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Bond market fingers on the button
One year after the introduction of the single currency and
the birth of the unified market, competition to provide Europe with
an electronic platform to trade government bonds has gathered pace.
This year could be crucial to establish which system will become
dominant in the near future.
At the moment, the hot favourite is EuroMTS. In operation
since April, this platform is based on the 10-year-long successful
experience of the Italian Mercato Telematico dei titoli di Stato
(MTS) on the domestic market and has grown impressively over the
past eight months. "Our market share is now approximately 25%. The
remaining 75% is still largely dominated by brokers and the
over-the-counter market," says Gianluca Garbi, managing director at
EuroMTS. The figures are the more impressive because the percentage
is calculated on all transactions, including the smaller ones that
a wholesale system such as EuroMTS will never be able to trade.
In the past few months, EuroMTS has outpaced all other
contenders. Xetra, a system owned by Deutsche Börse to trade cash
bonds and other securities, has been struggling to reach
satisfactory volumes in fixed income. And Coredeal, a solution
developed by the International Securities Market Association (Isma)
to trade Eurobonds, warrants and global depositary receipts, was
due to be launched last March. But after failed negotiations with
the London Clearing House, it is now expected to start operating
through Euroclear in March 2000, listing only cash bonds at first.
With the sector still in full evolution, EuroMTS is now
facing a major threat from the other side of the Atlantic called
Brokertec. This is a company originally formed by six big US banks
- Citibank/Salomon Smith Barney, Credit Suisse First Boston,
Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley
Dean Witter - together with Deutsche Bank, the only non-American
bank involved. It has recently been enlarged to include five top
European institutions - ABN Amro, Dresdner Kleinwort Benson,
Warburg Dillon Read, Barclays Capital and Banco Santander Central
Hispanoamericano. All except BSCH are also involved in EuroMTS.
Goldman Sachs has been the engine behind Brokertec, which
explains why its former employees occupy the top slots in the
company. The idea is to create a worldwide electronic platform to
trade cash bonds, repo and other securities, to be launched in the
spring of 2000, starting with the listing of the most liquid
government bonds. "We are going to start with them and then step by
step we are going to build up the other sectors," says London-based
Lee Olesky, chief executive of Brokertec Europe. "Once finalized,
our platform will allow US and European securities to be traded on
the same platform, providing a bridge for Americans to trade
European bonds and vice-versa. And, in a second stage, we are
thinking of Asia as well."
The real aim is clear: top banks fear being cut out of the
electronic revolution. The main threats include Reuter's Instinet,
and E-speed, a wholesale trading system developed by US bond
brokers Cantor Fitzgerald.
Now the battlefield is extending to Europe. E-speed was
launched in Europe last July and with the increasing involvement of
European banks in Brokertec, EuroMTS could suddenly face much
tougher competition.
Garbi is aware of the problem. "Brokertec is very similar to
us. It's got the same targets as it doesn't want to disintermediate
the market. It's formed by banks that are among our main
shareholders and I wouldn't be honest if I said that is not a
problem," he says. "I don't know what is going to happen but it is
becoming increasingly difficult to manage the relationships with
these shareholders."
He continues: "At the beginning Brokertec was an initiative
limited to the American banks, with only Deutsche Bank involved
among the European top institutions. Now it has been enlarged, but
I still think it is an American move to monopolize the European
market."
To be ready, EuroMTS has been continuously growing over the
past few months. The system, which was originally set up to trade
only government bonds from Italy, France and Germany, has
introduced Austrian, Dutch and Belgian debt in October and Spanish
and Portuguese government paper in November.
Also it has moved beyond cash bonds. In late November
Italian, French and German repos were admitted to trade, opening a
very lucrative market for the platform. "Repos represent a very
important market for us," says Garbi. "In Italy, for example, daily
volumes of repos are about e25 billion to e30 billion, while the
cash bonds total only about e11 billion."
But what EuroMTS is really reckoning on is the creation of a
non-government bond division. A first test has been already done on
the domestic Italian system, where a bond of the Istituto Nazionale
per la Previdenza Sociale (INPS) was the first non-sovereign to be
listed in any MTS platforms in November. A big spurt is expected by
early 2000 when a division for the lucrative jumbo Pfandbriefe
market will open for trading.
Will it be enough to cope with the American invasion? Garbi
appears confident and explains that they will continue to grow
following in the "bottom-up" approach that has characterized
EuroMTS so far. "We'll keep growing section by section to arrive to
build a platform comprehensive of all the main European benchmarks,
sovereign and not," he says. But the race has just started.
Luciano Mondellini
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