The world’s largest sovereign investor wants to curtail the big banks’ hold over bond trading.
The $860 billion Norwegian sovereign-wealth fund is backing the European Union’s campaign to bring transparency to the bond market and make debt trade more like stocks. The fund says the current setup — where investors call a bank to get a price — is dysfunctional and should be fixed by forcing the banks to publish their prices.
The fund will make reform of Europe’s debt markets one of its priorities, according to Oeyvind Schanke, its chief investment officer for asset strategies. It’s easy to see why. The fund, which manages Norway’s vast oil wealth for the benefit of future generations, held 2.62 trillion kroner ($300 billion) of bonds at the end of September. Anything it can do to make trading easier and cheaper helps it to meet its investment mandate.
“We need innovative mechanisms between the buyer and seller to improve liquidity,” Schanke said in an interview in London this month.
The fund’s largest government bond holdings were in U.S. Treasuries followed by Japan and Germany at the end of September. It is mandated by the government to hold 60 percent in stocks, 35 percent in bonds and the rest in property.
Unsurprisingly, the banks are fighting back against the rules, arguing that they will reduce liquidity in a market where the holders of some securities already struggle to trade. The big overhaul is part of a package of changes known as MiFID II, which was set to take effect in 2017 but may now be delayed to give banks and trading venues more time to get ready.
Banks determine price quotes based on various parameters: the liquidity of the bond, the risk that a counter-party will fail and the degree to which the transaction is structured. Two banks can offer different prices on the same bonds at the same time just because they hold different stockpiles of the securities.
“The setup is outdated,” Schanke said. “Why should the trading system be risk-based? Wanting transparency means changing the model.”
Not all bond trading is carried out bilaterally between banks. Stock exchanges and interdealer brokers alike have set up electronic markets to trade government and corporate debt. London Stock Exchange Group Plc, for example, has a bond-trading platform called MTS. Although MTS is a bet that more bonds will be traded electronically, LSEG’s chief executive officer, Xavier Rolet, argues that debt will always trade different from stocks.
“Fixed income doesn’t trade as continuously as blue-chip equity,” he said. “There are platforms today that enable listing and trading of fixed income. It’s something that will succeed, but I believe will look different from the blue-chip equity model.”
The world’s biggest banks have attacked the proposed EU rules even though they will only apply to 2,000 of the region’s most-liquid securities.
Still, Norway’s fund may find it hard to be heard in the debate since the country stands outside the European Union. It does discuss policy with the European Securities and Market Authority, the EU body charged with drafting the bond-market rules. And Norway’s financial regulator attends ESMA’s board meetings as an observer. It has no say in decision making.
Schanke is a member of ESMA’s secondary market standing committee, which assesses changes to market structure. While he backs MiFID II, it doesn’t go far enough, he says.
“The rule-making now is dependent on the model not changing,” he said.