activities related to that transition. Asset managers have been transitioning with CF30 plus Eurex cleared portfolios to LCH to take advantage of the basis inversion at the long end. SSA issuers are swapping their issuance on Eurex to take advantage of the 10-year Eurex LCH basis being positive in the 5-year to 10-year sector. European banks have been receiving swaps on Eurex on the NII theme last year after 10-year Eurex LCH which plus four basis fails. All of these are activities that should persist. On the other side, we've seen large hedge funds playing the normalization type trades along the forward curve.

Meridy Cleary: Interesting. And taking us to, I guess, another key market structure theme that's happening in parallel. And that is, of course, the Dutch pension reform where clients are looking to restructure their portfolios ahead of this major market structure shift from a defined benefit scheme towards a defined contribution system in the Netherlands. In-scope firms need to consider both EMIR 3 and Dutch pension reform simultaneously. So the cost impact for funds is mineral. So these are clearly topics that are kind of intertwined.

Roxane Blanc: It is true that some small pension funds have started to transition this year for their reform. But the timeline for this large industry transition is actually way longer than the one of EMIR. The recent proposal of amendment to put the potential reform through a vote of participants adds up to the uncertainty. In any case, additional costs implied by either change is something that will be scrutinized quite intensively by the funds themselves.

Meridy Cleary: Definitely. And of course, uncertainty is never good when it comes to market structure changes.

Roxane Blanc: Yes, totally. Today, obviously we focused more on the market impacts and potential expectations from a trading perspective. Most firms know whether they are in scope and to what extent. But we also know that June 24 is just a few months away. So currently, market participants are going through their own analysis and deciding on the way forward for them.

Meridy Cleary: Thank you so much, Roxane. We’ve covered a lot today, and there’s still so much that we could’ve discussed on this theme. Thank you so much for your time.

Roxane Blanc: Thanks, Meridy.

Meridy Cleary: To our clients, please don't hesitate to reach out to your J.P. Morgan sales representative to discuss our offerings in light of this regulatory change, including multi-branch account structures. And of course, stay tuned for more FICC market structure and liquidity strategy content here on J.P. Morgan's Making Sense channel. And please feel free to visit our JPMM page as well. Thank you and have a great day.

Voiceover: Thanks for listening to Market Matters. If you’ve enjoyed this conversation, we hope you’ll review, rate, and subscribe to J.P. Morgan’s Making Sense to stay on top of the latest industry news and trends, available on Apple Podcasts, Spotify, and YouTube.

The views expressed in this podcast may not necessarily reflect the views of JPMorgan Chase & Co, and its affiliates, together J.P. Morgan, and do not constitute research or recommendation advice or an offer or a solicitation to buy or sell any security or financial instrument. They are not issued by Research but are a solicitation under CFTC Rule 1.71. Referenced products and services in this podcast may not be suitable for you, and may not be available in all jurisdictions. J.P. Morgan may make markets and trade as principal in securities and other asset classes and financial products that may have been discussed. The FICC market structure publications, or to one, newsletters, mentioned in this podcast are available for J.P. Morgan clients. Please contact your J.P. Morgan sales representative should you wish to receive these. For additional disclaimers and regulatory disclosures, please visit www.jpmorgan.com/disclosures

© 2025 JPMorgan Chase & Company. All rights reserved.

[End of episode]

Navigating Asia’s bond and equity markets

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Meridy Cleary: Hi, you're listening to Market Matters, our market series here on J.P. Morgan's Making Sense podcast. I'm your host, Meridy Cleary from the FICC Market Structure team, and in today's episode, we're going to explore key themes in Asia across fixed income, FX, and equities markets. To do this, I'm joined by Clare Witts, head of Equity APAC Market Structure. Hi, Clare, thanks for being on here.

Clare Witts: Hi, Meridy. Thanks for having me.

Meridy: It's great to have you here, Clare. So when it comes to the evolving trading trends and regulatory initiatives in the APAC region, a lot of parallels can be drawn between market structure change in equities and FICC markets. We expect foreign investor access to some of the key emerging markets in the region to remain a top theme. We've seen central banks and markets regulators in the region ease certain controls on onshore FX and bond markets to drive further liquidity and investment. And Clare, what have you been focused on, on the equity side?

Clare: In equities, it's been a tale of two types of market. So for developed markets, particularly Japan, that's been where the majority of turnover is for our global clients. But similar to FICC, it's Asia's emerging markets where we see the most new interest, client questions, and also where some of the most significant market structure change is taking place. So for developed markets, the focus has really been on how to further improve efficiency of trading or reduced trading costs. Japan, Hong Kong, Australia are interesting from that perspective because the stock exchanges are making some quite significant changes to the market microstructure, like improving the auctions and trying to reduce the spread. But in emerging market equities, a lot of the focus is on improving access and attracting new investors. And although there's a lot of change across all of the Asia emerging markets right now, from a global investor perspective, the most interesting ones have been India and Korea, largely because of their relative size and opportunity compared to some of the other EM markets.

Meridy: Yes, I agree. Korea and India are key focus markets for us, too, particularly because of the addition of their government bonds into a growing list of global bond indices. India's fully accessible route, or FAR bonds, are being added to Bloomberg's EM local currency government index from January 31st of this year, and FTSE Russell's EM government bond index from September. And of course, we're approaching the final weight of 10% of India's FAR bonds in J.P. Morgan's GBI EM index in March. So amid these dynamics, we've seen an uptick in the share of FAR bonds held by foreign investors which has grown from around 2% pre-inclusion to now around 6%. So clearly the index inclusions are already having an impact. For India's bond markets, we expect continued focus on topics such as margin posting for India's government bonds, more flexible security settlement, and potentially regulatory change from the Reserve Bank of India or the securities regulators as well.

Clare: Yes, India's clearly been keeping us busy on the equity side, too. You also mentioned Korea, what's happening there?

Meridy: Yeah, definitely. I mean, Korea's had a lot of focus due to recent market structure reform spanning multiple asset classes. And after several initiatives by market authorities, for example, extending FX trading hours last year and allowing third-party FX transactions, Korea's government bonds are set to be added to FTSE's Wigby index starting November of this year. And we do see this as a significant development. The Ministry of Finance expects the inclusion to drive inflows into the local bond market and also increase liquidity in the FX market.

Clare: Yes, and that's helped on the equity side, too. Korea's long been targeting an upgrade to develop market status from emerging market in the MSCI equity indices. Perhaps as part of that, in March, we expect to see the removal of the short-sell ban, which has been in place since 2023, and that's a key focus area for some of our clients. In other topics on our side, with index inclusion, Vietnam's been also pushing some major capital markets reform in order to be upgraded by FTSE from frontier to emerging markets. So that includes the removal of refunding, and there's much more work to be done there on trade and post-trade infrastructure as part of those plans.

Meredith: Yeah, that's really interesting. And what about some of the microstructure dynamics on your side?

Clare: Hong Kong's going to cut their tick size to reduce spreads, so that should be positive trading costs. And India regulators are consulting on introducing a closing auction. It's one of the few markets globally that doesn't have one. Another thing that we can't get through this podcast without talking about, I think, is the potential impact of geopolitics and Trump 2.0 on China and the other APAC markets. And that will undoubtedly have some effect on capital market policymaking and fund flows. So I'm going to be keeping a close eye on how different types of investors in APAC, from the retail through to the domestic institutions, and of course, the global investors, are changing what and how they trade.

Meredith: Yeah, I completely agree. This year is definitely going to be another busy one. And Clare, when it comes to market structure evolution, the topic of execution challenges remains front and center. In the APAC region, a combination of market fragmentation, regulatory change, and market idiosyncrasies add to the complexities around the trade execution process. On the FICC side, trade execution obstacles in certain EM markets are heightened by liquidity constraints, manual workflows, shorter trading windows, and also market access and euro clearability. This year, we expect the industry to focus on efficient workflows and trading infrastructure between liquidity providers and liquidity takers to smooth out some of these constraints. Another point to add is around the extraterritorial impacts of regulation and the potential impact on APAC markets. A good example, which also spans equities, is the move to T plus one in the U.S. that happened last year. And this required Asia-based traders to adapt funding and execution strategies to meet those timeframes.

Clare: Yes, that definitely had an impact on the equity side as well. And we see a number of markets in this region thinking about how they change their settlement cycles going forward, but that's a bit further out.

Meridy: Yes, T plus one is definitely a conversation we're having here in Europe as well. And Clare, I wonder what are some of the key execution challenges on the equity side?

Clare: Two big things. Number one, as you mentioned, there's just the complexity of all the different markets in this region. There's over 16 of them with different market idiosyncrasies and rules. And this drives a huge rate of change. We've got equity trading teams on the ground in almost all the APAC markets, and that local knowledge and access is really helpful, because almost every week we're reacting to a rule change somewhere or a unique trading situation in one market or another. Just to share some information about how big the rate of change is, I do a monthly market structure summary. And every month, there's never fewer than 20 new items on it.

Meridy: Wow.

Clare: So what we need to do then is build a lot of that into the electronic trading platform so that we can smooth out those idiosyncrasies for our clients and really create a somewhat consistent trading experience. Then the second thing that's a big challenge is managing trading costs for institutional sized orders. And this has two components to it. In small ASEAN markets, for example, the issue is often finding enough liquidity given the relatively small size of the market. Whereas in large liquid markets like Japan or India, the trading order book is really thin and even small trades can signal the market and move the price away. So the trading solutions also need to be different. That can be using block desks or facilitation to try and trade in one go or using algos that are designed to manage that signaling risk by breaking up orders and distributing them smartly. So in APAC, probably more than in other regions, there really is no one size fits all for trading. We need to have a lot of different trading tools and channels available.

Meridy: And I guess on the topic of trading tools and execution trends, of course, the rise of electronic trading is a theme that we've all witnessed. It's a trend that has taken off in APAC over the last decade, but particularly since 2020. Our team have been tracking the rise of e-trading in EM, interest rate swaps, government bonds and FX products across APAC markets. For example, we've seen a continued growth in Japanese government bond e-trading driven by enhancements to overall trading systems in the market, which allow brokers to have more capabilities of pricing electronically.

Clare: And Meridy, are algos becoming more popular in the FICC world?

Meridy: Yes, definitely. And we've seen a notable trend in the rise of algo usage in the region, given enhanced algo quoting capabilities and other developments. A good example of this is the significant increase in NDF algos in APAC currency pairs, up around 140% since 2023. And we expect this trend to continue as the depth of liquidity in APAC pairs grows further. Automation trading tools are also growing. For example, the launch of auto pricing and hedging tools. However, in FICC we still see gaps such as local currency markets and APAC high yield bond markets, which are predominantly voice traded. And we're definitely monitoring those developments there. Clare, I'm curious, how has the rise of e-trading in APAC equities grown?

Clare: Well, we're at a different phase in the cycle of electronification for equities in that almost all orders now are traded electronically on every exchange and the infrastructure is well established. But there are two big themes to watch in the year ahead. Firstly, is more choice of trading venues. So this year, we'll see new alternative trading venues launching in Japan and in Korea for the first time, there'll be a new venue as well. So we're going to see more competition to the traditional stock exchanges. The other big change that's coming into APAC electronic trading, and this is something that in Asia is really at a far more advanced stage than the rest of the world, is the scale of retail electronic trading. And I'm sure this is going to continue through 2025. We're seeing retail investors building their own algorithmic trading strategies, often trading from their phones, using APIs as day traders, semi-professional investors. And they're a very significant part of the market activity, particularly in China, Korea, India and Taiwan. And even now, the Indian regulator has a consultation out about how retail traders can build and use algos. So I think the impact of that electronic retail trading activity is a key focus for the year ahead.

Meredith: Well, thank you, Clare. I think we can agree there are a lot of dynamics in these fast moving markets, which is very exciting. And we've covered a lot today from key themes on our radar to execution dynamics. And there's so much more that we could discuss. I'm sure we could go on for another hour. Thank you so much for your time today, Clare.

Clare: Thanks, Meredith. I've really enjoyed it.

Meredith: To our listeners, please stay tuned for more FICC Market Structure and Liquidity Strategy content here on J.P. Morgan's Making Sense channel. If our clients have any questions or would like any further information on the topics in this episode, please reach out to your J.P. Morgan sales representative. I hope you have a great day.

Voiceover: Thanks for listening to Market Matters. If you’ve enjoyed this conversation, we hope you’ll review, rate, and subscribe to J.P. Morgan’s Making Sense to stay on top of the latest industry news and trends – available on Apple Podcasts, Spotify, and YouTube. The views expressed in this podcast may not necessarily reflect the views of JPMorgan Chase & Co, and its affiliates, together J.P. Morgan, and do not constitute research or recommendation advice or an offer or a solicitation to buy or sell any security or financial instrument. They are not issued by Research but are a solicitation under CFTC Rule 1.71. Referenced products and services in this podcast may not be suitable for you, and may not be available in all jurisdictions. J.P. Morgan may make markets and trade as principal in securities and other asset classes and financial products that may have been discussed. The FICC market structure publications, or to one, newsletters, mentioned in this podcast are available for J.P. Morgan clients. Please contact your J.P. Morgan sales representative should you wish to receive these. For additional disclaimers and regulatory disclosures, please visit www.jpmorgan.com/disclosures. © 2025 JPMorgan Chase & Company. All rights reserved.

[End of episode]

FICC Market Structure: The evolving execution ecosystem 

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Kate Finlayson: Hello, you're listening to Market Matters, our market series on J.P. Morgan's Making Sense podcast channel. I'm Kate Finlayson from the FICC Market Structure and Liquidity Strategy team. And in today's episode, I'll be speaking with Eddie Wen, Global Head of Digital Markets. Eddie's team focuses on how we connect and engage in the market, the technology that we develop and leverage to automate workflows, optimize execution, and how we build and scale for the future of trading across all markets. So quite frankly, the best person for me to be speaking today as we discuss the changing execution ecosystem. Welcome, Eddie.

Eddie Wen: Hi, Kate. It's great to be here.

Kate Finlayson: Great. Well, listen, Eddie, I think an interesting facet of the space that we work in is the view on how the execution landscape is shifting. So we have electronification across asset classes. We have the entry of new market participants and technological advances. And I guess within this, we also have a future look at how market participants will have to adapt in order to stay relevant and optimized in the face of rising costs. If we focus on electronification just to start, looking at some of the asset classes that we cover in the space, so FX, spot, and then the movement of electronification in rates, and even credit where we see some advances. What are your thoughts on the evolution there and where some of these electronification trends can lead?

Eddie Wen: It's been a long journey, and for as long as I've been in the business, the trading business have largely become more and more electronic over the years. And if you look back at the things that we predicted a few years ago about the general trend where the focus on credit as the area of accelerated electronification, I think that's largely played out over the years. We've seen the growth of platform volumes on single security bond trading across the various different channels, the dealers on- are systematizing much of the workflows and allowing the automation of price creation and also automation of the risk management of the various different portfolios that, that's being traded electronically. We've also seen the rise in ETF volumes. More and more of our transaction volumes, the way we can package bonds and ship them through create/redeem processes and manage our inventory, ETF'S been critical for that. And thirdly, the portfolio trading business has also gone and it's grown significantly over the last several years. And all these things are interrelated as the market's electronifying ability to interlink the various different electronic services as well as some of the voice capabilities we have on the various different trading desks. That's kind of created a virtual cycle essentially, this acceleration across the different asset classes. I think the current focus for us is really try to develop more tools and make this process easier for clients. The development of portfolio solution services as well as various analytics and data tools that we're providing for clients have been a big driver to help facilitate the move, make it easier for our clients to adapt to an electronified world. I think this trend will continue. I don't see an end to it. But I think the focus for the next couple years, you'll see a continuation of credit, but also an expansion into other asset classes, like derivatives. I know this is not just primarily FICC focused, this is starting happening in like, equity derivatives, and also some of the derivative products in rates as well as in FX, you're gonna see that acceleration across now the more complicated product types becoming more flow driven and electronic trading will start happening with all asset classes as well.

Kate Finlayson: So we have bilateral streams and an increase there, and arguably I'd say move away from central limit order books clubs. And you've referenced this before, I think, Eddie, you've turned to this network effect where you have bilateral connectivity with aggregation functionality alongside. What are your thoughts on this network effect and the impact of it?

Eddie Wen: I think we're a big believer of this network centric E-trading model. If you look at the electronification of markets, the origination of the idea is, well, we're gonna put things on a central limit order book. However, what has developed over the years is seeing that the concept of bilateral connectivity and really reducing the friction of transaction has been a big driver for increasing volume. So you see in a market like foreign exchange, the large majority of our transactions are happening through bilateral channels, right? Whether it's doing our single dealer platform or direct API integrations or going through a software vendor that helps us connect to various different clients or services, that has the benefit of really reducing the cost of execution, but more importantly, that also allows us to custom tailor services to different clients for what they need. I think that type of network centric model seems to be the direction of travel. You see the uptake in rates, in US treasuries, building bilateral APIs, credit is an area that we've been very focused on in driving bilateral connectivity for our clients and trying to figure out how to custom tailor clients' solutions and make that work effectively. These things do take time and the challenge is that currently, everyone has a lot of software demands and the priority list for your IT management has been tremendous. So how do clients figure out how to juggle the various different technology needs that they have? How do you prioritize connectivity? And it's a little bit of a chicken and egg problem, 'cause it takes time for the dealers to get ready and for the clients to get ready. But ultimately, with the kind of growth we've been seeing over the last 12 months, I think it's starting to turn a corner. The number of bilateral connectivities we have in credit doubled in the last year. So you can see that trend will continue for the foreseeable future and over time, I think you're gonna have this very different market structure where it's not just about trading on a particular platform or venue, but really it's like how do you manage all the different electronic relationships you have with clients through APIs and service levels that you establish? How do you make that work properly? I think that's gonna be the interesting development over the next couple years.

Kate Finlayson: Yeah, absolutely. We see a lot of increased focus on that actually from market participants more broadly. Eddie, I mentioned a little earlier this trading ecosystem has changed, that the market participants and the makeup of the market participants have also shifted. So whether that is alternative liquidity providers, systematic strategies, [inaudible 00:07:30] to be deployed, for example, in credit, and even buy side looking to see where they can provide liquidity in certain circumstances. So with this in mind, how does this shape what we prioritize, how we innovate, how we interact in the market, and what solutions we provide for our clients?

Eddie Wen: I think the barriers to entry are definitely eroding between price transparency, clearing mandates, and capital constraints, resource constraints, and technology evolutions. So a lot of these are eroding what is traditional benefits or, or strengths of essentially the sales side, right? A lot of the access to liquidity is now becoming more democratized. People can go to channels, price discovery is no longer a huge challenge as they used to be. That has leveled the playing field. Now with that said, I think the difference in the current market structure, yes, the barrier to entries are lower, but you also see the counter to that is how do you achieve the scale, right? A bank like JP Morgan has access to a lot of different customers. They service all aspects about the global financial markets and how we connect the various different clients together. That's partly the areas of strength, right, for a large bank. Smaller trading firms have the agility and speed to build, to connect and build various algorithmic enhancements that's very sophisticated. So I think the verdict's still out in terms of how the market and the playing field would evolve, but we do recognize that there will be a lot more competition in the space and it's not gonna just come from the sales side. It's gonna come from trading entities. It's gonna come from non-bank financial firms. So it's gonna be an interesting market over the next several years, how they evolve.

Kate Finlayson: Yeah. I think staying on the market participants, given the rate environment of late, we have noticed an increased participation in retail market participants and investors, perhaps accessing whether it's through ETFs, simply managed accounts, and with that, obviously smaller ticket sizes, more electronic trading through some of those channels. What do you think this increase in retail participation could mean for wholesale markets? Is there any [inaudible 00:09:32]?

Eddie Wen: The lines are definitely blurring. If you look at markets like ETFs, which traditionally are retail investors trading to equity markets, there's a classic place of blurring the lines. And there are benefits to that, like I mentioned earlier about the ability for us to package inventory and to create processes on ETFs. That's helped dealer's side on the institutional market be able to source that liquidity from what is a co-mingled field. So I could see over time that the concept between retail and institutional will blur. Now obviously, as a bank like JP Morgan, we don't directly face off to the retail side of business, but platforms' intermediaries can help facilitate some of that bridging. I look back at the playbook and what's happened in the foreign exchange market broadly about 20 years ago and the evolution of retail margin brokers that were prevalent in, say, Japan and a number of places around the world. They actually have been the leader for a lot of the technological innovations when it comes to streaming prices, trading on a platform. And those tools existed in retail long before they actually existed in the institutional side. And I think retail has this driving force allows new ideas to develop very quickly and they adopt to new practices much quicker than the institutional players are. So there is something to be learned about how these tools have evolved. And I looked at some of the E-trading tools that's available for retail listed options, and I find it incredible how the capabilities of what's accessible for retail investors in some cases may be better than some of the institutional traders that sit on our trading floors.

Kate Finlayson: Eddie, the digitization of workflows, provision of more electronic trading, ultimately leads to more data. And when we've looked at data analytics, certainly in the fixed income space, FX especially, there've been many advances there. From our perspective of JP Morgan, how do we use increased provision of data and availability of data to optimize our business?

Eddie Wen: I think that, that's one of the huge benefits you get from the electronification of markets is the amount of information and data that comes out of the various different systems that we use. Now one thing to note, you mentioned about workflow, and I think it's important to also let the market understand that electronic trading isn't just something we are facilitating for our clients. It's actually something we're facilitating for our own sales force today. There are still clients who still prefers to talk to a salesperson for execution and we're giving those tools that's available to our clients to our sales force. And that benefit of that is actually what was traditionally a lot of voice driven activities now is being digitized and we're gathering a lot of information about how we trade, how we service our customers. And as a result, between sort of pure electronic channel and as well as our internal voice channels, we now have a holistic picture about how every quote is being generated, how often do we miss, what's the level of competitiveness we need to be in order to win flows? And I think that's helped our business optimize itself in many ways. How do you tune the pricing to become the most competitive pricing agent on the marketplace? And that's really important for us to grow our market share. It's important to establish that client trust that they have on us. And also really understand how liquidity should be generated on these electronic markets that's been growing. Now, on the back of it, I think over the years, as we become more electronic in nature, the business doesn't stop evolving. It's not like building a system and the problem is solved. I think over time, as you gather more intelligence about how you're pricing, how you're risk managing, that allows you to optimize your business very differently. Now over the years, if you look at the electronification process across many asset classes, they tend to have a function that breaks down historical silos. Like you're looking for in a change in the early beginning, we used to have traders that would service one currency pair. Over time, you have machines that services all currency pairs together. So it allows you to exploit that informational correlation between different asset class and different products and you're much more efficient on how you hedge as a result of this. All this is generated from data that's kind of been provided to the machinery as you analyze sort of the correlation patterns across different asset classes, which have very strong correlation of risk. You now no longer need to hedge as much as you did, reducing your costs of hedging, which ultimately translates into cost savings for our clients, tighter bid offer spread, and better liquidity. So I think the story around data, even though it's a side effect of the electronification process and nonetheless is a really powerful driver for us wanting to do more, because we're learning a lot from the information that we have.

Kate Finlayson: I think when we look at how our clients are assessing availability of data but also the technology they look to deeply and enhance, buy versus build I know has long been a consideration, right? But where we have increasing cost constraints, priorities in terms of tech investment spend, how can that be approached or what are your thoughts on how best to tackle that particular consideration?

Eddie Wen: This has always been an age-old problem, buy versus build. The reality is firms really need to think hard about what is strategic IP versus commoditized service that they can outsource? Now increasingly, we're seeing software intermediaries that's helping us performing streamlining the connectivity process and help standardize certain protocols for communications, for example. And I think that is a trend that we will continue to see in the future as more of these, what used to be a strategic advantage is actually better done through scale in a centralized entity. I think you're gonna see the emergency of software standards or consortium based approaches to build standard protocols that allow certain types of commonly done activities be done in one place as opposed to everyone reinventing the wheel. And I think that ultimately long-term will help facilitate growth of these networks that we've been talking about for some time.

Kate Finlayson: Eddie, my last question to you today, as we look to partner or work with various technology firms, what are we looking to accomplish from a market structure perspective?

Eddie Wen: Vendors really have the opportunity to grow if they can provide help the industry standardize on software solutions and make it easier for us to service our customers.

Kate Finlayson: Seems straightforward to me (laughs).

Eddie Wen:  (laughs)

Kate Finlayson: Eddie, thank you so much. It's been great to speak with you. You, we've covered a number of different elements. We know that the space continues to really throw up some really interesting observations. So thank you, Eddie.

Eddie Wen: Well, thank you, Kate. Pleasure to speak with you.

Speaker 3: Thanks for listening to Market Matters. If you've enjoyed this conversation, we hope you'll review, rate, and subscribe to J.P. Morgan's Making Sense to stay on top of the latest industry news and trends, available on Apple Podcasts, Spotify, and YouTube. The views expressed in this podcast may not necessarily reflect the views of J.P. Morgan, Chase & Co., and its affiliates. Together, J.P. Morgan, they are not the product of J.P. Morgan's research department and do not constitute a recommendation, advice, or an offer or a solicitation to buy or sell any security or financial instrument. This podcast is intended for institutional and professional investors only and is not intended for retail investor use. It is provided for information purposes only, referenced products and services in this podcast may not be suitable for you and may not be available in all jurisdictions. J.P. Morgan may make markets and trade its principle and securities in other asset classes and financial products that may have been discussed. For additional disclaimers and regulatory disclosures, please visit www.jpmorgan.com/disclosures/salesandtradingdisclaimer. For the avoidance of doubt, opinions expressed by any external speakers are the personal views of those speakers and do not represent the views of J.P. Morgan.

[End of episode]

FICC Market Structure: Tapping into Asia’s markets

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Leland Price: Hi. This is Lee Price from the FICC Market Structure and Liquidity Strategy team here at J.P. Morgan. Today, we're going to be focused on some of the key market structure dynamics in the Asia-Pacific region and how some of the onshore markets are developing through new access routes for global investors. To do that, I'm joined by my colleague Meridy Cleary. Hey, Meridy. How are you today?

Meridy Cleary: Yeah, I'm doing well, thanks. How are you?

Leland Price: I'm good. So, Meridy, we know that emerging markets have recently been in the spotlight, and we've been tracking several policy developments influencing the access routes into some of these markets. We hear the term non-deliverable forwards, or NDF, markets in Asia a lot. Can you kind of set the scene for us in terms of changes underway?

Meridy Cleary: Yeah, so in recent years, with the growth of electronic trading and demand for emerging markets, NDFs have really become an increasingly important tool for foreign investors to hedge and trade EM currencies. NDFs are traded offshore and don't require physical delivery of, for example, Korean won and are instead cash settled in US dollars or another freely convertible currency. Even though NDFs still account for a small portion of overall FX derivatives volumes, we expect this segment of the market to really continue growing.

Leland Price: Right. And Asia now has the largest NDF markets in the world, which includes the Indian rupee, Korean won, and Taiwanese dollar NDF markets. Meridy, how are some of the policies around FX market access shifted in recent years?

Meridy Cleary: Well, since the Asian financial crisis in the late '90s, many countries in the region introduced FX market restrictions and controls on participation in onshore FX markets. This was intended to curb speculation and currency volatility in these less liquid EM currencies and also to help protect a country's foreign currency reserves like the US dollar. Today, the APAC region holds the largest amount of dollar reserves than any other region. So we're seeing some of these countries gradually relax the restrictions on their currencies, which is very interesting space to be in.

Leland Price: Definitely. And I guess to shift gears a little bit, Korea presents quite an interesting story being the largest and most liquid NDF market. Meridy, when you think about some of the things happening in Korea, what stands out to you?

Meridy Cleary: Korea has drawn a lot of attention lately as it's currently undergoing significant FX market structure reforms. These are part of a broader effort to make the won more tradable and attract foreign investors. One of the key reforms, which was announced last September, is to open Korea's onshore interbank FX market to certain foreign financial institutions. Registration opened last October, and firms are expected to begin trading by the second half of this year. However, it might take a little bit longer depending on some of the admin and registration and so on.

Leland Price: Right. And we know that Korea has been aiming to be included in the global emerging market bond indices. What measures have they been taking to that end?

Meridy Cleary: Yeah, so Korea has been working to get its bonds and other instruments listed on global indices. This is to help drive further market growth and liquidity. In February, Korea introduced several measures to help meet international benchmark requirements. This is focused on the FTSE Russell's World Government Bond Index. For example, Korea is extending its won trading hours. This is to begin this July to open new doors for liquidity in the London trading hours. Ahead of the official extension, Korea is currently undergoing a series of test pilots where market participants trade during those extended trading hours. Other measures that Korea has introduced include the removal of certain foreign investor requirements, simplified registration procedures. And over the last few years, it's been mandating that onshore companies disclose filings in English. This is, again, for the convenience of foreign investors and also to keep in line with global practices. It has been estimated that Korea could be included into the FTSE Russell's World Government Bond Index in early 2025, which could create a estimated gross capital inflow of around $70 billion US. But this is just a estimation, so we definitely have our eyes on this topic.

Leland Price: Wow. Yeah, and understood that it would be a very significant development, obviously. Let's pivot and turn our attention to another key APAC market. Last year was announced that India is being added to the JP Morgan Emerging Market Bond Index, which is set to go live soon. Let's explore that for a minute.

Meridy Cleary: Yes, India is really in the spotlight right now. So this is set to occur over a 10-month period beginning June 28 of this year through March 2025. And the reason this has really made headlines is because, in those 10 months, the inclusion is expected to bring in around $24 billion US in inflows to India's bond market.

Leland Price: OK, understood-- so another very significant potential development there. And the internationalization of the rupee is also a key topic. Meridy, what are some of the key reforms we're seeing to help build liquidity and depth in India's FX markets?

Meridy Cleary: Yeah, so for context, in the past decade or so, the Reserve Bank of India, or RBI, has been working to reduce volatility in the rupee. Now that India feels better capitalized with foreign currency reserves, policymakers are introducing measures to gradually open up the rupee markets.

A key development happened last April when India announced plans to allow certain financial institutions within the GIFT City-- so this is India's offshore financial market-- to trade NDFs with residents onshore. The hope is that by developing an onshore NDF market, volatility in the rupee will be better managed. RBI also released a report on the internationalization of the rupee last June, so it's clearly a big focus, as you mentioned. Other measures to enhance the market access for foreign investors include the extension of onshore trading hours, similar to Korea. And India has also introduced other measures like easing certain underlying asset requirements to facilitate FX transactions and allowing the free cancelation or rollover of contracts.

Leland Price: A lot going on there. And it sounds like the GIFT City is becoming increasingly valuable financial center for India.

Meridy Cleary: Yeah, it really is. This GIFT City is India's only IFSC, which is an International Financial Services Center. Recently there have been talks that RBI in the city are collaborating on the domestic trading and clearing systems. So there's clearly a big focus on the development of market infrastructures.

Leland Price: And we briefly touched on currency internationalization. China has been looking to grow the international presence of the renminbi and its onshore markets more broadly. We know that traditionally China has kept its onshore market fairly controlled. When you think about the measures to allow more foreign participation in the mainlan, what comes to mind, Meridy?

Meridy Cleary: Yeah, so the Connect schemes between mainland China and Hong Kong have been very key. They've created new access routes for international investors. For example, Bond Connect went live in 2017 and Swap Connect in 2023. These have really helped to expand the hedging options for foreign investors, which has been impactful. In late January this year, regulators in Hong Kong and China announced six policy measures to further develop financial cooperation. One of the key measures is that of Repo Connect. Essentially, this would open China's onshore bond repo market to offshore institutional investors that already have access to China's interbank bond market. So the opening of China's $232 trillion repo market could be impactful and will provide offshore investors with more tools to finance their yuan bond holdings.

Leland Price: So obviously it could be hugely significant. Currently, we're waiting on more details to emerge on Repo Connect, but the expectation is that the netting will be covered once China's bankruptcy law is passed, potentially next year. But all of these moving pieces are still in the works. So let's shift gears again. We also have our eyes on the announcement that the Hong Kong Exchanges and Clearing Limited plans to launch China Treasury bond futures. This is primarily to improve liquidity and further strengthen Hong Kong as a renminbi hub. We're waiting for more details ahead of this launch, including set time frames and regulatory approvals. Meridy, before we wrap up, what else is on our radar in terms of APAC market structure?

Meridy Cleary: Yeah, there's a lot. We've seen a growing focus globally, for example, on digital finance and boosting the opportunities for tokenization in markets. This has also been a focus in Asia. Hong Kong, for example, released several consultations on tokenization and a new proposed regime for stablecoin issuers. That'll happen in just a matter of weeks, so clearly a big topic. I would also say ESG and sustainability is a big focus point. Regulators in Asia have been focused on the development of rating systems, taxonomies, and climate-related disclosures. For example, the second version of the ASEAN Member States Taxonomy was published in February. Singapore just released their sustainability framework, and India just released their climate-related disclosure framework, so clearly a lot of focus in that area.

Leland Price: Yes. And of course, artificial intelligence seems to be the hot topic of 2024.

Meridy Cleary: Yeah, it really does. And it's been a headline grabber in Asia as well. China has enacted their AI regulations. And Singapore launched their second version of its AI National Strategy last year. More recently, for example, the ASEAN member states published guidelines. And looking ahead, we expect new legislation coming from India by the middle of this year, potentially Japan before the end of the year. And Hong Kong has also indicated that it might [INAUDIBLE] AI rules and guidelines as well.

So we'll continue monitoring, but clearly a lot going on.

Leland Price: Definitely a lot of moving pieces in the region. I think it'll be fascinating to see how these dynamics fall into place. Well, thanks for your time today, Meridy.

Meridy Cleary: Yeah, thank you so much for having me.

Leland Price: And to our listeners, stay tuned for more FICC market structure content on this channel. For more information on these topics, please reach out to your J.P. Morgan sales representative. Have a great day. 

[End of episode]

FICC Market Structure: Blockchain’s case for liquidity 

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Kate Finlayson: Hi you're listening to Market Matters, our market series here on J.P. Morgan's Making Sense podcast channel. I'm Kate Finlayson from the FICC Market Structure and Liquidity Strategy team.

As our listeners know, we look at what could shape liquidity in the market and how you access it. And certainly, in today's environment, there are a number of drivers influencing this. In today's episode, we are going to take a look at advancements in technology that could play a role not only in how one accesses liquidity and the speed with which you can access, but also some of the broader potential benefits that can be derived with respect to balance sheet and capital usage.

To discuss these elements I'm joined by Scott Lucas, Head of Markets DLT at J.P. Morgan. Scott, thanks for being on today.

Scott Lucas: Of course, Kate thank you. It's great to be here.

Kate Finlayson: The last time we did a podcast together, Scott, on distributed ledger technology or DLT, which is another name for blockchain, that podcast was in 2021 and a lot of the work and advances being made with respect to DLT were hugely encouraging, albeit a little nascent. And certainly there's still a lot of room to run in terms of adoption of this technology more broadly and all the use cases that can be deployed. That said, how far have we actually progressed?

Scott Lucas: I think it's a good time to do the podcast because the market condition has changed and think that's one of the areas that actually is a stimulus for where we think we can make progress this year versus the homework's been done by the broader market over the last two years in setting those conditions of breadth that we've seen. 

And what I mean by that when we first started on this journey although we did the podcast in early 2021 we've been working on stuff on the market through 18 and 19 when the conditions were such that QT was starting there were a bunch of reasons to start looking at diversifying liquidity that was one of the key drivers of how the technology was being deployed. And then Covid happens and liquidity is no longer a challenge.

So that condition is starting to pivot back to an area where actually the liqudity is challenged. There are new ways opening up, built off that breadth of experimentation in the last couple of years that can be implemented this year, and that's where we expect to see the depth.

So I think actually it's a good time because we'll start to see some of those challenges be met by what's been built in the last couple of years through 2024.

Kate Finlayson: Okay, so how do we move from use cases to a more liquid market in some of these use cases?

Scott Lucas: So I guess the key thing is really to demonstrate value and that really is about utilising the experiments and proof of concepts that have been tried over the last few years in a much more meaningful way. And so for example, our repo product that's been in the market for nearly three years has done a trillion dollars’ worth of value. We've been lending on that platform for a long time. Now we're in the process of not just expanding the footprint of where we can trade and the types of collateral we can use but also looking to bring liquidity in. So you're now having the nascent sort of capability to do a bit of a two-way market, so we can mobilise liquidity in a more effective way than is possible on existing technology rails.

If you think about that construct alongside connecting platforms, again there's work being done in demonstrating value in connecting platforms, you're starting to set the conditions for what could be a very effective way to mobilise liquidity across these platforms that you can't do today. I think that's where we've got to start demonstrating value through 2024. And demonstrating value is not just the trade but the economics associated with those trades.

Kate Finlayson: Right, and so one area where there has been the mention of DLT playing a role is in the move to T plus one settlement. And that has felt quite far off as an achievement, quite frankly. There is quite an operational shift involved in the move to T plus one settlement for US securities, not only of course for US market participants, but especially European and Asian asset managers, given the small amount of time they have clearly because of the time zone differences. And aside from operational considerations, there are implications for FX liquidity, funding costs, and trading dynamics on the fixed income side too. As both the EU and the UK also look at a potential move to T plus one, albeit again further out, what role could DLT play and how achievable in the near term could that actually be?

Scott Lucas: Sure, so I think that you're right, I mean, it's not just about the speed of settlement that I think that technology can provide, but it's also that precision. So you know, going back to products that are on the market, you can trade those today, you can settle them today at a specific time, you can mature them today, or at some time in the future at a specific time.

So there's characteristics if you apply them to a circumstance such as mismatch in timing for T plus one settlement and the impact on how those trades are funded for offshore clients or even things like the ETF create redeem process. There's some areas of potential that we're exploring in that space. So if you look at T plus one settlement and you're a European or an APAC client then actually timing your FX trades in order to have dollars in the right place to meet your settlement obligations is difficult. And the FX market timings don't change.

So there are other ways we can look at solving that problem. For example, doing a intraday repo for cross-currency collateral in Australia or in APAC on the day of settlement can be a source of dollars for those clients. We're kicking the tyres to see if that's something that's an effective solution for our clients and potentially a wider solution for the market.

Kate Finlayson: OK That's encouraging. Something that's slightly less encouraging, of course, is that bank capital requirements have only increased in recent years. We have Basel III reforms that are being proposed in the US, in the form of Basel III endgame and the G-SIB surcharge proposals which would have material implications for liquidity and clearing capacity if those proposals, those two NPRs, are finalised as currently drafted.

Regardless, against this backdrop of increasing capital costs and trading costs for all market participants, how could blockchain alleviate or even enhance liquidity provision?

Scott Lucas: Okay, I think there's two key ways that could happen. The first way is really utilising some of the capabilities we've mentioned before around the speed and precision of settlement. So, you know, counterparties can trade today, settle today, mature today, so you can really offset some of that overnight risk into an intraday market.

So if you're taking things from overnight, whether it be FX or financing transactions moving into intraday, then clearly the balance sheet consumption, which is an overnight metric, is reduced, and that relieves some of that pressure. The second example would be going back to what I alluded to in the first question, is around a two-way market for liquidity.

So if there's liquidity available in Asia that can be recycled in Europe that can be recycled in the United States because you can trade, settle, mature and then recycle those assets. A lot of the sort of liquidity that kind of in inverted commas ‘sits on the shelf’ during the day because the current technology doesn't enable it to be utilised in a follow-the-sun model. If you can be precise and you can be accurate and you can measure that risk and you can settle in a very clear way, that becomes available. I think both of those things in partnership could offset some of those liquidity constraints we see today.

Kate Finlayson: And so how in theory could that actually work?

Scott Lucas: So I mean, if you think about the FX market today, if you're doing a funding transaction you'll trade today, receive the opposite and pay your currency today and then you'll mature that tomorrow. That brings with it overnight risk. There's a scalable cable and Euro-dollar market to meet dollar obligations for clients, not in the US. If some of that could be transformed into an intraday swap, specifically to meet funding requirements that sit both within the US and the Euro opening hours, then you could take some of that overnight risk off balance sheet, make an intraday trade, Euros for dollars in the morning, dollars for Euros in the afternoon, and then you're relieving some of that balance sheet pressure, but in a way that is still very precise, and payment versus payment settlement, it's a risk reducing exercise as much as a balance sheet reduction exercise.

Kate Finlayson: Thanks Scott. So for clients that haven't thought about DLT or simply haven't been able to quite frankly prioritise given other technology spend requirements, how best can they position themselves for advances in DLT?

Scott Lucas: I think it's a fair question, particularly when you look at the buy side. A lot of the sell side are creating their own platforms and there's a derivative of the regulation and just general sort of competitive dynamics, we end up with a lot of banks with platforms. And if you're on the buy side and you think about, well, how do I engage with this? Onboarding to any platform, regardless of whether it's blockchain or not, is a complicated process. So onboarding to lots of blockchain platforms doesn't feel very appealing.

So, you know, in the context of our platform, we have financing, we're working towards issuance, we're going to be able to offer FX, we have the tokenised collateral network. I think it's important to be able to do multiple things that are important for your business on a single platform. And there are multiple platforms being developed.

The other bit is each platform in and of itself is an island unless it's connected to the wider market infrastructure. So ensure that whatever platform you're looking at joining to realise that benefit is part of the broader ecosystem, whether that be traditional market infrastructure or connecting to other blockchain platforms. And there's a lot of work happening in that space as well. If you're considering how do I get value out of being in this technology and how do I maximise the value for the spend that I can commit to this technology, picking a handful of platforms that show as many trades as possible and there on the pathway to being as connected to the market infrastructure as possible.

Kate Finlayson: We've covered a lot of ground, Scott, in today's chat. There is a lot of potential. Clearly, things have moved on. And no doubt, we'll be chatting again because there seems to be a fair bit of momentum and certainly the environment for these use cases and this technology to be deployed. So thank you so much for joining today.

Scott Lucas: Thanks for having me.

Kate Finlayson: And to our listeners, stay tuned for more FICC Market Structure and Liquidity Strategy content on this channel. Hope you have a great day.

[End of episode]