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German Government Bonds: An end to muddling through

The main banks trading in the European government bond markets are looking closely at the mechanisms used to offer government bonds in the primary market.

Given the huge size of the Bund market, Germany's Bundesbank muddles through with a surprisingly primitive and unreliable system for accepting bids from banks. That system services both Bund issues and the central bank's weekly tender offers, known as repos or Wertpapierpensionsgeschäfte. Banks bidding for German government bonds have up to now used phone or fax to send their bids through to the Bundesbank's 16 regional branches - known as the Landeszentralbanken - which sends them in turn to the Bundesbank's headquarters. The bids are then passed on to the finance ministry in Bonn, where they are scrutinized and sent back to the Bundesbank. Having made the allocation, the Bundesbank then relays it back to the banks, via the Landeszentralbanken.

With so many links in the chain, all done by phone or fax, mistakes have been inevitable. Orders were sometimes "lost" en route, and errors remained undiscovered until it was too late to correct them. A new e-mail-based bidding system now being introduced at the Landeszentralbank (LZB) in Frankfurt was conceived primarily to minimize human error.

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