LONDON (Reuters Breakingviews) - Primary dealers are an odd choice for Europe’s next financial land-grab. Officials in the EU may force banks who buy sovereign debt directly to move some jobs out of London after Brexit to retain the privilege, Reuters reported on Wednesday. This could make a business whose appeal is dwindling even less attractive.
There’s a certain cachet to being a primary dealer – someone who can bid at government bond auctions and then sell the debt to others. And those who belong to this club have a better chance of being involved in lucrative syndication deals. The quid pro quo is that they also have to ensure the market for these bonds is liquid, for example by quoting firm prices for these securities.
The balance between these pros and cons has changed since regulatory changes made it more expensive for banks to hold debt on their books. Credit Suisse specifically cited the need to meet tougher Swiss financial regulations when it gave up European primary dealer roles in 2015. Others have also thrown in the towel. The average number of primary dealers in a selected group of EU countries has declined to 18 from around 23 in 2006, according to the Association for Financial Markets in Europe.
The cost of relocating jobs currently based in London may spur others to quit. The fewer primary dealers there are, the greater the risk that market liquidity will suffer. That could be to the detriment of bond prices, though the damage may only become perceptible when monetary policy becomes less accommodative around the world.
If a flawed bond auction system starts to affect the cost of borrowing, governments will have to rethink how they sell their debt. One option is to give banks more incentives to be primary dealers. Another is to allow a greater range of market participants to bid directly for bonds. Italy has dipped a toe into the water and has been selling so-called BTP Italia bonds directly to small savers since 2012. An EU bid to grab primary dealing jobs may force such roles to change.
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