Banks Unite in Project Neptune to Boost Bond Trading

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A group of banks and investors is working on a project to increase trading of corporate bonds in the U.S. and Europe amid a drop in dealer holdings because of new regulations.

The 12 lenders and 16 European money managers are working with ETrading Software Ltd. to create standardized language and a messaging system known as the Neptune project, said Sassan Danesh, a partner at the London-based technology consultancy. The Wall Street Journal reported the plans yesterday.

Trading in the bond market has declined as banks, seeking to preserve capital, cut their holdings of securities. Project Neptune is designed to allow traders to advertise bonds without revealing buyers and sellers, according to Danesh.

“The bond market is changing, which is why these solutions are being developed,” said Robert McGrath, global head of trading at Schroders Plc, which manages 271.5 billion pounds ($434 billion). “We don’t know how things will look when the process is done but we want to be as involved as possible.”

BNP Paribas SA, Credit Suisse Group AG, Goldman Sachs Group Inc., HSBC Holdings Plc, JPMorgan Chase & Co. and Societe Generale SA are among 12 banks involved in the talks, according to the WSJ. Axa Investment Managers Ltd. and Schroders are also involved in the discussions, the WSJ reported.

Liquidity Slump

Spokesmen for BNP Paribas, Credit Suisse, Goldman, HSBC and JPMorgan declined to comment. An official at Societe Generale had no immediate comment on the program.

“The utopian result for the bond market is one big central pool where everybody lists their interests – but this is unrealistic,” Kevin McPartland, head of research for market structure and technology at Greenwich Associates, said in a telephone interview. “This isn’t the first talk of doing something like this, but you need a healthy quorum of dealers and investors to make any solution like this work.”

Liquidity has dropped by about 70 percent since the 2008 crisis in Europe and the U.S., according to strategists led by Alberto Gallo at Royal Bank of Scotland Group Plc in London. A corporate bond in Europe trades once a day on average, compared with almost five times a day a decade ago, according to RBS.

“Clients get easy access to multiple bank inventories in an easy manner, whilst still allowing each bank to compete on the quality of the inventory information they supply,” said ETrading’s Danesh in an e-mail. “Effectively the banks own their own ‘‘shops’’ and can compete in their own manner, whilst the ‘‘mall’’ simply provides convenient access.”

The initial phase of the project focuses on helping dealers inform investment managers what they hold in inventory, rather than linking investors to each other, he said.

The banks are planning to pay $48,000 each for the first part of the consultancy work and blueprints for the proposal, which is initially planned for Europe, the WSJ reported, citing people it didn’t identify.

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