Links between government bond and futures markets: dealer-client relationships and price discovery in the UK

We use transaction-level data to study trading and clearing relationships between dealers (ie, Gilt-edged Market Makers and clearing members) and their clients, and price discovery in the UK gilt cash and futures markets in 2016. Using a network approach we analyse the distribution of trading and clearing relationships between dealers and clients, the concentration of the associated volumes and how these change over time. We find that volumes in each market are concentrated in a few key dealers, that clients tend to have relationships with a limited number of dealers and that such relationships and volumes were resilient during most of 2016, including around the EU referendum and subsequent policy announcements. We also assess the systemic risk that could be caused by the inability of those dealers operating across the two markets to perform their roles as clearing member and market maker, finding that there may be some scope for spillover effects from potential disruption in the cash market to the futures market through this channel. Finally, we find that order flows (that we proxy using net volume traded) of clients in the UK gilt futures market can affect cash prices, suggesting that the futures market plays a role in price discovery in the cash market.