EXCHANGE SEEN APPROVING "WHEN ISSUED" GILT TRADE
The Stock Exchange is virtually certain
to agree to change its regulations in order to permit "when
issued" trading of U.K. Government bonds (gilts) as part of an
experimental series of bond auctions later this year, market
sources said.
    "The principle that this "when issued' trading should take
place has been accepted by the Executive Committee of the
International Stock Exchange," said George Nissen, chairman of
the Gilt Edged Market Makers' Association (GEMMA). "It's a
question of how, rather than whether," he told Reuters.
    The Bank of England announced in February that it planned a
possible series of experimental auctions for gilts, similar to
the system used to market U.S. Treasury issues, with the first
auction possibly in April or May.
     The Bank said at that stage that it was not opposed in
principle to "when issued" trading developing in bonds in the
period between the announcement of full details of the auction
and the auction itself, as in the U.S.
    However, "when issued" trading is prohibited under the rules
of the International Stock Exchange, formerly the London Stock
Exchange, and would require an amendment in order to proceed.
    Nissen said discussions on the technical details of a rule
change to allow "when issued" trading were still taking place
between the Government broker at the Bank of England and the
Quotations Department of the Stock Exchange.
    The 27 gilt-edged primary dealers regard the introduction
of grey market trading as an essential feature of an auction
system covering part of the Government's funding needs.
    "If we are going into an auction system, we need to have
some form of market test of the stock we're bidding for," said
Simon Hartnell, Head Trader at primary dealer Alexanders Laing
and Cruickshank Gilts Ltd.
    "The American WI (when issued) market certainly functions
very efficiently," he said.
    Nissen said he believed that if "when issued" trading were
not allowed, market-makers "would be extremely unhappy about the
whole auction."
    Gilt dealers noted that it was a basic provision of Stock
Exchange rules that dealing could not take place in a stock
until it was listed by the Quotations Department. However, this
was mainly designed to prevent a grey market springing up in
equities prior to listing.
    They pointed out that in contrast to the many uncertainties
connected with an issue of equity securities, there would be
few imponderables relating to bonds just about to be issued by
the Bank of England.
    Senior market sources noted that in any case "when issued"
trading would be supervised by the Stock Exchange and would be
subject to Bank of England supervisory guidelines.
    Since the Bank of England and market-makers themselves are
known to be in favour of the idea, the sources said, there was
now a presumption that there would be scope for "when issued"
trading to take place.
    Gilt sales now are effected by means of large-scale stock
tenders or by tap issues of stock tranches direct to the
market. But greater market capitalisation following the "Big
Bang" restructuring last year provided an opportunity for
change.
    A combination of both systems would enable the Bank to
benefit from both the flexibility offered by traditional
marketing methods and the guarantee of a steady supply of funds
implied by auctions.
    The Bank said in a consultative document published in
February that possibly two or three experimental auctions might
each raise between one to 1-1/2 billion stg.
    The remainder of the funding would be conducted by
traditional tender and tap issue means. Total gross official
sales of gilt-edged stock were 11.9 billion stg in 1985/86.
    Nissen said that market-makers had agreed unanimously with
the bank's view that auctions would be more easily conducted on
a price basis, rather than based on yield.
    He said that the odds were also in favour of adoption of a
bid price form of auction, where successful bidders were
allotted stock at the various prices at which they bid, rather
than a common price allotment whereby stock was allocated at
the lowest accepted price.
    Hartnell said that while a "when issued" facility was crucial
to market-makers' adaptation to the new system, he would also
have liked to see an extension to the "fallow" period proposal
made by the Bank of England.
    The Bank said that it would not sell by any method stock of
the same type as that to be auctioned between the time of the
announcement of auction details and a period ending 28 days
after the auction itself.
    Noting that in the case of long bond auctions, U.S. Primary
dealers have as much as three months between successive sales
of stock, Hartnell said the Bank's proposal was "very tight."
    Nissen said that following a meeting between GEMMA and the
Bank of England on March 3, which he described as "very helpful,"
GEMMA submitted a note making several further residual points.
    Market-makers are now awaiting a further, fairly
definitive, paper from the Bank which would contain details of
auction procedures. Although the Bank has not yet formally
announced a definite intention to proceed with the auctions,
most market participants assume that they will go ahead.
    "My own view is that we are on course and the first
indications from the original paper - an auction at the end of
April or in May - must be the best assumption," he said.
 REUTER
