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Capital Markets

Covered bonds: Packmohr plan unpacked

ECBC plenary meeting divided about how to handle market making.

With much being made of the split between "core" and "non-core" covered bond markets, and that between legislated and structured issues, it is a comforting thought that the European covered bond community is for once in harmonious agreement.

Unfortunately, the extent of that agreement is that something needs to be done, rather than what that something might be. Last month in Milan, the European Covered Bond Council met to discuss possible solutions to the problems in inter-dealer market making. One of the key selling points of covered bonds is the stringent market-making commitment to which underwriters commit themselves.

But volatility in the wider financial markets as well as specifically in covered bonds, culminating in the pulling of a three-year deal from AIB Mortgage Bank last November, caused the suspension of market-making in covered bonds on the advice of the ECBC’s "eight to eight" committee. Problems in the swap market as well as negative headlines, especially regarding Spanish, UK and US covered bond sectors, have meant that market-making problems have persisted through the first quarter of 2008.

The focus of the ECBC plenary meeting was the Packmohr plan, the proposed development, formulated by Ted Packmohr, head of covered bond research at Dresdner Kleinwort, of a hybrid trading platform to replace the flawed telephone system that allows market-makers a significant measure of deniability in quoting prices.

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