MarketAxess will begin to expand its electronic trading platform to U.S. taxable municipal bonds through its trading venues in the U.K., European Union and Singapore in an effort to streamline buying and selling of taxable munis for foreign buyers.
Stephen Winterstein, co-head of municipal fixed income with MarketAxess, said: “Demand for access to U.S. taxable municipal bond market liquidity outside of the United States has grown steadily across the last 12 months, a time in which we have seen accelerated electronic trading adoption. Now with expanded access to a global liquidity pool, our global network of institutional investors and dealers are able to trade taxable municipal bonds on our platform.”
U.S. taxable municipal bond trading on MarketAxess has seen record adoption during the last year, with full-year 2019 trading volume of $5.1 billion, up 53% year-over-year, the firm said, adding that international interest has grown during that time.
Winterstein said foreign investors began to have an interest in municipal bonds for a couple of different reasons, but it began during the Build America Bond era and exploded last year, when issuers began refunding their exempt debt to taxables as a replacement for advanced refundings.
However, he said, because of regulatory differences between the U.S. and the U.K. and EU, foreign investors have had more difficulty in reporting trades.
MarketAxess is providing liquidity through its electronic platform, which in addition to its electronic trading capabilities will also support regulatory reporting obligations for international investors under the MiFID II rules. Up until this point, taxable munis have mainly been done via dealer-to-dealer voice trading. This essentially means from a regulatory standpoint in the U.K. and EU, municipals were considered illiquid and non-reportable.
“This extension also supports liquidity provision through the all-to-all Open Trading™ marketplace, allowing any participating investor or dealer client to either take or make liquidity anonymously,” a release said. “Unlike the traditional investor-to-dealer trading model, Open Trading allows for broader connections and expanded trading opportunities.”
By trading electronically — which has become the international standard —and providing regulatory reporting support as a result, Winterstein said, it broadens foreign investors' ability to buy munis.
When compared to other fixed income asset classes, munis are a very high-quality asset class, and international investors can use taxable munis to diversify their portfolios.
While the taxable sleeve of the municipal market is small relative to exempts, foreign investors can look to munis as attractive sovereign or subsovereign debt for their portfolios, Winterstein said.
“We believe that this is going to introduce an ease of process, an ease of workflow, clear reporting … we believe it's going to provide access for issuers to deeper pools of liquidity for their taxable bonds in the U.K. and in Europe," Winterstein said.
MarketAxess believes its platform will join the world in migrating to executing trading electronically.
In the municipal market, “we still have souls to win. Because of the nature of the market, the idiosyncrasies and vast number of issuers, moving munis to electronic trading has taken longer," Winterstein added. "We have seen adoption globally, with everything moving electronically and that is an irreversible path.”
Andre Severino, global head of fixed income with Nikko Asset Management in London, commented: “In our view, investing in U.S. taxable municipal bonds offers an attractive yield pickup with broader portfolio diversification and generally strong credit credentials. By having efficient global access to liquidity in these instruments, we can make strategic investment decisions quickly and deliver best execution for our clients.”
