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Electronic Issuance and the Future of Primary Dealer Systems
This chapter gives an overview of initiatives taken by OECD debt managers in implementing electronic systems in the primary market. In addition, their impact on market structures will be analysed.
The use of electronic systems in the primary market consists of: 1) electronic auction systems (in some cases also handling buy backs and switching operations); 2) syndication; and 3) direct issuance to retail investors. An increasing number of issuers use electronic auction systems.
Auctions are the most commonly used issue method. However, after the introduction of the euro a number of EU countries (in particular the smaller ones) have introduced syndication as a supplement to auctions. This issue method is effective in rapidly building-up an outstanding volume of considerable size. Electronic book building typically supports syndication. However, experiences thus far indicate that the contacts between the sales team and the investors remain very important, although there is the technical possibility to enter bids directly into the system. A special issue related to electronic sales is direct issuance to retail investors. Technological developments – notably the Internet – enable issuers to reach retail investors directly. Thus far, only a limited number of countries have used this possibility. The key consideration is costs. Accordingly, the different electronic systems for selling directly to retail investors reflect different cost minimising strategies. An important strategic issue concerning electronic issuance is the ability to directly reach a broader investor base. In parallel with the globalisation of financial markets, and the establishment of the euro zone bond market in particular, issuers have become increasingly concerned about reaching a broad and diversified investor base. A much-debated issue in this context is the future role of primary dealers.
The use of electronic systems in the primary market consists of: 1) electronic auction systems (in some cases also handling buy backs and switching operations); 2) syndication; and 3) direct issuance to retail investors. An increasing number of issuers use electronic auction systems.
Auctions are the most commonly used issue method. However, after the introduction of the euro a number of EU countries (in particular the smaller ones) have introduced syndication as a supplement to auctions. This issue method is effective in rapidly building-up an outstanding volume of considerable size. Electronic book building typically supports syndication. However, experiences thus far indicate that the contacts between the sales team and the investors remain very important, although there is the technical possibility to enter bids directly into the system. A special issue related to electronic sales is direct issuance to retail investors. Technological developments – notably the Internet – enable issuers to reach retail investors directly. Thus far, only a limited number of countries have used this possibility. The key consideration is costs. Accordingly, the different electronic systems for selling directly to retail investors reflect different cost minimising strategies. An important strategic issue concerning electronic issuance is the ability to directly reach a broader investor base. In parallel with the globalisation of financial markets, and the establishment of the euro zone bond market in particular, issuers have become increasingly concerned about reaching a broad and diversified investor base. A much-debated issue in this context is the future role of primary dealers.