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Europe's Hidden Capital Markets

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Europe's Hidden Capital Markets EUROPE’S HIDDEN CAPITAL MARKETS EUROPE’S HIDDEN CAPITAL MARKETS EVOLUTION, ARCHITECTURE AND REGULATION OF THE EUROPEAN BOND MARKET JEAN-PIERRE CASEY KAREL LANNOO CENTRE FOR EUROPEAN POLICY STUDIES BRUSSELS The Centre for European Policy Studies (CEPS) is an independent policy research institute based in Brussels. Its mission is to produce sound analytical research leading to constructive solutions to the challenges facing Europe today. The views expressed in this report are those of the authors writing in a personal capacity and do not necessarily reflect those of CEPS or any other institution with which the authors are associated. ISBN 92-9079-596-4 © Copyright 2005, Centre for European Policy Studies. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the Centre for European Policy Studies. Centre for European Policy Studies Place du Congrès 1, B-1000 Brussels Tel: 32 (0) 2 229.39.11 Fax: 32 (0) 2 219.41.51 e-mail: [email protected] internet: http://www.ceps.be CONTENTS Executive Summary ............................................................................................................ i 1. Trends in European Bond Markets............................................................................1 1.1 Development and integration of European bond markets ..........................1 i. The shift away from relationship banking to arm’s-length finance ....1 ii. International comparisons of debt, equity and bank loan finance ......4 iii. International comparisons of bond market growth rates .....................7 1.2 European bond market overview and trends................................................9 i. International versus domestic debt securities in the EU.......................9 ii. Net issuance of international debt securities........................................15 iii. Size of international bonds issued by EU entities................................16 iv. Evolutions in debt securities maturities................................................17 v. A new asset class: The issuance of ultra-long bonds...........................20 vi. Recent trends in European sovereign debt markets............................23 vii. Recent trends in the European corporate bond market ......................25 viii. Covered bonds and securitised debt .....................................................30 2. Bond and Bond Derivatives Market Structure .......................................................33 2.1 Primary markets ..............................................................................................33 i. Bond listings..............................................................................................33 ii. Underwriting ............................................................................................34 iii. Public-private cooperation in the primary market – The development of primary dealers............................................................36 iv. Technology in the primary market ........................................................36 v. Syndicated credits ....................................................................................37 2.2 Secondary markets ..........................................................................................38 i. The emergence and consequences of the MTS trading system..........38 ii. Electronisation of trading........................................................................42 iii. Trading activity in the European sovereign and corporate debt markets.......................................................................................................44 iv. Over-the-counter vs. on-exchange bond trading in the EU................49 2.3 The structure of European bond derivatives markets................................53 i. Futures and options .................................................................................53 ii. Over the counter interest rate derivatives.............................................56 3. Bond Markets and EU Legislation...........................................................................59 3.1 EU FSAP legislation and the bond markets.................................................59 3.2 The pre-FSAP regulatory framework...........................................................60 3.3 The FSAP measures.........................................................................................60 i. The prospectus directive .........................................................................61 ii. The transparency directive .....................................................................64 iii. Market abuse and insider dealing..........................................................65 iv. Markets in financial instruments directive (MiFID)............................68 v. Consolidated accounts in IAS or equivalent ........................................72 vi. Conclusion.................................................................................................72 4. Bond Market Liquidity, Efficiency and Transparency: The Role of Public Policy ..........................................................................................74 4.1 Introduction .....................................................................................................74 4.2 Economic growth and the benefits of dynamic bond markets .................74 i. Introduction ..............................................................................................74 ii. Funding .....................................................................................................76 iii. Monetary policy .......................................................................................77 iv. Pricing and hedging.................................................................................78 v. Financial cycles and stability ..................................................................79 vi. Market discipline......................................................................................80 vii. Liability and portfolio management......................................................81 viii. Conclusion.................................................................................................81 4.3 Regulating bond markets in Europe.............................................................82 i. Why the recent attention on bond markets?.........................................82 ii. Principles for bond market regulation ..................................................83 iii. Some fundamental differences between stocks, bonds and their respective market microstructures ........................................................86 iv. Fundamentals of retail investor protection in bond markets.............92 4.4 Transparency and liquidity..........................................................................102 i. What is liquidity and how to define it?...............................................102 ii. How liquidity affects asset pricing ......................................................105 iii. Liquidity and financial market efficiency...........................................105 iv. Transparency ..........................................................................................107 v. Degree of price transparency in US and EU bond markets..............108 5. Conclusions...............................................................................................................113 Bibliography ....................................................................................................................118 Annex I. EU Legislation Governing the Securities Market........................................128 List of Figures Figure 1.1a Bond, equity and bank assets markets in EU-12, EU-15, US and Japan, end 2003 (% of GDP)..........................................................................4 Figure 1.1b Bond, equity and bank assets markets in EU-12, EU-15, US and Japan, end 2003 (€ billions) ...........................................................................5 Figure 1.2 Total EU private equity investment (€ billions).........................................6 Figure 1.3a Bond markets in EU-15, US and Japan, 1992-2003 (% of GDP)................6 Figure 1.3b Bond, equity and bank assets markets in EU-15, 1995-2003 (billions of ecus/euros) .................................................................................7 Figure 1.4 International debt issues by currency .........................................................9 Figure 1.5a Domestic debt securities, by sector composition.....................................12 Figure 1.5b International debt securities, by sector composition...............................12 Figure 1.6a EU market share in global international debt securities markets .........14 Figure 1.6b EU market share in global domestic debt securities markets ................14 Figure 1.7 Share of net issuance of international debt securities, by region ..........15 Figure 1.8 Average value of issue by bond type (€ millions) ...................................16 Figure 1.9 Eurobond maturities by issuer nationality...............................................18 Figure 1.10 International bond maturities ....................................................................18 Figure 1.11 Maturities of bond types.............................................................................19
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