LSE retail bond market launches

Date: Friday 29 Jan 2010

Next week, private investors will get the opportunity in an area of the UK market previously populated almost exclusively by institutions and where up to now small investors rarely got a look in.

The London Stock Exchange is to launch a retail platform for trading government and corporate bonds, opening up a part of the market where up to now minimum deals generally started at £50,000 and often ran into millions.

At a time when retail savers are seeing interest on cash accounts reduced to little more than pin money, the Exchange hopes it has got its timing spot on.

It says it is filling a gap in the market highlighted by its merger with Borsa Italia. The retail bond market is big business in Italy and the LSE believes it is time for the UK investors to have to have the same opportunities to buy bonds as investors elsewhere.

The Italian exchange saw £110bn of bonds traded in the first half of 2009 with 590 bonds listed. But that is still small in comparison to Germany, where turnover annually is over €10bn.

The aim is to make it as easy to trade bonds as shares, the LSE says, adding that the market will operate identically to shares traded on the LSE, with two-way (buy/sell) spreads being offered. Dealing sizes could be as low as £1,000 or maybe even lower to encourage retail investors.

The LSE says it wants 40 UK government bonds and up to 80 corporate bonds to be available on the market, though initially only nine corporate bonds will available on launch.

The gilts (or UK government bonds) will be mainly straightforward conventional bonds. A couple of index-linked issues will also be traded.

The corporate bonds can be issued by anyone as long as a bond meets the listing requirements. The initial group traded are likely to be backed by corporate household names to help liquidity early on.

In Italy, some companies issue bonds directly to the public and eventually the LSE would like something similar to develop in the UK.

An issue such as Manchester United’s recent £500m bond offer would tick all of the boxes, the LSE says. It had the brand recognition to appeal to the private investor, while institutional investors could be attracted by the additional liquidity.

So far, over 15 retail brokers have signed to operate in the new market. The LSE expects that figure to rise closer to 20. Settlement will handled electronically through Crest’s straight-through-processing system.

The LSE is hopeful a new regulated, on-exchange bond market could spark a sea change for investment in the UK, both for companies and investors.

While changing views to extent may be a way off, with investors and savers alike struggling to find safe income havens at present it should be guaranteed a warm welcome.

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