MTS, the owner of the dominant trading platform for euro zone government bonds, yesterday rejected claims by market-makers that the semi-official system has been exposed as flawed by Citigroup's controversial transactions.
Mr Gianluca Garbi, chief executive officer at MTS, defended the quote-driven electronic platform, as opposed to one based on trading orders, as the best available compromise for the diffuse market.
"Any attempt to create an order-driven system in the past five years has failed because of opposition by the issuer governments," he said.
Order-driven markets include Eurex, the platform for German government bond futures, whose trading volume far outstrips the cash market for euro zone bonds.
Citigroup stunned the euro zone government bond market on August 2nd by first selling €11 billion of the paper in less than two minutes and soon after buying back €4 billion at lower prices. The all-out selling orders hit the other primary dealers, required by MTS to provide daily bid-and-offer quotes on the system, with an unprecedented force.
This led to large losses to some banks, fuelling calls for sanctions against Citigroup but also claims that the system based on obligations was partly to blame.
The transactions forced MTS to take an emergency decision to limit liquidity.
The trades are being investigated by the Financial Services Authority of the UK and reviewed by several euro zone regulators.
As many as 55 banks are acting as market-makers, or dealers participating in primary debt auctions and playing a significant role in secondary trading.
Banks are keen to maintain this status because of the lucrative business to underwrite the government's syndicated bond issues, an activity worth about €430 million last year, according to Dealogic.
But Mr Garbi said some of the smaller banks had entered the market without sufficient risk provisions.
"The number of banks acting as market-makers in the euro zone is still too large in comparison with the US," he said, adding that the total should fall to about 30.
MTS says the system has made trading in euro zone government paper cheaper and reduced borrowing costs for the governments.
The euro zone may have a common monetary policy but 12 national treasuries determine fiscal decision-making, including borrowing. This contrasts with the US market, where borrowing on behalf of the federal government is concentrated at the Treasury.
MTS also says trading costs have fallen from about €200 to every €1 million of securities traded to between €3 and €4 over the past five years. Regulated by MTS, bid-and-offer spreads have narrowed to as little as 4 basis points for some bonds.
The national treasuries, some of which are shareholders in MTS, use MTS trading statistics to rank primary dealers. - (Financial Times Service)
