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12 | ifr special report | December 2008 PFANDBRIEFE ROUNDTABLE “


We need the secondary market to work and the money markets to work again before it comes it a primary issue. But it mustn’t be forced. Issuers need to be very careful about tapping the market with a primary issue.


Hagen : There might be an interest among issuers for issuing jumbos, but are the investors prepared to buy a jumbo? If they buy a jumbo they will expect liquidity, otherwise it just doesn't make any sense.


Pimper : This is why we need the secondary market to work and the money markets to work again before it comes it a primary issue. But it mustn’t be forced. Issuers need to be very careful about tapping the market with a primary issue.


I would also add that there should be at least some secondary market spread performance before an issuer comes with a new one. So first secondary, and then primary.


Hagen : At the moment we are very much focused on trying to get the basics sorted out, but maybe we must also look at the jumbo market and the secondary market. We need to return to the discussions we had before September – where we need more transparency in the secondary markets and price transparency for the investors; do we need different kind of market making procedures or commitments; is the jumbo bond market we used to have before still a valid concept for the future? These things need to be re- considered before we come back with the same procedures as in previous years.


IFR: Laurent, can MTS assist in what Louis has said on transparency?


Viteau : We can always argue about whether or not there should be market making, but it is the way the secondary market has traded that probably must change slightly.


Five years ago, one of the prerequisites for a liquid bond was to have it trading somewhere where everybody could see it. There was a commitment to put positions on the balance sheet all day long, which is what the investment banks were doing. That applies to all the European governments, agencies and Pfandbriefe of a certain size.


In the last year to 18 months we have come to realise that’s possibly not the best


way to ensure sustainable secondary markets. In other words, why should dealers be obliged to put positions on balance sheets and to quote prices all day long, whether it is Pfandbriefe or covered bonds? Maybe it should not be an obligation. Maybe it should not be conducted on the basis of being axed, but instead institutions should be more or less allowed to trade when they want to trade and provide liquidity or take liquidity when they want.





Why should dealers be obliged to put positions on balance sheets and to quote prices all day long, whether it is Pfandbriefe or covered bonds?


You could even go a bit further: why should it be the dealers only who are committed to provide liquidity in the secondary market? In the equity market, for instance, it is not the dealers who provide liquidity, it is a much wider universe. The liquidity providers and liquidity takers are completely diverse. Maybe the bond market should go this





way as well. It's not going to happen tomorrow and there's probably some more structural change needed, such as the es- tablishment of a central counterparty or some other means of removing counter- party risk. There are investors in the jumbo markets saying they want to have the same access as the investment banks, because they want to provide liquidity. I have heard several investors make comments like that. Maybe that is the way the market should go. Maybe the secondary market


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commitment should be slightly different. You should expect the dealer group to be there on request, but also open the market a bit more so that more participants can provide their own liquidity or take it when it is needed.





Pimper : Are we discussing this now because of the crisis or is there a feeling the system needs to be changed anyway? There is no liquidity out there due to the crisis. From my point of view there's no solution that is going to work well in this environment. Maybe a swap market or a government market might work, but swaps used to be such plain vanilla products, whereas right now it is very complex – or has become so in recent months.


Huber : There are three points which make it necessary to establish functioning market making again. First, trading books can refinance themselves at a level where they don't get penalised by having positions, which is still not the case. If you buy something you have to get rid of it as soon as possible, because you have an immense cost of carry.


The second thing is that the hedging instruments are coming back to being normal – certainly swap markets. Thirdly there is a question of how much credit hedging is needed in a portfolio for covered bonds? This is a whole universe: we will see in the future if it is needed for German covered bonds. When you provide that kind of liquidity, how sure can you be when you hold a position that there won't be something new coming out with much wider spreads which jeopardises your position?


These are the kinds of questions we need to answer before market makers become comfortable enough to really provide liquidity again into the secondary market.


Engelhard : It's good to think about how the world could look, and how these types of schemes which enhance secondary market liquidity could work in the future. At the same time, in the current environment when there is no transparency in Libor and


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