Covered bonds: ECBC puts a head on troubled shoulders

"The failing of the ACI decision was that it was made exclusively by traders" Richard Kemmish, Credit Suisse

The group will comprise representatives of the eight largest covered bond markets by outstanding jumbo issuance volume and the eight most committed market-making institutions. According to the ECBC, the 16-person committee will advise on measures to amend market-making agreements to "facilitate a return to orderly trading conditions". If it succeeds, it will be none too soon. Some of the words being used to describe the present state of the covered bond market ("confused", "sporadic", "patchy", "messy") would have been laughed at had they been pitched six months ago. But the market has fundamentally changed, and the question of whether covered bonds can be considered a rates product rather than a credit product has been answered in the negative, despite the best efforts of market participants. "In today’s world, you have to say we are looking at a credit product," says one.

There is certainly a need for action. But can the ECBC succeed where others have failed? The much-publicized efforts of the ACI financial markets association to maintain market-making in secondary covered bond markets were unsuccessful, and the attempt to split the market into "core" and "non-core" sectors by tripling bid-offer spreads for the latter and only doubling them for the former led to widespread dissatisfaction among issuers.