Community in the Fixed Income Market

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1

Delivering Liquidity and Efficiency to the Investor

Community in the Fixed Income Market



Osijek,
13 May 06



Benedict Traill


MTS Group

2

Introduction:



How has electronic trading brought efficiency and liquidity in the Fixed Income

Markets in Europe
?






Electronic Trading Platforms have built pools of liquidity over the past 5 years





Banks have shifted market making onto electronic systems





MTS Group and BondVision: Electronic platform of Choice





Electronic trading has brought benefits to Dealers and Clients alike



3

Electronic trading offers:






Liquidity & Transparency
:


an asset class with consistent and transparent





pricing can attract new groups of investors





and increase overall turnover as the need to “shop




around” for prices is eliminated, creating market




confidence




Distribution
:




maximising access to the number of counterparties is




convenient and cost efficient when delivering liquidity




Straight
-
through
-
processing
:

elimination of errors due to mismatching or late




instructing, the simplification and automation of back




office procedures and the zero rate of fail due to




mismatching


these all bring significant cost savings





Access
:



electronic trading offers the same advantages





to all, whereas traditional voice brokerage is





more likely to favour larger accounts

Why have electronic trading platforms built pools of liquidity over the past 5 years?

4

Why have Banks have shifted liquidity provision onto electronic systems?






Real
-
time, tradable liquidity:


helps create a consistent smooth bond curve; in the




medium term dampens the adverse effects of





illiquidity on bond yields



Flows visibility:




the market maker can monitor in real time if issues




are getting cheaper/richer because of market flows




Client Reach:



salesforce can now reach a much broader client




base globally



Sales force priorities:



electronic distribution frees the salesforce from




executing low margin business so that that it can




focus on higher margin areas & on giving valuable




feedback to clients



Analysis
:




sales, traders, and the bank’s management have a




better way to measure the quality of market making




activity and the nature of client activity

5

The Electronic System of Choice: MTS Group

MTS Inter
-
Dealer
Market



Trading Volumes





EUR 80 billion daily
(Cash & Repo) via MTS


Liquidity





70% Electronic
Interdealer Mkt via MTS





6







MTS
Amsterdam

MTS
Portugal

Merger MTS
Spa
-

EuroMTS

MTS Finland, Spain
and Ireland









MTS France

MTS Belgium

1998


1999


2000


2001


2002


2003


2004

MTS S.p.a.

privatisation


Geographic presence


Largest fixed income cash market in
terms of number of participants,
geographic reach, and turnover


First exchange with presence in all
EMU countries



MTS
-

Highlights

EuroMTS

inception

21 markets with
participants from 19
countries

690 participants

MTS: Europe’s leading electronic government bond market

From local market to pan
-
European platform


2005

MTS Denmark

MTS Austria

MTS

Greece

MTS Poland

NewEuroMTS

EuroMTS Global

MTS
Deutschland

7

The Electronic System of Choice: MTS Group

ABN AMRO BANK (POLSKA) S.A.

ABN
-
AMRO BANK NV LONDON

AIB CAPITAL MARKETS

ALPHA BANK

B. SANTANDER CENTRAL HISPANOSA

B.BILBAO VIZCAYA ARGENTARIA SA

BANC OF AMERICA SEC.LTD

BANCA AKROS S.p.A.

BANCA CABOTO S.p.A.

BANCA IMI

BANCA FIDEURAM

BANCA LOMBARDA S.p.A.

BANCA MEDIOLANUM S.p.A.

BANCA NAZIONALE DEL LAVORO

BANCA POPOLARE DI LODI

BANCA POPOLARE DI SONDRIO

BANCA SELLA

BANCO COMERCIAL PORTUGUES INVE

BANCO DI SARDEGNA

BANCO ESPIRITO SANTO S.A.

BANK BPH S.A.

BANK GOSPODARKI ZYWNOSCIOW. SA

BANK HANDLOWY W WARSZAWIE SA

BANK MILLENNIUM S.A.

BANK PEKAO S.A.

BARCLAYS BANK PLC

BAYERISCHE LANDESBANK

BAYERISCHE
-
HYPOVEREINSBANK AG



BHF
-
BANK A.G.

BNP PARIBAS SA

BRE BANK S.A.

C.R. DI FIRENZE S.p.A.

CAIXA GERAL DE DEPOSITOS SA

CALYON

CAPITALIA SPA

CITIGROUP GLOBAL MARKETS

COMMERZBANK AG

CREDIT SUISSE FIRST BOSTON

DANSKE BANK

DAVY STOCKBROKERS

DEUTSCHE BANK AG

DEUTSCHE BANK POLSKA S.A.

DEXIA BANK BELGIUM

DRESDNER BANK AG

DZ BANK AG

EFG EUROBANK ERGASIAS SA

FIONIA BANK

FORTIS BANK NV
-
SA

GOLDMAN SACHS INTERNAT.

HELABA HESSEN
-
THURINGEN

HSBC
-

CCF

HSH NORDBANK

ICCREA BANCA SPA

ING BANK

ING BANK SLASKI S.A.

IXIS CORPORATE AND INVEST. B

JP MORGAN SECURITIES LTD

KBC BANK NV

KREDYT BANK S.A.

LA CAIXA

LANDESBANK BADEN
-
WURTTEMBERG

LEHMAN BROTHERS INTERNAT. LTD

MCC SPA

MERRILL LYNCH INTERNATIONAL

MORGAN STANLEY INT LTD

MPS FINANCE BANCA MOBILIARE

NATEXIS BANQUE POPULAIRE

NATIONAL BANK OF GREECE

NOMURA INTERNATIONAL PLC

NORDDEUTSCHE LANDESBANK

NORDEA BANK DANMARK A/S

NYKREDIT

OKO BANK

PIRAEUS BANK S.A.

PKO BANK POLSKI S.A.

RABOBANK INTERNATIONAL

RAIFFEISEN BANK POLSKA S.A.

ROYAL BANK OF SCOTLAND PLC

SEB AG

SOCIETE GENERALE S.A.

SOCIETE GENERALE SA O W POLSCE

SVENSKA HANDELSBANKEN

SYDBANK SA

UBS LIMITED

UNICREDIT BANCA MOBILIARE SPA

WESTDEUTSCHE LANDESBANK

MTS Liquidity Providers : all European Primary Dealers

8

Why is MTS the system of choice for Banks & Clients?


Corporate Structure



International ownerships between Euronext
-
LIFFE with Banking community


Banks are stakeholders in the business, resulting that there is market representation in
the decision making process of the Company.



Governance



Participation in the governance structure establishing and tailoring of rules to suit local
market needs and circumstances eg) benchmark size


Governance of each market is handed over to the local banking community




Network and Economies of Scale



Dealers can leverage on the technology already in use for the MTS markets allowing for
economies of scale at the front and back office level


Result is that new MTS markets can be established within 3
-
6 months whilst minimising
the cost for market participants who act as partners in the new venture


Dealers can access Cash, Repo and Derivative markets through a single network



Euronext can encourage its unparalleled pan
-
European and international network of participants
(782 on derivatives and 286 on cash markets) to trade more on MTS and BondVision


Euronext.Liffe’s and GL Trade’s international networks, in particular in North Amercia and Asia
(where Euronext also has a hub in Singapore); can provide additional connectivity points to global
investors



9

Why is MTS the system of choice for Banks & Clients?


Cost



Increase trading efficiency and reduced costs for members



Brokerage Fees
:


Since 1998 the cost per million traded in the market has



dropped by


around 98%


Custody Fees
:


3
-
5 euros per million cost per trade vs 7
-
12 euros for



non
-
MTS trades and from 15+ euros for OTC


Middle/Back Office Savings
:

Full s
traight
-
through processing (STP)




Liquidity



The opportunity to rapidly build and unwind a position in a tradable instrument with
minumum impact on its price


Liquidity is positively correlated to:



Tightness of bid/offer spread; Size quoted; Size issued; Depth of market; Speed of execution; Traded
volume




Transparency




Real
-
time distribution of tradable prices to direct participants



Provision of price discovery to investors via quote vendors (Reuters, BBG etc)


10

Achievements of the Platform in EU and beyond

0
500
1000
1500
2000
2500
Jan-02
Feb-02
Mar-02
Apr-02
May-02
Jun-02
Jul-02
Aug-02
Sep-02
Oct-02
Nov-02
Dec-02
Jan-03
Feb-03
Mar-03
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05
Sep-05
Oct-05
Nov-05
Dec-05
Jan-06
Feb-06
Mar-06
Date
Volumes
0
10
20
30
40
50
60
Bid Offer Spread (Ticks)
NewEuroMTS Turnover
Czech Republic 4,125% 2020
Czech Republic 4,625% 2014
Poland 3,625% 2016
Poland 3,875% 2009
Poland 4,200% 2020
Rep. of Hungary 3,500% 2016
Rep. of Hungary 4,000% 2010
Rep. of Hungary 4,375% 2009
Rep. of Hungary 4,500% 2013
Rep. of Hungary 4,500% 2014
Rep. of Hungary 5,625% 2011
Rep. of Lithuania 4,50% 2013
Slovak Republic 4,5% 2014
Slovak Republic 7,375% 2010
Launch of
NewEuroMTS
NewEuroMTS
Turnover
11

Universal Model: Extension to Local Currency Markets

CASE STUDY OF MTS POLAND



Growth in Liquidity as International participants joined the marketplace


Exceptional volume growth of 400% since launch of the market.



This has helped with the integration of Local financial community with EU market and the
internationalisation of the debt market



Since inception in Nov 2004, 88% of business has been transacted by locally
-
based liquidity
providers.





Model to be extended with launch of MTS Israel in July 2006

Evolution of MTS Poland Volumes since Launch
0
5000
10000
15000
20000
25000
Q4 2004
Q1 2005
Q2 2005
Q3 2005
Q4 2005
Q1 2006
Date
Volumes
12

How can Clients access the MTS Liquidity?

BONDVISION
:



Multi Dealer
-
to
-
Client Market powered by MTS, the leading e
-
trading platform in Europe



Regulated Market

with a European Passport (4 June 2001)
-

MiFiD



Liquidity providers connect Using Existing Telematico (MTS) Infrastructure: full integration
with the Inter
-
dealer Market



Clients Connect via light and user
-
friendly technology
across the public Internet or VPN



Fast growing Market (2006:
+50%

year on year in volumes activity Q1 06 vs Q1 05)



284

clients connected,
35

Liquidity Providers



Complete array of Fixed Income products available for trading

13

BondVision Overview


Products Available

UK Gilts
Denmark (DKK)
ETF (based on
EuroMTS Index)
US Treasuries
over 700 issues
EIB (EARNS
Prog
.)
L
ä
nder
KfW
Freddie Mac

CADES
CRH
ERAP
UNEDIC
Poland (EUR, USD,
PLN)
Hungary (EUR, HUF)
Czech (CZK)
Bulgaria (EUR, USD)
Croatia (EUR)
Latvia (EUR)
Lithuania (EUR)
Romania (EUR)
Slovakia (EUR, SKK)
Slovenia (EUR)
Ukraine (EUR, USD)
Cyprus (EUR)
Jumbo Pfandbriefe
Obligations Fonci
è
res
Cedulas Hipotecarias
Irish
Cov
Bonds
(ACS)
UK
Cov
Bonds
ABS (Italy)
Finnish covered
bonds
Dutch covered bonds
Germany
France
Italy
Spain
Portugal
Austria
Ireland
Greece
Netherlands
Belgium
Finland
Investment grade
Min.
Outst
.

0.5bn
Min. Maturity > 1 yr
EUR, USD and local
currencies
1 bn + Issues
Issues , Benchmark
Off the Run, Index
-
linked,
Fixed/Floating,
Principals (BTP,
OAT, OLOs), T
-
Bills
Others
Corporate
Bonds
EUR Agencies
Central Europe
Covered Bonds

Sovereign
Bonds
UK Gilts
Denmark (DKK)
ETF (based on
EuroMTS Index)
US Treasuries
over 700 issues
EIB (EARNS
Prog
.)
L
ä
nder
KfW
Freddie Mac

CADES
CRH
ERAP
UNEDIC
Poland (EUR, USD,
PLN)
Hungary (EUR, HUF)
Czech (CZK)
Bulgaria (EUR, USD)
Croatia (EUR)
Latvia (EUR)
Lithuania (EUR)
Romania (EUR)
Slovakia (EUR, SKK)
Slovenia (EUR)
Ukraine (EUR, USD)
Cyprus (EUR)
Jumbo Pfandbriefe
Obligations Fonci
è
res
Cedulas Hipotecarias
Irish
Cov
Bonds
(ACS)
UK
Cov
Bonds
ABS (Italy)
Finnish covered
bonds
Dutch covered bonds
Germany
France
Italy
Spain
Portugal
Austria
Ireland
Greece
Netherlands
Belgium
Finland
Investment grade
Min.
Outst
.

0.5bn
Min. Maturity > 1 yr
EUR, USD and local
currencies
1 bn + Issues
Issues , Benchmark
Off the Run, Index
-
linked,
Fixed/Floating,
Principals (BTP,
OAT, OLOs), T
-
Bills
Others
Corporate
Bonds
EUR Agencies
Central Europe
Covered Bonds

Sovereign
Bonds
14

LIQUIDITY PROVISION



Investors can access largest dealer panel


blend of global houses and regional specialists
-

and trade the largest available list of securities



MTS Dealers guarantee full commitment to Euro sovereigns ( incl. Fixed, Indexed, Zeros &
short dated) as well as US Treasuries, Gilts, Central and Eastern European bonds
(International and Local currency) within one trading platform



Possibility to set pre
-
set alert trading levels for clients


REGULATORY



BondVision satisfies both regulatory (ISD passport) and compliance needs (proof of best
execution) of Clients.



Client now has the electronic trail to prove the transaction was traded at the best possible level



BondVision enhances the automation of the process portfolio strategy and trading
orders/execution/post
-
trading which is becoming a key factor for the rating agencies view of
portfolios.


COST



FREE
to investors. Also post trading functionalities and efficiency allows further cost savings

What advantages does BondVision bring to Clients?


15

CONCLUSION
:


ENHANCED LIQUIDITY:




-


Liquidity and the availability of pricing on a wide variety of products established together

with tools to access this liquidity


-


Constant ability to trade provides comfort to investors to deal, which can grow the size

of the overall market


-


Better price dissemination and more efficient matching on bonds including illiquid

securities


REGULATORY BENEFITS:






-


Practice of best execution introduced in Europe has speeded up the transition to

electronic distribution of plain vanilla products



IMPROVED EFFICIENCY:





-
Possibility for customer to compare prices (for the full size of the order) from a number of
counterparties

-
Size and Scope of Trading network provides wide counterparty selection

-
Cost Savings : Brokerage & Settlement Costs


-


Straight Through Processing


-


Availability of statistics for Quantitative analysis








What efficiency and liquidity does Electronic trading
bring to the marketplace?