 |
"The failing of the ACI decision was that it was made exclusively by traders"
Richard Kemmish, Credit Suisse |
The group will comprise representatives of the eight largest covered bond markets by outstanding jumbo issuance volume and the eight most committed market-making institutions. According to the ECBC, the 16-person committee will advise on measures to amend market-making agreements to "facilitate a return to orderly trading conditions".
If it succeeds, it will be none too soon. Some of the words being used to describe the present state of the covered bond market ("confused", "sporadic", "patchy", "messy") would have been laughed at had they been pitched six months ago. But the market has fundamentally changed, and the question of whether covered bonds can be considered a rates product rather than a credit product has been answered in the negative, despite the best efforts of market participants. "In today’s world, you have to say we are looking at a credit product," says one.
There is certainly a need for action. But can the ECBC succeed where others have failed? The much-publicized efforts of the ACI financial markets association to maintain market-making in secondary covered bond markets were unsuccessful, and the attempt to split the market into "core" and "non-core" sectors by tripling bid-offer spreads for the latter and only doubling them for the former led to widespread dissatisfaction among issuers. Unsurprisingly, the active members of the ACI conference call were all covered bond traders, and client-facing debt capital markets bankers listening in were said to have had their heads in their hands when the decision to split the market was taken.
It is for this reason that the ECBC’s eight-plus-eight group is so structured. "The failing of the ACI decision was that it was made exclusively by traders," says Richard Kemmish, head of European covered bonds at Credit Suisse and a member of the ECBC council. "There was no voice for the DCM guys, so the issuers were overlooked."
The ECBC is in the process of obtaining data on the relative commitments of market-making banks. Each of the eight-largest covered bond markets – Germany, Spain, France, the UK, Sweden, Portugal, the Netherlands and Ireland – will individually decide which of its own issuing institutions will act as its representative. Although some dissatisfaction is expected from the issuing countries that don’t make the cut, there are no problems expected in having the representatives support the entire market. "In the covered bond market, countries are more inclined to club together," says Kemmish. "The mood between issuers is very collegiate. For instance, after the ACI decision, one statement was sent by all of the issuing banks in Sweden, rather than many individually."
The eight-plus-eight group is expected to meet as soon as possible after the announcement of its membership, and thereafter whenever any one of its members deems it necessary. Its composition will be revised annually, although any member market can choose to change its representative at any time. Because of its advisory role, the group will remain independent of the ECBC.