Nominal trading sizes below the set minimum as commonly referred to as “fractional” or “sub-nominal” trading sizes.
Say an investor wishes to purchase $100k nominal of the 2025 Republic of Nigeria Eurobond. This Eurobond has a $200k minimum and therefore every trade needs to be $200k or more in order to be executed and settled. Theoretically a fractional trade can be executed by a trader, however some International Central Securities Depositories ("ICSDs") refuse to clear and settle any settlement request for a nominal volume that is below the set minimum for each bond.
To ensure settlement of fractional sizes, the investor is allowed to purchase $300k and simultaneously sell back $200k in order to end up with the desired $100k. In this way, the buy leg ($300k) of the transaction meets the minimum settlement volume criterium and so does the sell leg ($200k). The opposite of this process, a sale and buy back, is possible when an investor wishes to sell a fractional size. This example is illustrated below.
Fractional trades are becoming more popular amongst especially retail investors; however execution remains at the discretion of the dealer.
When a Eurobond is issued, the issuer decides the minimum nominal threshold, with bookrunners providing advise.
Minimum amounts are set to adhere to either regulatory standards, index requirements or generally to dictate the type of investors who can have access to the bond.
A regulator may wish to have a certain minimum nominal amount per bond in order to avoid (large) retail investor participation in both the primary or secondary market. The same view can be adopted by the issuer or the market-makers assisting the issuer with bond issuance. Trading sizes in low nominal amounts can be looked at as an operational burden to settle and have less commercial attractiveness.
In addition, or alternatively, listing a bond on an index may come with minimum nominal amount requirements for a bond too.
An investor is merely required to fund their custody account with the amount of the netting, i.e. the cash amount representing the fractional nominal amount.
In some markets, two trades ( a buy and a sell or vice versa) meeting the minimum nominal amount are needed in order to settle the netted difference between them.
For instance, a $100,000 fractional purchase requires a purchase of $300,000 nominal and a simultaneous sale of $200,000 if the bond has a $200,000 minimum threshold. Both trades will be accepted for settlement and the net difference, $100,000, will be left on the investor's account. Funding is only required for the fractional size and not the initial $300,000 buy leg as the custodian will net both the buy leg and sell leg.