UK's biggest banks plan to open up bond trade

Two of the UK's largest banks are poised to throw their weight behind an ambitious attempt to open up the corporate bond market to a wider audience and remedy the lack of transparency and liquidity that has long bedevilled bond trading.

Royal Bank of Scotland is preparing to issue a bond on the London Stock Exchange's electronic retail bond trading platform, which launched yesterday, and Barclays is believed to be likely to follow suit.

The move is the latest attempt to increase transparency in financial markets post the crisis, with France leading a push to centralise the fragmented euro zone corporate bond market on an electronic exchange.

As well as aiding price transparency and slashing often yawning bid/offer spreads, the LSE initiative aims to open up the bond market to retail investors, who are shut out by most UK corporate bonds only being issued in units of £50,000 (Dh291,755).

In countries such as Germany, France, Italy and Spain, where most debt is available in lots of 1,000 euros, retail investors are an important source of funding.

Nine pre-existing corporate bonds, from names such as BT, GlaxoSmithKline and Tesco, will migrate to the new platform today, alongside a range of gilts.

RBS, which has previously issued retail sized bonds in Italy, Germany and the Netherlands, will become a market maker to the new platform, alongside Evolution Securities.

It will also launch the first primary issue, a 10-year bond with a 5.1 per cent coupon in lots of just £100.

Pricing

"This brings the same opportunities for British investors as for those on the continent. It is possible for [UK] private investors to access corporate bonds and gilts but it hasn't been a very friendly place for them," said Ben Board, head of UK listed product sales at RBS.

"They have been held hostage by spreads that may have eaten the first year's yield and they could not be confident that pricing would be transparent."

The LSE estimates that of the 10,000 corporate bonds outstanding in the UK, only 150-200 are available in retail-size denominations.

"Hopefully this will bring new issuance where the UK lags some of its European rivals," said Patrick Humphris of the LSE.

Paul Killik, senior partner of broker Killik & Company argued that opening the market up to private investors would lower companies' cost of capital.

However, Killik feared the LSE would face opposition from investment banks that profit from the opacity and wide bid/offer spreads, which can be as much as 5 per cent, in the current over-the-counter system.

Making money

"The lack of transparency is the one thing that everyone complains about, but it's the one thing that people involved in the markets don't want to change because they are making so much money out of it," he said. "There are vested interests that want to keep the world as it is today."

Others fear the initiative could be stymied by high execution costs, which are much higher than the LSE charges for equity deals. However, Humphris was confident the move chimed with the post-crisis zeitgeist.

— Financial Times