Developing a model for Europe
“MTS is a product of the geopolitical history of Europe,” says Gianluca Garbi, chief executive office of MTS and EuroMTS. What started as an Italian national initiative in the 1980s to deal with its national debt has since spread throughout Europe by defining its market as a thoroughly European one. The European bond exchange today has more than 500 connections throughout Europe, with daily average transaction volumes in excess of E85bn, and it accounts for more than 60% of the total turnover in the euro-denominated government cash bond market.
The MTS system was created in Italy in 1988, as an initiative by the Italian treasury and the Bank of Italy to manage its imposing national debt, building liquid bond issues for investors in a way that was cost-effective for the issuer. Privatised in 1997, it soon began its European expansion under Garbi’s guidance.
The year 1998 was an exciting time: there was the euro, there was a new economic boom, and electronic trading was the centrepiece of every business plan. At the time, only Italy had a mature platform for continuous electronic bonds quotation, thanks to its government initiative; throughout the rest of Europe, standards and practices varied widely. MTS, with its proven technology, Telematico, provided by SIA, and a sound business model, was poised for success. “But we realised that Italy alone could not succeed in the new market,” says Garbi. “We tried to think broadly in a European sense.”
At the time, Garbi noted that there was still deep resistance towards unification. A bank in one EU country considered investors from other EU countries to be foreign investors. “Many European initiatives that failed did so not because of technology, but because governance is in the hands of one country or a small number of countries or institutions,” Garbi explains.
So MTS set out to devise a corporate structure that would allow the company to operate locally throughout Europe – and what it did was to share governance. In the first markets MTS entered – the Netherlands, France, Portugal and Belgium – MTS was (and is) a minority shareholder. This is the origin of EuroMTS, the reference pan-European benchmark bond platform with a listing size of E5bn or more, the minimum listing size chosen with liquidity in mind.
“We tried to please all the participant issuers, banks and investors,” Garbi says. “It was not easy – on any side. It was difficult to convince the Italians to give up control; and it was difficult to convince the non-Italians that we were serious.”
Five years on, MTS has 51 shareholders, and no single group has a majority; in fact, no single participating bank is allowed to own more than 5%. European investors hold 89% but no one country dominates. However, Italian banks hold 38% of the company. “It is clear that MTS started from Italy,” says Garbi. In some cases, issuers hold equity stakes in order to participate directly in the governance of the company managing the market. In the MTS model, dealers and issuers work together to develop and increase efficiency in their government debt markets. All profits above 10% are returned to the market via reduced membership fees or transaction costs.
As European sentiment has evolved, so has MTS’s business model. In the most countries entered most recently – Austria, Finland, Denmark and Greece – MTS has established divisions of existing entities, rather than setting up new companies. “Today it is more acceptable to have a legal entity based in London or another European centre. At the beginning that was unthinkable,” Garbi explains. The Greek operation, for example, is a division of EuroMTS. “So the story of MTS as a legal entity is the story of Europe,” maintains Garbi. Although the company has altered its model for expansion, the diversity of its ownership base ensures that it remains true to its pan-European vision. Today MTS is present in all EU countries and is expanding into eastern Europe as fast as the Euro-zone is, through NewEuroMTS.
The MTS platform offers efficiency and transparency, as well as reduced costs. Minimum issue sizes are not directly required in the various national MTS markets, although the EuroMTS benchmark requirement of E5bn or more has trickled down through the various national markets. Although there are fewer chances for opportunistic gains, the benefits of stability seem to outweigh that.
Throughout its operations, MTS has remained focused on its core business. “We are European fixed income,” asserts Garbi. Straying away from this core business led to trouble, as with a recent foray into Japan. “The experience in Japan was not successful,” he admits readily. Although the Japanese economy seemed to be on the brink of a revival, this was not the case, and MTS had its fingers burned. While the company does not discount further ventures outside Europe, Garbi says that it will only do so following a different model, working in partnership with an existing system rather than setting up autonomously. “It would be a mistake to put resources into the US or Asia, starting from scratch, but we do not exclude the possibility of an alliance or merger or some other form of consolidation.”
“There are a lot of initiatives out there,” Garbi explains. “Our priority is consolidation rather than the creation of new confusion.”
Nonetheless, “it is very difficult to predict the future. There is not one single market,” Garbi says. In addition to expanding horizontally, into new national markets, MTS also has its eye on opportunities for vertical expansion, moving into new businesses allied to its core business. EuroMTS expanded into non-sovereign bonds with the creation of EuroCredit MTS for covered bonds with a minimum issue size of E3bn. Following that, EuroMTS started listing agency and supranational bonds with a minimum size of E5bn that are part of issuance programs. In March this year, it introduced a new market for trading of quasi-governmental bonds of E2-5bn outstanding, complementing trading of these issuers at E5bn or more through EuroMTS.
Since January 2003, MTSNext has managed the first real-time, tradable and transparent pan-European bond index; formerly the CNO Etrix, it was acquired from the French Bond Market Association, a prime example of the company’s belief in consolidation.
It has also expanded from B-to-B to B-to-C through its BondVision operation, a regulated exchange for Internet-based multi-dealer to client market for government and quasi-government securities, which is part of the MTS group but separated by Chinese walls. Different investors have different needs, which may be pointers to new business opportunities. For example, institutional investors have different needs from banks, engaging in different types of trades and wanting less transparency. Garbi also indicated that MTS has the retail market in its sights: “In an electronic market, the chain is all connected,” he says.