Bondcube Wins Europe’s Approval in Quest to Fix Broken Trading

Bondcube has won approval to operate its electronic platform in 31 European countries as it seeks to fix a corporate bond market that BlackRock Inc. says is broken.

The electronic bond-matching venue has “passported” its existing approval from the U.K.’s Financial Conduct Authority to the other countries, according to a statement today. Bondcube is seeking approval from the U.S.’s Financial Industry Regulatory Authority, which it may obtain in the next few weeks.

“Being regulated in London by the FCA is one thing, but being regulated by the other 30 countries is what you really need,” Paul Reynolds, Bondcube’s chief executive officer, said in a phone interview. Reynolds previously traded corporate debt at Citigroup Inc., Deutsche Bank AG and UBS Group AG.

The platform helps clients match large orders in illiquid bonds that banks cannot complete internally, Reynolds said. The buyer and seller still need a dealer to execute the trade. The company plans to go live for corporate bonds, including junk bonds, emerging-market debt and asset-backed securities in both Europe and the U.S. in mid-February.

Bondcube intends to ask the Securities and Exchange Commission to be designated as an alternative trading system once FINRA has approved it as a broker dealer.

Liquidity in the secondary market for corporate bonds is drying up even though the primary market -- where companies sell debt to investors -- is headed for a record this year. The banks that traditionally facilitate trading in the securities have been hobbled by regulations that force them to cut their inventories of debt.

Broken Structure

The world’s biggest investor has said the banks’ reduced bond holdings have fractured the structure of the market. BlackRock said in a paper that low interest rates and muted volatility have masked the “extent of the breakage.”

Shifting transactions to electronic markets would help repair the damage, the investor said. The asset manager also suggests reducing the complexity of the securities by encouraging companies to issue more standardized debt.

Bondcube is competing with MarketAxess Holdings Inc. and Electronifie Inc., which operate their own electronic bond venues. Bloomberg LP, the parent of Bloomberg News, also has a platform.

A group of banks and investors is working on a plan known as Neptune to create a standardized language and messaging system for trading corporate debt.

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