TS, the eurozone government bond trading platform, plans to offer pan-European corporate bond trading, pitting it against two rivals in a race that could end banks’ traditional dominance of the market.

MTS, part-owned by the London Stock Exchange and best known for government bond trading, said on Monday it was developing an order-driven corporate platform to list and trade the euro-denominated debt instruments. It could launch as early as the first quarter of next year.

MTS’s proposal is the latest response to the so-called Cassiopeia Committee, a Paris-based, international group of investors, issuers and market makers who began meeting this year at the behest of Christine Lagarde, the French finance minister.
Their mission was to explore ways of restructuring and improving the market amid fears that weakened interest from banks in market-making would affect investors’ liquidity and interest in corporate debt – which could in turn raise issuer borrowing costs.
Paris has long been frustrated by London’s dominance of euro-denominated corporate bond trading in spite of the UK’s refusal to join the single currency.

In April the committee called for a trading platform that works more like a stock exchange, where users can see the order “book” and gauge the depth of interest in a particular bond. The committee said on Monday the MTS proposal met its aims. It has already approved two other proposals, by NYSE-Euronext and by TradingScreen.

Corporate bond trading has historically been far less liquid than stock trading because of the sheer variety of outstanding bonds.
That had left banks with a central market-maker role because of their ability to hold large inventories. After the financial crisis the banks’ desire to maintain such inventory has weakened in the face of regulatory changes, notably the higher levels of capital they will have to hold.

One demand of the Cassiopeia Committee was that the over-the-counter market should shift to a clearing model – with trades guaranteed by a central counterparty in return for a fee – to help make the market more transparent and to reassure investors.
The NYSE Euronext platform and TradingScreen’s planned platforms have arranged clearing by LCH.Clearnet, the European clearing house. MTS is in talks with clearing houses about supporting its efforts.

Jennifer Hughes and Philip Stafford for Financial Times, November 15 2010