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

IFR: We have had the suggestion that there has been more participation at the auction level from end investors with yields at the highest levels of the year so far. How has the role of hedge funds changed in terms of involvement in sovereign debt and have they become more important from the point of view of sovereign issuers?

Wilders: I think we haven't issued for a month now, or over a month, and it would have been a tap, so we wouldn't be able to see the details of hedge fund participation. Going back to the DDA, we saw different investors, and more real money investors, than we had ever seen previously in terms of both numbers and new accounts. For example, we saw private banks for the first time in our experience, which means that somewhere private individuals, wealthy private individuals, thought, "Well, it might be safe to invest our money for a while in government bonds", and probably, if the cycle turns, they may go again and we will see different buyers coming in. For us it's very difficult to say, "I want to target one specific group", as long as we are open to as many investors as possible, there are always some that are willing to buy, given current circumstances. That's what we hope to achieve, and as a result hedge funds are welcome, private individuals are welcome, and all investors in between.

Ezquerra Martin:Well, they are more flexible, as Erik was saying, within syndica- tions or DDAs or whatever. Certainly, looking at the numbers, not only in our deals but in others, their participation has diminished. No longer do you see these overwhelming bids in the books of syndicated deals, which were hard to believe. Now they are more low profile. But, fortunately, their place has been taken by other types of real money, pension funds and insurance companies, which used to have a much lower level of partici- pation. So, at the end of the day, I think that perhaps their impact might be more detrimental and more visible in the falling volumes in the secondary market than in the primary, because in the primary market it is just a matter of substitution, really.

Rivoire: I think, in the secondary market, we have clearly seen in the last few months less activity from hedge funds,

mainly due to the refinancing considera- tions. Due to the tensions we have in the money market, all the prime brokers have slightly, or dramatically, changed their refinancing conditions. So it is definitely more costly to enter into a position: if you look at the average leverage of the hedge funds, it has dramatically decreased in the last few months. Obviously the liquidity and the bid offers are slightly wider than they were, and it means that, for all these reasons, things are more challenging for them to enter into new positions.

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.

What are the consequences for the secondary market? I think that the hedge funds obviously remain in the market, especially in terms of relative value trading, and due to the fact that they were ready to buy and to sell to take advantage of the pick-up, et cetera. The effect of this will be to contribute to the normalisation of the European curves, in the same way that they operate in the US Treasury market. Although, due to this lack of participa- tion on the part of the hedge funds, it is clear that the relative value element is more challenging. A lot of market partici- pants – not only hedge funds but some US investment banks as well – have dramati- cally reduced their presence, which means they are not in a position to take advantage of even the smallest pick-up the market is offering. This is because it might be too costly in terms of refinancing as well as costly in terms of managing positions in this environment.

” Though, and as Erik has said, fortunately

we have seen some shift from the hedge funds to real money interest and especially reserve managers, as well as more interest from bank treasurers. But in terms of

relative value especially it has clearly changed the way the secondary market is working.

Maisey: In addition to the financing costs the bid offer spreads are wider, so some trading opportunities or ideas have disappeared or are no longer profitable for hedge funds, which is an integral part of their business. I also think now might be the perfect time to try and push for further changes in the way the market operates, for example the introduction of new par- ticipants. The market has been in a state of some flux and I think this may encourage new platforms which in the long run will help a faster return to normality. So we actually think that this is a great time for a more competitive environment in the dealer-to-dealer space and to see what other platforms can come up with in terms of ideas, technology and innovation, particularly in terms of fee innovation.

IFR: Does diversification across platforms actually increase the total volume in the market or just divide it between different competing platforms?

Maisey: The big risk, in my opinion, is you end up fragmenting the market and that could be detrimental. That is a big risk if you have too many platforms, and I think in all electronic markets there isn't room for an unlimited number of platforms, so you generally are only going to have a small number. Probably only one, two or three electronic platforms are viable. But I think the advantage of more competition really lies in innovation – particularly fee innovation and technology, trying to find some new ways of trading that will bring in more accounts. Alternatively it may mean that investors can manage their volume better, or find new trading ideas. With a lot of those things, it is hard to predict what's going to happen, but some competition will always lead to improvement and ultimately advance the market.

Hogan: It is still early days and it is important to remember that the MTS model has been in place for ten years. I think the benefits to the marketplace in general from the multi-platform environment has been the change to the rules and the change of the contract between the primary dealers and the

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