Angelo Proni, CEO at Euronext Group’s MTS explains how electronic market making will increase transparency and liquidity of EU debt instruments and make them more attractive to investors.
European Union (EU) debt is now forecast to reach around €1 trillion, a sum higher than the GDP of many member states, and although the EU’s history of issuing debt instruments stretches back more than 13 years to the European Financial Stability Facility, the recent €800 billion Next Generation EU has put the EU on the path to becoming the fifth biggest borrower in the EU after France, Germany, Italy, and Spain. This shift reflects the EU’s evolving status as a borrower of significant consequence in European fixed income markets.
With this new status, the bloc aims to become more sovereign-like as an issuer, mainly to optimise its cost of funding. The European Commission (EC) is therefore looking to adopt similar policies to those used by most sovereign borrowers in Europe, including electronic market making by primary dealers to facilitate efficient and transparent price discovery and secondary market liquidity.
A new electronic trading platform for EU debt instruments
MTS is one of the leading European electronic fixed income trading platforms, part of Euronext Group. Its mission has always been to support debt issuers in Europe (and beyond) improve their cost of funding through electronic markets and associated services. Euronext’s focus is on delivering the technology and infrastructure on which Europe’s financial markets operate and promote the emergence of a well-functioning European Capital Markets Union.
With the EU’s emergence as a borrower of note, we have been given the opportunity by the EC to deliver a central limit order book for the EU Primary Dealer Network through MTS EU, which launched in November 2023. With MTS EU, MTS is now delivering to the EU what we have consistently delivered to sovereign debt issuers – electronic trading infrastructure, price discovery capabilities, deep liquidity, and all the monitoring and reporting services that are an integral component of the MTS offering.
Increasing market transparency and creating a level playing field
For the market, inclusive of the EU itself but also its intermediaries, investors, regulators and other key stakeholders, the emergence of a transparent electronic marketplace for EU debt instruments is an important step forward.
From the perspective of the borrower, the EU benefits from a real-time view of the market level at which they are borrowing, across the whole yield curve. What’s more, by leveraging MTS’s reporting and monitoring tools, the EU can understand which of its market makers is performing well and allocate the rewards attached to good performance fairly and transparently, based on objective measures.
Our platform therefore establishes a level playing field for dealers on which to compete freely and fairly, and be rewarded on the basis of a clear and common set of rules.
Firm and reliable price discovery will attract investors
Meanwhile, the central limit order book means that for the first time primary dealers, the borrower, and investors will all be able to rely on real-time, firm price discovery in the secondary market. All market stakeholders are thus able to leverage the price of quoted securities, to make more informed decisions.
Ultimately, this will make EU debt instruments a more attractive investment prospect as investors can see clearly where they can trade at any given time – these are “money where your mouth is” prices. From the perspective of the EU this is a clear win, as by making its debt more attractive, its cost of borrowing will be the key beneficiary.
Additional benefits for the buy side
Another key benefit of MTS EU is that it concentrates interdealer liquidity. Already, 24 of the 38-member strong EU Primary Dealer Network use the venue, and that number will grow. These contributors are creating an important pool of liquidity, which will support their service to clients on the investor side.
A deep and transparent pool of interdealer liquidity will give investors the confidence to engage, knowing that the price of building and unwinding positions will ultimately be lower than before. Users of MTS BondVision (MTS’s Dealer-to-Client trading system) benefit further by being able to view in real time, at no additional cost, the interdealer order book.
A fully formed market from day one
It goes without saying that every market maker and intermediary has their own interests to pursue. MTS EU is a rare instance where each market participant can achieve these interests while also contributing to a collective benefit and where good performance will be rewarded.
The venue is already having a significant impact, with average daily trading volumes now close to €1 billion, single-counted. Our record day so far saw volumes of €2 billion in the wake of a major issuance deal. The first few weeks of MTS EU have exceeded everyone’s expectations in terms of trading volumes and liquidity (there is typically up to €140 million on the book’s best five bids and offers). Across the various MTS domestic markets designated by the Debt Management Offices in Europe, MTS EU is now showing the fourth, sometimes third, highest trading volumes.
MTS EU testifies to the fact that if designed correctly, electronic liquidity in the interdealer market can be very successful in providing real value to investors, primary dealers and issuers. Improved data quality and transparency also benefits regulators. Last but by no means least, as funding costs improve for the borrower, taxpayers across the EU will also feel the benefit where it matters most – in their wallets.
©Markets Media Europe 2023
