Electronic European government bond trading has, since the inception of the euro, been dominated by MTS. However, the market is slowly opening up to other platforms as some states have given their primary dealers the option to make markets away from MTS. Hélène Durand looks at recent developments and asks whether more competition will change the way European government debt is traded.
Since April 1, primary dealers in Belgian and Dutch debt have been able to fulfil their quoting obligations on electronic platforms apart from the domestic platforms run by MTS — the Italian company that runs a network of government bond trading platforms.
While it is very early days, the opening up of trading European government bonds to other platforms is seen as a positive step in trying to improve competition and liquidity in European government debt.
"We have been very much involved in this space and have been supporting DMOs [debt management offices] in offering their primary dealers the option of choosing the platform on which they wanted to trade," says Mark Austen, managing director at the European Primary Dealers Association.
"Competition between platforms is a very positive thing for the market and will lower cost and improve innovation without damaging liquidity.
"The model chosen by Belgium and Holland offers the best of both worlds. While it will take months if not years to say how it changes the markets, so far it has been a positive experience for participants and the market as a whole."
A head of government bond trading in London agrees: "We very much welcome more competition among different platforms, which should bring down cost and improve efficiency over time, as well as open electronic trading to a bigger group of participants."
Belgium was the first sovereign officially to announce in February that it had chosen three trading platforms on which primary dealers would be allowed to fulfil their obligations: BGC e-Speed, ICAP BrokerTec and MTS Belgium.
This was the first time that a sovereign, apart from Spain and Greece, had allowed banks to trade its debt electronically off the local MTS platform.
At the time, Baudouin Richard, chairman of the executive committee and director of financial markets and front office at the Belgian debt agency, said changes in the market landscape, including the development of a "consolidated best page" where dealers could consolidate the prices showed on different platforms, meant that the main hurdle preventing primary dealers from using more than one platform had been cleared.
The Dutch State Treasury Agency was quick to follow suit in March, announcing that primary dealers could choose between ICAP BrokerTec, BGC e-Speed, MTS Amsterdam and Eurex to trade its bonds. Other platforms are free to apply as long as they fulfil the relevant criteria.
Reconsidering the one platform rule
"We had some questions over the years from our primary dealers asking us to reconsider the one platform rule," says Erik Wilders, agent of the DSTA in Amsterdam.
"Furthermore, the European Commission conducted an inquiry into MTS’s business model in early 2007 and we felt after this that as long as a platform met the right criteria, primary dealers should be able to quote on it. We concluded that as long as there was a low entry barrier, we would end up with a virtual market where prices would converge.
"We also felt that the competition between platforms would increase innovation and diminish our cost of funding in the long term. Our first anecdotal evidence is positive and we have seen compliance improve."
Other sovereigns are now said to be considering similar steps.
Agence France Trésor, although it never had specific rules against primary dealers quoting on platforms away from MTS, is changing rules slightly so that primary dealers will be encouraged to quote elsewhere.
MTS France will be excluded from the Market Committee on which it was sitting. The Association des Marchés en Taux Euros (AMTE) will now be in charge of running the administrative side of the multi-platforms.
Liquidity a problem
While the opening up of the competition to other platforms has been welcomed by the industry in general, it has failed to alleviate the effect of the credit crunch on the liquidity of European government bond debt, which has dried up substantially in the last eight months.
"Spreads have widened and it has been more difficult to execute large trades for dealers," says Wilders.
"It has been impossible for primary dealers to quote with a two cents bid/offer spread. Even the multi-platform model could not prevent liquidity from drying up. Most of the liquidity has been concentrated in Bund futures or swaps and effectively anything outside of these instruments has been considered as off-the-run.
"However, the system is not broken, but it might take a while to normalise. We will ultimately go back to tight spreads between Germany and other EU sovereigns."
Jeffrey Hogan, managing director for business development at BGC, agrees. "Ultimately, the market will settle and we are seeing concrete signs of this already," he says.
"The extreme volatility in recent months is calming down and portfolio readjustments made necessary by market turmoil have been completed.
"As a result, we anticipate electronic volumes picking up and as the liberalisation process continues, overall volumes will grow. During this recalibration process, the DMOs are monitoring dealers, taking into account the extraordinary market circumstances and measuring them against their peers rather than as an absolute."
But during these volatile times, voice broking has been the option of choice for dealers in Europe.
When it comes to large risk transfers, banks have shunned electronic platforms, where they are more exposed to counterparty risk, in favour of over-the-counter trading.
John Edwards, director for fixed income for ICAP electronic broking, notes: "In times of severe volatility, voice broking can offer an element of protection that electronic execution can’t in less liquid sectors.
"However, by encouraging a multi-platform set-up, the competitive element will have a positive impact and help the European government bond markets progress towards the US model, where 98% of on-the-run benchmarks are now traded electronically."
