114 4 Debt
vative. Empirical analysis shows that the market for euro-denominated credit de-
fault swaps leads prices of underlying corporate bonds.^127
Primary market. Primary markets can be based on various procedures. A very
common procedure is the auction (for auctions, see section 10.3.2). According to
the ECB, anecdotal evidence suggests that around 70% of euro area government
bonds are issued through auction. Syndication is another very common issuance
procedure (for syndication, see section 4.7). Typically, syndication is chosen
where specific marketing is required to attract investors or for reasons of speed.
Non-government debt securities, debt securities issued by governments of smaller
countries, and new types of debt security have been issued through syndication.^128
It is increasingly common for securities to be sold on primary markets in sev-
eral tranches (tap sales) so that the outstanding amount of the security increases
over time. Euro area government bond tap securities are typically sold via auction.
However, if the initial tranche of the tap is issued through syndication, then syndi-
cation is also sometimes used to issue further tranches of the same security.^129
Secondary market. In Europe, trade execution via the telephone or through
voice brokers dominates both inter-dealer and dealer-to-customer debt securities
markets for private sector securities. A broker is an intermediary between buyer
and seller. Electronic trading systems are used in particular for the trading of gov-
ernment bonds. Government bonds are traded much more than private sector
bonds.^130 Credit derivatives are relatively new products and they have been traded
electronically throughout most of their history. According to the ECB, around
80% of European CDSs were traded electronically in 2007.^131 Options and futures
on euro-denominated debt securities are virtually exclusively traded electronically
on Eurex (all Eurex bond derivatives are options and futures on German govern-
ment bonds).^132
From a regulatory point of view, secondary securities markets can be divided
into regulated and non-regulated markets. Regulated markets are markets that ful-
fil a set of regulatory requirements specified in the MiFID and are recognised as
regulated markets by their home Member State. The list of regulated markets is
published once a year in the Official Journal and includes even bond markets.^133
Most regulated markets are operated fully electronically.^134
Post-trading infrastructures. Trading is followed by post-trading clearing and
post-trading settlement. The euro area inherited the market infrastructures of its
member countries. Consolidation has mainly taken place domestically, and to only
(^127) Ibid, pp 5 and 56–60.
(^128) Ibid, pp 33–34.
(^129) Ibid, p 35.
(^130) See ibid, pp 36–37.
(^131) Ibid, p 45.
(^132) Ibid, p 47.
(^133) Annotated presentation of regulated markets and national provisions implementing rele-
vant requirements of ISD (Council Directive 93/22/EEC) (2008/C 57/11).
(^134) See ECB, The euro bonds and derivatives markets (June 2007) p 37.