EU government bond trading: MTS approves non-banks on govvie platform

MTS will probably unveil the mechanics behind the new trading structure for its European government bond trading platform before the year-end. A brief statement last month put to rest months of speculation on whether the MTS Supervisory Board would allow non-banking participants to trade on the platform, which up to now has been the preserve of primary dealers. The verdict was positive but surprised many as the decision has been mired in controversy for some time since it was first mooted over a year ago. In fact, such was the level of discord among bankers that few believed the platform would be able to approve a radical move and still retain its market position.

This is primarily because primary dealers feared being picked off by the mooted new participants, who would not be under the same obligations to quote on a wide range of sovereign bonds. Although MTS has not officially outlined how the new system will work, it is clear that dealers have been informed that an order-driven system will likely be used where non-banks participate, which would eliminate their cause of concern. But at present there are still many unknowns, ranging from which on-the-run bonds and benchmarks will be used to how the new participants will be chosen. Some bankers gave the scheme a tentative thumbs up – or at least they did not seem as defensive as they have been.

Forced liquidity

Europe’s debt management offices have successfully used MTS to monitor their dealers’ performance in market-making commitments. Many of the peripheral DMOs believe this strategy helped close the spread gap their bonds traditionally endured relative to the continental sovereign benchmarks. Hence the liquidity that dealers provide on the platform is largely forced (and unprofitable for the dealers) and would possibly disappear in the event that they were forced to quote prices in an environment where other participants on the platform were under no obligation to make markets in the same manner.

The DMOs have accepted that change was inevitable; the accusations that the existing market model was anti-competitive had intensified. And as one trader says, there is real need for a true shake-up in government bond trading. The present structure of quotation obligations for primary dealers hides the fact that there is a lack of deep liquidity.

In September, outline details of the new methods that the DMOs will employ to measure their primary dealers’ performance emerged (see Sovereign Debt: Debt trading to open up under DMO plan, Euromoney, September 2007). It seems this paved the way for MTS to approve the entry of non-banking players.