U.K. Loses Another Primary Dealer as Societe Generale Quits

  • Follows Credit Suisse's exit from the role in October
  • French bank will focus on `core activities,' spokesman says

Societe Generale SA resigned as a primary dealer for U.K. government bonds, the second market maker to exit in just over three months.

The French bank’s resignation follows Credit Suisse Group AG’s decision to leave its role in October, which was the first such move since December 2011. SocGen will end its role in both the conventional and index-linked markets as of the close on Feb. 5, the Britain’s Debt Management Office said in a statement on Friday.

The exit comes as U.K. primary dealers and investors said this week that it’s becoming increasingly difficult to sell gilts due to new regulations. Banks are also cutting costs in their fixed-income departments amid a drop in trading profits and tighter rules that increase the cost of warehousing risk and market making.

“The nature of being a primary dealer for any sovereign debt market has changed significantly such that the benefits accrued to the primary dealer have changed substantially,” said Anthony Perrotta, a partner at financial-services research firm Tabb Group LLC in New York. “Having this mandate to be a market maker and potentially own securities in the wake of auctions, the risk-reward now is no longer in favor of being a primary dealer.”

SocGen relinquished the role to focus on its “core activities, including through optimizing the use of its scarce resources in the context of a fundamentally changed regulatory framework,” the bank said in an e-mailed statement.

DMO chief executive Robert Stheeman said this week he agrees with the premise that the ability of primary dealers to run large inventories has been reduced, and that this means their warehousing capacity has declined. At an auction of five-year gilts last week, investors bid for 1.07 times the targeted amount, the lowest bid-to-cover ratio since a 2009 sale of 40-year securities that missed its sales target.

At a Jan. 26 meeting with market makers and officials of the DMO and the U.K. Treasury, investors said the burden of regulation risks cutting liquidity and pushing up transaction costs -- particularly in repurchase agreements, or repos. They also raised concerns about the level of investor participation at auctions, the minutes published the following day show.

A reduction in primary dealers doesn’t necessarily mean liquidity will be hampered because the nature of how liquidity is provided is also adapting to the new regulation, Tabb’s Perrotta said.

“What will happen over time is that the cost of risk transfer, which has been essentially zero for many years, will now be passed from the banks onto their customers.,” Perrotta said. “But I think they are going to do it in such a way that it’s not a shock to the system.”

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