Cyprus bonds dematerialised, shifted to CSE

Cyprus Government bonds have been dematerialised with the task entrusted to the

Cyprus Stock Exchange to keep the registry following a deal among the CSE, the Finance Ministry and the Central Bank.

CSE Vice Chairman Demetris Papadopoulos said the shift to the Exchange will commence on April 12 which means that the settlement time will be cut from T+8 to T+3.

“The shift to a dematerisalised (electronic) registry and cutting down the settlement time had been one of the principle obstacles why foreign institutional investors were not very active in government bond trading,” he said.

The fact that the CSE has a number of custodian service providers, among them many foreign names, is also seen as a favourable factor to attract institutional, especially foreign interest. The custodian providers include BNP Paribas, Citibank, Bayerische Hypo-Und Vereinsbank AG and all the major local and Greek banks.

Meanwhile, well-informed sources confirmed that last week a number of important legislative amendments were passed, all aimed at facilitating a modern trading environment for bond trading.

The stumbling block however, remains the trading platform on which the Cyprus government bonds will trade, since at the moment there is no actual trading. The bonds are issued through an auction system held and conducted by the Central Bank on behalf of the Ministry of Finance, after which they are listed on the CSE, but because of huge mark-ups or wrong pricing, there is seldom any trading, forcing the Central Bank to act as market maker for the bonds.

 

— Trading platform

 

The CSE is one of the candidates insisting that it has a cost effective and tested platform on which government bonds may trade. The Finance Ministry, probably on the intense lobbying of the Central Bank, may decide otherwise and instead allow trading on the bonds to shift to another platform, such as the EuroMTS, which reliable sources claim is where most euro-zone bond trading is taking place.

The Finance Ministry may alternatively decide to follow the case of Greece, which has entrusted trading on its bonds both to the Greek Central Bank trading system as well as the MTS.

The Central Bank’s preference for the MTS platform has been evident from 2005 when it first allowed two Cyprus Republic Eurobond issues to trade. According to a previous Central Bank announcement, about 24 international banks trade on NewEuroMTS with an obligation to offer continuous bid and offer prices on the bond trades, which are cleared through Euroclear or Clearstream.

People who were opposed to the dematerialised and settlement system from shifting to the CSE insist that it would have been better to shift trading on the MTS platform and settle through Euroclear.

 

— Liquidity and return

 

While officials ponder which platform to turn to, they also need to decide how they can attract primary dealers to the market, which will buy the bonds from the government and then offload some or all on the secondary market where all types of funds and investors may trade.

For the primary dealer to act as market makers, Cyprus will need to pass special laws to regulate the matter, which may also apply for equity trading.

With the introduction of the euro as Cyprus’ currency from January 2008, Cyprus will start issuing bonds in euros, which because of the small size and restrictions on liquidity will be slightly more expensive than the standard benchmark, the German bunds.

“The pricing issue will depend on where the bonds trade and are settled, how liquid the market is and other issues such as servicing of the debt. The higher the risk, the higher the price over bunds,” said an informed source.

 

— Tough scrutiny

 

Ahead of the introduction of the euro and the fact that the bonds of a future euro-zone member would be will be cleared through the CSE, the Exchange is currently under the intense scrutiny of the ECB.

The ECB is evaluating the CSE to check its legal framework, the security issues, the expertise and up to 18 criteria that the CSE needs to meet before it is allowed to become a euro-zone clearing agent.

CSE officials are confident that having passed two previous evaluation tests, they will be able to satisfy the ECB requirements.