CME's BrokerTec to launch new collateral basket for EU bonds

LONDON (Reuters) - Electronic bond trading platform BrokerTec will on Monday launch a collateral basket for bonds issued by the European Union, marking a further step in the EU's transformation into one of the world's biggest borrowers.

The 27-nation EU, which borrowed relatively small amounts before the coronavirus pandemic, has started issuing bonds that will raise up to 800 billion euros ($943 billion) in the coming years to aid its response to the crisis. The bloc has also issued bonds to fund the EU's SURE unemployment scheme.

Investors say the scale of the planned issuance means there is a need for infrastructure to support trading volumes - in particular by making the new debt easier to use as collateral for repo markets.

BrokerTec's new general collateral basket for EU debt "will include both SURE and Next Generation EU bonds," said Kate Karimson, head of European repo at the platform.

BrokerTec is part of the CME Group, the world's biggest financial derivatives exchange.

"Our customers say this should help with liquidity," Karimson said, while stressing that it was still early days for the EU's development into a major bond market.

Banks and businesses rely on repo markets to raise cash against collateral, often via high-quality sovereign bonds such as triple-A rated German debt.

Including EU bonds in a collateral basket could help ease pressure on the supply of German Bunds, a market squeezed by massive central bank bond-buying.

And repo market activity would allow the borrowing and lending of EU securities, in turn allowing for investors to take a position in cash bond markets.

BrokerTec said it had been in talks with the European Commission about how to further support this new EU bond issuance across repo and cash bond trading.

The EU will establish a bills programme for short-dated borrowing and in September start selling debt at auction, where dealers purchase the debt and sell it onto investors, as government borrowers commonly do.

So far the EU has sold new bonds via a syndicate of banks. Selling bonds at auction, issuing bills and tapping existing bonds are all tools used by debt management agencies to build up liquidity in bond markets.

"Everyone is looking to see what happens here (EU bond issuance), everyone is of the same appetite to increase liquidity in this space," said BrokerTec's Karimson.

(Reporting by Dhara Ranasinghe; Editing by Catherine Evans)