The project is aimed at trading the bonds of French companies, but it could expand to take in other euro-denominated issuers. However, there are some doubts as to whether the plan will succeed since the majority of deals are still conducted by telephone.
The Financial Times has reported that French Finance Minister Christine Lagarde's plans to make French corporate bond trades electronic could appeal to other eurozone issuers. Last week, Lagarde announced her country’s intention to boost Paris’s role as a financial centre. The project would mark a departure in the fragmented corporate bond world by centralising activity.
Bonds have so far escaped regulatory and political efforts to make the financial markets – particularly those dealing in derivatives – more transparent and less risky through the increased use of electronic trading and central clearing.
Currently the project is aimed at trading the bonds of French companies, but it could expand to take in other euro-denominated issuers. Friday’s meetings were a step along that path and the group is aiming to present a full set of plans to Lagarde by the end of March.
In theory, electronic trading should reduce risk and encourage greater participation because it makes the market more transparent and reduces dealing costs.
In practice, however, efforts to introduce trading technology to corporate bonds have met with limited success and the majority of deals are still conducted by telephone.
Corporate bonds have proved hard to adapt to electronic trading because of their illiquidity. A company’s traded equity is usually a single stock, but its debt is divided into many different bonds with varying structures, of which only a few are likely to trade regularly, even for household name companies. For example, according to Bloomberg,French energy group EDF has 65 issues linked to its name, while France Telecom has 46.
As a result, banks, with their ability to hold a large inventory of illiquid paper, have retained a central role. Even electronic trading platforms have really only replicated that, providing the chance for an investor to check quotes from a range of banks.
This is a stark contrast to other asset classes, such as foreign exchange and equities, where technology has allowed hedge funds and other large investors to make markets and trade between themselves.
If the Paris project succeeds, this could change. The venture is bringing together issuers, investors, trading platforms, banks and brokers in an effort to produce a new trading model. Initially begun by investors talking directly to issuers, the plans are now being fronted by Paris Europlace, an industry body that promotes Paris as a financial centre.
© Financial Times
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