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ECB Plan to Modernize Bond Sales Gets Cool Reception From Banks

ECB Plan to Modernize Bond Sales Gets Cool Reception From Banks

(Bloomberg) -- An effort by the European Central Bank and the region’s biggest public-sector borrowers to modernize bond issuance is getting mixed reviews from banks amid concern it may diminish their decades of control.

Market participants have until July 9 to submit feedback to the ECB on the electronic platform, known as the European Distribution of Debt Instruments. EDDI may only go ahead if it gets positive feedback and would be completed around 2021, said Kalin Anev Janse, secretary general of the European Stability Mechanism, one of the borrowers involved in the project.

“Investors are in general positive, issuers working with us are interested and engaged, and banks are at the moment split,” Anev Janse said in an interview. Some banks “are very positive. Some are still uncertain what it means for them.”

EDDI is intended to be a one-stop shop that tackles inefficiencies in the 320 billion-euro ($359 billion) public-sector bond market, which like the broader primary market still relies on phone calls, instant messages and emails. It’s the first effort led by borrowers and which streamlines the entire process of bond issuance, from orders and allocation to settlement.

The ECB consulted with supranationals and agencies that issue debt continuously to support local government projects, sovereign budgets and development programs. Those include the Council of Europe Development Bank, the European Investment Bank, the ESM, BNG Bank in the Netherlands and German development bank KfW, according to people familiar with the matter, who asked not to be identified because the talks were private.

ECB Plan to Modernize Bond Sales Gets Cool Reception From Banks

The ESM, the euro-area’s permanent rescue fund, sold more than 40 billion euros of bonds last year and has been at the forefront of technology developments for borrowers. Anev Janse promoted the idea of a public-sector issuance platform since at least 2017.

Representatives for the Council of Europe Development Bank, the ECB and the EIB declined to comment.

“The current market infrastructure is still functioning but nevertheless pretty much unchanged in the last 20 years,” said Petra Wehlert, head of capital markets at KfW. “We are a large issuer with a large funding program and we have to monitor developments in digitization.”

Bloomberg LP, the parent of Bloomberg News, competes by providing services that facilitate bond ordering and distributes information on new debt offerings.

Existing Systems

Some banks are concerned that EDDI may detract from existing efforts to make bond sales more efficient. Tech and data firm IHS Markit Ltd. runs a platform that lets investors place orders electronically, mostly with European and Asian dealers. In the U.S., Wall Street’s biggest banks are working on a rival system dubbed Project Mars.

“I think it will get very mixed feedback,” said Armin Peter, London-based global head of debt syndicate at UBS Group AG, which uses IHS Markit’s existing system. “What will it mean for those tech companies who are providing those services already today on a global basis?”

Others believe EDDI won’t disrupt their role or reduce their fees. Banks support borrowers by underwriting deals when a market window closes unpredictably, said Friedrich Luithlen, head of debt capital markets at DZ Bank in Frankfurt. Borrowers also rely on banks to make secondary markets in their bonds, which ensures smoother trading and future access.

“If this part of the business did break off because there’s no more syndication and no more need for us to advise on pricing, then that takes away most of the incentive for banks to make markets,” Luithlen said.

Bank Role

The system isn’t designed to cut dealers out of the process, said Anev Janse.

“We’re not here to disrupt the banks,” he said. “They play an important role in the syndicated process by advising on pricing, underwriting securities and ensuring regulatory compliance. All of that will happen the same way it’s done today.”

Still, borrowers are gaining power in Europe. Recent market regulations ensure they have the final say on who buys their bonds and EDDI caters to them throughout the process.

It allows issuers to communicate their intention to sell notes and lets banks build a book of orders they can see, according to Anev Janse. It can be used to decide and relay allocations through to the process of transferring investor funds to borrowers.

In addition to better communication and access to data, the system would speed up settlement to two days or less from five, according to Peter Nijsse, managing director in treasury and capital markets at BNG Bank in The Hague.

“The transaction should start with the issuer and they should be the first one in the system to create the bond and start the process,” said Nijsse. “The issuer is left out of the existing systems.”

--With assistance from Paul Cohen and Carolynn Look.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Abigail Moses

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