The role of banks as primary dealers in European government bond auctions remains key, and pressure on banks to maintain this function appears to have stabilised, two debt agency chiefs said on Wednesday.
Primary dealers buy government bonds directly from a government's debt management office and sell them on to investors in the market. They typically are also entrusted with maintaining secondary trading activity, which entails holding some of those bonds on their balance sheets for a period.
Although regarded as a prestigious role for banks, tougher regulation since the financial crisis has made primary dealing less profitable because of the extra capital that banks now have to hold against possible losses.
"The immediate pressures on primary dealers, that in some cases led to an exit, has stabilised," Robert Stheeman, chief executive of Britain's Debt Management Office told Reuters on the sidelines of an Association for Financial Markets in Europe (AFME) bond conference in Brussels.
"Primary dealers are fundamental to what we do and we take the challenges facing them seriously."
The number of primary dealers across Europe has decreased in recent years; AFME said in March that 20 primary dealers had left the market in 2018. That left the European Union with the lowest average number of primary dealers since the global financial crisis, the report said.
It attributed the decline to falling turnover in government bond markets, which is depressing banks' trading revenues.
Speaking during a panel discussion on trading and liquidity in primary and secondary markets, an official at Ireland's debt management agency said government bond issuers had to be aware of the challenges facing primary dealers.
"There is still a role for primary dealers," said Anthony Linehan, deputy director for funding and debt management at Ireland's National Treasury Management Agency. "Should you allow investors to participate in auctions directly, like the US does? For me, the model as it stands - that primary dealers have access to auctions - still works." The UK DMO's Stheeman said measures introduced in Britain from April 2016, in response to the changing market environment, had worked well.
These measures included smaller short and medium conventional auctions and increasing the allocation of non-competitive bids at an auction from 10% to 15%. "At the time we observed that there was increased pressure on primary dealers in the UK and elsewhere, driven by balance sheet constraints, and we wanted to make primary dealer participation as commercially viable as possible," Stheeman said. "So we tweaked the system."
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