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12 | ifr special report | June 2008 SOVEREIGN BOND MARKETS ROUNDTABLE “

To have the covered bond and agency markets trading over the phone will not be sufficient to restore investor confidence in

the marketplace.

I think as a group communally we agree that that's not disappearing. So if that's your premise then you have to try to optimise the situation, given the risks and the undesirability of making markets. I think Belgium and Holland have shown leadership to the market by saying: "We recognise and understand that there are conditions where we will call them ex- traordinary, where you don't want to make markets, but some of your peers might wish to make markets and we will reward them for doing that.”

So what the platforms need to do – in conjunction with issuers, regardless of what category they are in – is be able to monitor and compile and report to those issuers the performance of the dealers. So you have the willingness of the issuers to be flexible as well as the commercial peer pressure within the dealer community, which has always existed and which always will exist. Add to this the desire of investors to see a price somewhere somehow; and the ability of the platforms to compile, tabulate and distribute this information, and then you have the beginnings of the solution.

Rivoire: I agree but the situation is different between the sovereign and the covered bond markets.

Hogan: It is just the difference in price, though.

Rivoire: No, no, no, that's wrong.

Ezquerra Martin: One is made up of sovereign and the other a multitude of many banks from various jurisdictions..

Proni: I would like to make the point that yes, we agree that it is the issuers who should take the lead, although it begs the question: should you really disregard the type of issuer? For example, is a covered bond issuer in a position to offer similar incentives to a sovereign issuer? Because if they were, then I would assume that the covered bond issuers could actually have implemented similar systems and restored liquidity in the same way that has happened for sovereigns. In which case, why didn't they? I'm not sure they can actually afford those incentives.

Wilders: At some point, it starts to become interesting as a market-maker. Going into an auction with an off-market price, if you get it you are happy and you never know if that's what everyone else is doing.

Proni: We agree that it is better to have some prices, as bad as they may be, than no prices.

Maisey: I think it is definitely better if there is always a price for something from a theoretical point of view. I think at the moment, though, the problem is that there has been a lot of pain and people have become very nervous. This has led to the view that, "irrespective of price I just don't want to hold that bond or get left with a certain position in something, because I can't cover it". I think this brings us back to the point on the differentiation between different credits and different markets. There are certain covered bonds where the market is going to return to normality more quickly than others, or where it has suffered less than others. There are others where potentially the market will never come back and then people conclude it proved it had to be a bad idea, and people didn't understand the risks or don't want to trade anymore.

Everyone understands electronic trading

is an efficient way to clear risk, to find buyers and sellers, and the price trans- parency is a big benefit. I just think it will take some time for people to be confident enough with the potential downside of being a market-maker, sticking your head above the parapet and putting prices out there. At the moment it all looks like downside to do that, there isn't enough upside in doing that currently. Maybe it will come back very aggressively, but it is more likely to come back over time.

Rivoire: I think that it is not only the banks, but the issuers as well – in fact all market participants – that are working to try to find the best way to do it, taking into consideration the new market conditions, which obviously vary between the different asset classes. But all the banks are committed to try to provide the best market, the greatest transparency and the best market-making they can. But, once

again, the banks need the market to return to a more stable footing to be able to do this in a very efficient way.

IFR: Does this work in extraordinary circumstances? So, for example, at the height of the crisis when there were, and still are balance sheet constraints with banks unwilling to provide liquidity even to each other, should they be expected to market- make even sovereign, agency or covered bonds?

Maisey: For some of us it is not just about our appetite to provide liquidity. For us, our balance sheet hasn't changed through the whole thing, but for lots of our clients it has. So it is not just about, if we are prepared to do it, it is also about whether people on the other side who want to take risk, or we can lay risk off too, or where we can source bonds from. So it is not just about bank appetite, it is about investor appetite as well.

Leclercq: The issuers are also trying to promote their own transparency and the way to do that is also a factor. Before the crisis, we looked at volumes: we looked at volumes and we appraised our primary dealers accordingly, depending on the volumes they traded in the market. We dif- ferentiated between customer volumes and voice traded volumes, the former of which weren't on the electronic platform where the market-making obligation existed. When you look now at how we appraise our primary dealers, we base it on their compliance to their quoting obligations. In other words, how are they doing, are they compliant or non- compliant? We look also at volumes to some extent, but one of the major points which we look at is are they compliant, and can they be over-compliant, can they be better, can they do something better? So we have switched to a different way of thinking, we have focused on, as Erik said, trying to give price transparency to the market and I am really convinced – as Erik is also – that the only way to have price transparency, is to have your primary dealers making markets. It is really that change of appreci-

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