CME’s BrokerTec to launch new collateral basket for EU bonds
LONDON (Reuters) – Electronic bond trading platform BrokerTec will launch a basket of collateral for bonds issued by the European Union on Monday, marking a further step in the transformation of the EU into one of the largest borrowers in the world.
The 27-country EU, which borrowed relatively small amounts before the coronavirus pandemic, has started issuing bonds that will raise up to € 800 billion ($ 943 billion) in the coming years for help its response to the crisis. The bloc has also issued bonds to finance the EU’s SURE unemployment scheme.
Investors say the scale of the planned issuance means there is a need to have an infrastructure to support transaction volumes, in particular by making it easier to use the new debt as collateral for the repo markets.
BrokerTec’s new general basket of guarantees for EU debt “will include both SURE and Next Generation bonds from the EU,” said Kate Karimson, the platform’s head of European pensions.
BrokerTec is part of the CME group, the world’s largest financial derivatives exchange.
“Our clients say this should help liquidity,” Karimson said, stressing that it was still early for the EU to develop into a major bond market.
Banks and corporations rely on repo markets to raise liquidity against collateral, often through high-quality sovereign bonds such as German triple-A rated debt.
The inclusion of European bonds in a basket of guarantees could help ease the pressure on the supply of German Bunds, a market choked by massive bond purchases by central banks.
And repo market activity would allow borrowing and lending of EU securities, allowing investors to take positions in spot bond markets.
BrokerTec said it was in talks with the European Commission on how to further support this new EU bond issue in repo and cash bond transactions.
The EU will establish a bond program for short-term borrowing and start auctioning the debt in September, where dealers buy the debt and sell it to investors, as government borrowers typically do.
So far, the EU has sold new bonds through a syndicate of banks. Selling bonds at auction, issuing bonds, and mining existing bonds are all tools used by debt management agencies to build up liquidity in the bond markets.
“Everyone is looking to see what’s going on here (EU bond issuance), everyone is hungry for more liquidity in this space,” said Karimson of BrokerTec.
Reporting by Dhara Ranasinghe; Editing by Catherine Evans