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November 2001

The new Italian connection


Deal: Merger of technology platformsStructure: MTS buys 15% stake in CoredealResult: New corporate bond structure – CoredealMTS




Most EuroMTS announcements are not what you would call exciting. 'Record trading volumes on MTS Portugal' and the like don't exactly get the heart racing. But a recent joint initiative from EuroMTS and the International Securities Market Association (Isma) is rather different.
Isma has taken Coredeal, its inter-dealer credit trading platform, which lists about 5,000 corporate bonds but lacks liquidity and decent technology, and combined it with EuroMTS, which has a robust technology platform and good liquidity but no corporate bonds. The result is CoredealMTS, a bond exchange that will be ready for use in January 2002 and may one day become an open exchange for dealers, institutional investors and borrowers.
On its own, Coredeal was never a great success. Isma announced that it was going to set it up in early 1998, when banks and everyone else in the financial markets were drunk with optimism about the possibilities that technology was beginning to offer for trading. Speaking from a villa in Provence, where he was relaxing after the busy build-up to the CoredealMTS announcement, John Langton, CEO of Isma, was candid about the platform's performance. "There is no point saying that Coredeal had good volumes, because it didn't," he admits.
That's not to say that it was a bad idea. Coredeal pooled corporate credits from about 60 firms out of Isma's 600 members and put them on an electronic exchange. The platform became a recognized investment exchange in May 2000, regulated by the FSA. But Isma had agreed from the beginning that it was going to use technology provided by Bank of New York.
So every time Isma or its Coredeal members wanted to make a change to the platform, the changes had to go through Bank of New York. Langton is careful not to criticize the bank - it did everything expected of it and always worked to the best of its ability, he says - but Coredeal just couldn't make changes quickly enough through a third party to keep up with the pace of development in electronic trading. So, for example, users were left frustrated at having no access to euro spread dealing. "The environment was changing so fast," says Langton, "that what seemed feasible in 1998 and '99 seemed outdated just three months later. We needed more and more changes and more and more capital. It didn't work."
Isma faced another problem. Coredeal was set up for Isma's broker-dealers in corporate credits, of which there were about 60. But Isma has 600 members in 50 countries, and most of them are price takers, not market makers. So the 540 Isma members that were unable to use Coredeal were understandably unhappy that Isma was fully funding the venture. Isma then sold 42% of Coredeal to some of the broker-dealers, including Morgan Stanley, JPMorgan Chase, Lehman Brothers and UBS, but it still held a large stake that it needed to reduce. Says Langton: "We needed to usurp someone else's system or pay someone else to provide it. But we were on a strict budget. And these platforms don't come cheap.
Enter EuroMTS, Italy's well-respected electronic inter-dealer trading platform, which has made a name for itself in European governments trading, and had more recently moved into quasi-government bonds and Pfandbriefe. EuroMTS has 400 connections, or users, across Europe, and it handles an average daily transaction volume of e45 billion ($40 billion), counting one side of the transaction.
EuroMTS is now taking a 15% stake in Coredeal, and Isma will gradually reduce its stake in the company to the same level by 2004. So Isma reduces its stake and gets better technology that is already installed with broker-dealer clients and MTS gets corporate bond trading. And both sides benefit from the credibility that the other offers.
So far so good, but it's where this could lead that's the really interesting part. Any recognized market maker that is a member of
Isma and that meets the requirements of exchange membership could use CoredealMTS when it launches in January 2002. Potentially, any member of Isma could use it.
And it could go yet further. Says Langton: "There is no reason why institutional investors could not sign up to it, but that's up to the new board. The clear divide that we used to have between broker-dealers and investors is gone. If it turns out that volumes will come from opening it up to all, including borrowers and institutional investors, provided they meet the rules of the exchange, I don't have any objection to that."
And although the platform is a private network now, it could even work together with BondVision, the internet-based European government bond trading site that EuroMTS bought from what was left of the infamously unsuccessful BondClick venture. TradeWeb Europe dominates northern Europe with its European sovereigns trading, but BondVision is thought to have a good chance of survival, especially in southern Europe. EuroMTS does not rule out the possibility of somehow incorporating CoredealMTS's corporate bonds onto that platform, but this is likely to be a complex long-term plan, partly because CoredealMTS is an exchange and BondVision is based on requests for quotes.
That is another crucial point. Up to now, the only real fixed-income exchange has been the Swiss Stock Exchange (SWX). It's one of the best kept secrets in the City, but SWX lists about 1,300 Eurobonds for dealers and investors alike, and it trades them cheaply, with full STP. It is mainly geared at retail investors, and the average ticket size is about $50,000.
But SWX has failed to build this into a broader exchange. At the time of writing, SWX knew few details about the CoredealMTS venture, so it could not comment fully on the new competition. Ueli Goldener, head of fixed income at the exchange, sounded cautious, saying: "There have been many announcements of strategic alliances." Goldener defends SWX's position, saying that it boasts ABN Amro, Barclays Capital, CSFB and UBS as market makers, as well as Cantor Fitzgerald for Eurobond business only. By the end of 2002, it hopes to have eight market makers.
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