Event Recap: Modernizing the Swedish Bond Market

Challenges in the Swedish bond market

On December 12th, the ICMA, Nasdaq and the Nordic Capital Market Forum hosted an event labeled “Modernizing the Swedish Bond Market” at Nasdaq Stockholm.

The discussions centered on the challenges the Swedish bond market has faced in recent turbulent markets and the opportunities that a more accessible bond market could provide.

The event featured speakers from Alfred Berg, Avanza, ICA Gruppen, Kommuninvest, Nordnet, SEB, Swedbank, the Swedish Securities Markets Association, the Swedish Investment Fund Association and Gernandt & Danielsson.  

Opening Remarks: Olof Manner, Senior Advisor, Swedbank

Olof Manner opened the seminar with a keynote speech describing the development of the bond market since the mid-1980’s. We have come far since the days of manually calculating prices and risks on a handheld calculator and physically delivering bonds by running suitcases of bearer bonds between brokers. However, the market is still dependent on a relatively small number of intermediaries and the access to the market is still very much telephone/chat based.

Panel 1: Is There a Need to Reform the Institutional Market Model?

Moderator: Johan Wijkström, Head of Regulatory Business Development, Swedbank & ICMA Nordic Regional Chair.

Panelists:

• Christian Ragnartz, Head of Debt Management, Kommuninvest
• Erik Skårbratt, Head of Credit Trading, SEB
• Fredrik Petterson, Chief Analyst, Swedish Investment Fund Association
• Maria Janson, Head of Institutional Banking Swedbank and Chairman SVPM
• Åsa Skogsfors, Head of Treasury, ICA Gruppen

The panel kicked of with a question concerning the need to broaden and expand the current investor base that could be met with an increasing demand from segments that have historically been excluded from the market (e.g., retail investors).

Several panelists noted that the fixed income segment (government, covered and Kommuninvest bonds) have worked well in recent years and that there does not seem to be a lack of demand in the market. However, it was also noted that retail investors, typically in the form of private banking clients have become more interested.

One issuer noted that they see a stronger need for more corporate issuers than investors, as a broader issuer base would enable companies to see recent comparable trades before issuing.

The discussion then turned to the matter of transparency and whether there is a need to improve upon it.

One panelist prefaced the conversation by saying that the Swedish market participants have chosen to self-regulate the transparency (post-trade) at a level that goes beyond the requirements of MiFID II in certain regards.

Another noted that the reduction of the Swedish Riksbank’s involvement in the market will be to the benefit of the fixed income market as there will be a more natural supply and demand that will generate trades.

One of the speakers stated that there is a need to increase the level of transparency beyond the self-regulation and regulatory requirements. Trade reports need to become more timely, less error prone and be communicated more effectively. It was also noted that investment funds would be able to be more active in times of distress if the transparency levels were higher.

As last remarks, one panelist suggested it would be best to await further harmonization from ESMA instead of imposing further national guidelines or requirements.

We are seeing new technologies entering the bond markets in Europe. For example, the use of distributed ledger technology that can enable trades directly between issuers and investors. Raising the question of where the panelist thought we where headed?

One speaker said they do believe that it will eventually happen but that the current model works well in the fixed income segment. Another remarked that a platform with more direct access would be beneficial for issuers in good times but perhaps not as easy to access in times of higher volatility. It was also noted that there will still be a need for market makers who can carry risk, even if we move into a more open marketplace, to which one of the trading participants responded that they would definitely participate if there was a push towards open and order-driven markets.

The panelists were then asked how they believed the market would be arranged in 10 years time.

One panelist first highlighted the fact that the market has changed a lot already during the last decades. They used to have 16 dealers but now have 5 and the market has become more order driven. The normalization of yields at a higher level will likely increase the demand for the asset class as a whole.

Another panelist commented that a more transparent and accessible marketplace with more participants would be welcomed. However, it would have to be done in a way that is manageable for small treasury teams when it comes to administration.

An audience member commented that there are problems in the market that were not felt by more frequent and large issuers but had a detrimental impact on investment funds during covid-19, what is going to stop that from happening again?

The panelists responded that that is true and that there may be a need for a more open market model to mitigate that risk, even if the market for investment grade corporate bonds and AAA fixed income securities were never truly closed.

A second audience member then asked what changes the panelists would like to see in the future.

The first panelist responded by saying that the market was never closed during the COVID pandemic but that there was an issue with price discovery. The problems were most prevalent in the high yield segment but from the banks’ perspective there is no need to change the investment grade market.

Another commented that the traditional market-maker role of the banks is losing profitability and that the banks incentives to make markets is diminishing because of the increasing cost of capital. On the other hand, it is still a crucial part of the banking community’s overall offering in bond markets.

A second panelist commented that it would be good to see a development towards a more open market with participation from smaller investors but also noted that the segment which they are a part of is functioning well quite well now.

In last remarks, one panelist said that they would be positive towards trying a more open and accessible marketplace for the segments that are not functioning well today, e.g., high yield and unrated corporate bonds.

Legal considerations linked to Public Offerings
Mikael Borg, Gernandt & Danielsson

Mikael presented some regulatory considerations that comes with allowing the public to invest in bond offerings. To summarize in brief, the main considerations lie in the assessment of the target market, the nature of the product, product governance, and disclosure and prospectus requirements.

The key issue is that most bonds are currently offered with denominations above 100,000 EUR which means that very few private individuals can participate in the primary and the secondary markets. By setting a lower denomination, issuers would be required to publish a more extensive prospectus and do so before marketing the securities to investors. Mikael highlighted the fact that it is rare to file prospectuses before marketing bonds in Sweden while it is actually the norm in many other European markets.

Furthermore, possible additional legal steps and requirements are highly dependent on the type of issuer and the complexity of the bond transaction. Issuers with MTN programs written in the Swedish language who are issuing plain-vanilla debt instruments would for example be required to make only limited changes to their base prospectuses which are filed with the Swedish FSA once per year, in order to accommodate for a retail segment. These types of offerings are likely (as a starting point) most suitable from a retail investor protection standpoint as well as they are typically less complex and typically requires less active engagement by investors during the bond’s lifetime. 

Non-frequent or first-time issuers in the high yield segment would need to make larger alterations to their issuance process to give retail investors access. However, Mikael emphasized that this should not be an insurmountable obstacle as the different market participants routinely have these processes ready, i.e. in relation to equity transactions and thus the legal competence already exist in our local eco-system to quickly create an effective model for retail offerings of bonds too.

Panel 2: Unlocking the Potential of the Retail Community

Moderator: Nina Suhaib-Wolf, Director, Market Practice and Regulatory Policy, ICMA.

Panelists:

• Magnus Lilja, Head of Private Banking, Avanza Bank
• Martin Ringberg, Country Manager Sweden, Nordnet
• Mikael Borg, Partner and co-head Capital Markets, Gernandt & Danielsson
• Maria Granlund, Portfolio Manager, Alfred Berg

The panel started with a discussion on the retail community’s demand.

The first speaker said that bonds are becoming increasingly demanded by their clients. Notably retail investors are no longer only seeking high yield debt but are also enquiring about the possibility to buy investment-grade corporate bonds and government, covered and municipality bonds. Another panelist continued and stated that the mechanism to buy bonds is simply not good enough for private individuals.

The panelists were then asked how they foresee retail investor participation in the primary market.

One of the panelists started by saying that they would have no problems filling a retail quota in primary market transactions just like they do in collaboration with the large investment banks today on IPOs. They went on to say that the best way would be to allow a mix of retail and institutional investors in the same tranches, potentially at slightly different terms depending on the ticket size. This would benefit all participants; issuers would receive a clear benefit of a lower funding cost and fund managers would obtain a more frequently traded market which would benefit valuations and management of liquidity.

A second panelist continued by saying that this is a trend all over Europe and that there have been recent cases in e.g., Italy, Belgium, Portugal which shows a strong demand as well as clear benefits from the issuers’ point of view. A third panelist agreed and emphasized that it has been tested before and that the best solution is to combine retail and institutional interests in one tranche. For this to happen, investors must be clear about the demand so that issuers are willing to take a little bit of risk to achieve a lower funding cost.

Mikael Borg was then asked to reiterate how burdensome it would be for an issuer of plain vanilla bonds to allow retail participation.

It would require a bit more work, but the associated cost would be immaterial in the grander scheme of things, especially for larger corporates with listed equity and MTN programs.

Another panelist continued to state that there should be a coordinated effort amongst lawyers, bankers, themselves, and institutional investors to promote bonds traded on exchanges from large companies which are publicly traded. Currently, retail participation is highest in the segments with the highest risk, which is not a good situation.

The panel then shifted to the secondary market.

It was first said that standardization of terms and more information and reference data would be beneficial. More importantly, retail investors will need a digital marketplace where there is a transparent spread they can act on. Some clients have the ability to call their bank for indicative prices but that’s not what investors want, noted one panelist. This was confirmed by a second speaker, who said it is a simple matter of transparency and liquidity, if we can achieve better transparency, deeper liquidity will follow.

Moreover, portfolio managers were said to have a pretty clear view of where bonds are priced in the market (pre-trade). The problem is that they are working in a bubble and the information is not disseminated to the larger market. It would therefore be much better if we had a digital marketplace where the banks price bonds everyday so that we have a core liquidity. It was also noted that this could enable the establishment of benchmark prices and indices that would be to the benefit of the entire market.

An audience member then asked whether the introduction of retail investors on an open market would benefit fund managers ability to manage liquidity.

Alfred Berg responded that funds are currently forced to keep ~10% liquid reserves in the form of cash to handle unexpected outflows. Another panelist responded by saying their clients could help alleviate that issue in an open marketplace and allow fund managers to trade smaller volumes to better match their needs and ultimately increase the market exposure of the portfolio, to which Alfred Berg agreed.

Final Remarks, Fredrik Ekström, President of Nasdaq Stockholm

Fredrik highlighted that the market for other financial instruments has developed rapidly into a more digitalized environment and that it should be possible to improve on the bond market as well. In his closing remarks he asked the audience, “If you think the market will be different in 10 years, why start moving in 8 years and not tomorrow?