City loses bonds role as business moves to Milan before Brexit

London will no longer be the first stop for European governments selling bonds, as the bulk of business on a key platform switches to Milan ahead of the deadline for the UK’s departure from the EU next year.

From the start of March only the UK government and UK-based banks will use a London-based arm of MTS Cash, a venue owned by the London Stock Exchange Group. It plays a key role in linking sovereign borrowers with the investment banks that help price the bonds and sell them to asset managers.

Every other European government will access MTS Cash via new venues based in Milan, where the MTS began life in the late 1990s.

The move by the LSE is the latest sign that several important, but low-profile, components of the plumbing that underpin European financial markets are shifting out of the City. They are being forced to prepare for a world in which the UK is no longer in the EU.

Refinitiv’s FX swaps platform is transferring its $300bn-a-day foreign exchange swaps business to Dublin, while CME Group’s BrokerTec platform is shifting its €250bn-a-day repo trading business to Amsterdam.

The LSE privately told its customers in the summer but had not gone public on the plans. Mark Spanbroek, chairman of FIA Epta, a market maker trade association, said it was inevitable that European governments would want to ensure that the mechanisms they use to sell their debt remain within the bloc.

Though now owned by LSE, MTS started as a venture between the Italian Treasury and the Bank of Italy as a way for banks to bid competitively for bonds. Italy is now the largest sovereign debt market in the eurozone.

“The Italian move is very good in that the regulators get the market,” said Mr Spanbroek. “It’s a market with a lot of knowledge.”

It comes amid a series of moves by markets based in the City of London as they hedge against the UK becoming a third country after leaving the EU without a political agreement.

“This will allow MTS to continue to service its clients regardless of the outcome of the negotiations between the European Commission and the UK government,” Fabrizio Testa, chief executive of MTS, wrote in the notice.

MTS Cash trades around €13.4bn a day across all its markets. Around 20 per cent of the business is likely to move to Italy with the planned changes.

The newly-issued debt of some European countries, like France, is distributed to end investors through their domestic banks and local platforms. However, more than a dozen EU countries, including Austria, the Czech Republic, Ireland, the Netherlands and Portugal, rely on MTS in London to reach investors such as asset managers. Primary trading in Israeli sovereign debt will move, too.

MTS also plans to shift trading in the secondary market, between investment banks and institutional investors, for eurozone debt to Italy. However, it will keep open the UK arm, MTS BondVision.

MTS had warned customers over the summer that it could close some UK markets and open new ones in Italy.

Philip Stafford November 19, 2018

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