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June 2008 | ifr special report | 11 SOVEREIGN BOND MARKETS ROUNDTABLE

out there, and obviously not everyone can trade on that price. But it is at least a starting point for a discussion which is difficult if the market has entirely disappeared.

Hogan: The central issue in the covered bond market has been the issuers. I think the leadership shown by the DTSA to assess the market at times of both normal conditions and at times of extraordinary conditions has been crucial. It makes sense to monitor dealers in both normal and fast conditions and then make comparisons against their peer group.

Wilders: It is also very important to have a price somewhere. It doesn't matter how wide spreads were to begin with, but it starts with some transparency and even though it can be painful to have to trade on a very wide spread, that's the chance you took when you bought the bond or went short of the bond. That's what it is all about: transparency. It is obviously more difficult in the covered bond market because of the number of issuers.

Rivoire: I think it is not only a question of transparency and liquidity. You've also got the question in terms of quality of the credit and in the last 12 months we have seen a re-pricing of all credits as well as a re-pricing of liquidity. Obviously the covered bond market has re-priced because the quality of the pools behind the covered bonds may be different. Because the regulations are different in various countries there may be different conse- quences too. For sovereigns, the market has just re-priced the liquidity and obviously there are a fewer credit differences, but it is more the liquidity that the market has re-priced rather than the quality of the credit, which is the situation with covered bonds. I think that is a major difference.

That was more the case in the last 12 months, even if the situation has improved in the last few weeks, we have not seen any significant buying interest from investors in covered bonds. When we talk about market-making and about the trans- parency and liquidity, it is difficult for a bank to regard it as an efficient market because in fact the market doesn't exist anymore. In terms of net flows, even if liquidity has been lower than before the last 12 months, in the end all of the sovereign issuers have been able to sell what they need to sell.

Anne Leclercq, Belgian Debt Agency

Wilders: Whether you want to buy, or you want to sell, despite having very wide spreads, at least this approach will provide you with some transparency.

Rivoire: But the fact is that, for the covered market, even very wide prices don't mean a lot, keeping in mind the lack of investor participation.

Wilders: Nevertheless if it can be established where there is selling interest and where there is buying interest, even though it might not be very a very tight market, at least it is a starting point.

Rivoire: I agree, but the banks, as we said at the beginning, are in the middle between the issuers and the investors and if the investors are not there, at least for a temporary period, it is difficult for the banks, especially due to the agreements and commitments they have made, to compensate for the fact that investors have disappeared. It is difficult for the banks to stick to the same market-making rules if you've got parts of the market which have disappeared. But now the situation has been improving, the issuers coming back and the ECBC is working with the different platforms to see what is viable and what is not. But we have to keep in mind that market-making is efficient only when the market is efficient and only if the market is working as it should.

Wilders: But this is exactly when you need market-making. If everything is going well, who needs market-making? So it starts with the situation where there is

someone in the middle with information about where both buyers and sellers are located, and puts them on a screen somewhere to give some transparency. This is the basic premise of market making: knowing where the buyers and sellers are.

Rivoire: If I may, I think that when you say we need market-making when the market doesn't work, in one way I totally agree. But from another perspective, it is dangerous to force the banks to continue to quote when they don't want to trade. It is necessary to make a distinction between quoting prices and trading.

Hogan: There shouldn't be any difference between quoting and trading, because all your prices should be live continuously.

Rivoire: No, there is a major difference. If you quote and you want to trade, you are pleased to take and to keep the position. If you quote and you don't want to trade but were forced to, what are you going to do? In this scenario if you trade the probability is that the position will be sold back into the street, which will accelerate the magnitude of price movements in the process.

Wilders: Even I have an interest at zero bid- 200 offered, so at a certain spread there must be a willingness to trade.

Hogan: I assume you are describing the core issue of the existence of compulsory market-making in Europe, whether it is in governments or covered bonds or agencies.

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