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27 Feb 2007

Hedge Funds Looking For Direct Access to MTS

Following reports that hedge funds such as Citadel and Vega are trying to gain direct access to the pan-European bond exchange network MTS, the European Primary Dealers Association (EPDA) reported that it has not yet decided whether to allow third parties to access its platform, but the group has reportedly set up a committee to consider admitting hedge funds as members.

They do warn however, that third party participation in the electronic markets could undermine the current structure and introduce greater risks.

MTS is an abbreviation for Mercato dei Titoli di Stato, which translates to "Market for Government Bonds". The technology of the Italian based MTS platform is the Telematico system, a sophisticated electronic platform specifically designed for the trading of fixed income instruments. It replaces the expensive and often time-consuming process of trading over-the-counter.

According to a recent FT report, these moves are showing how powerful the hedge fund industry is becoming and also highlights the dispute over the current structure of the euro-zone government bond markets.

In a discussion paper circulated Tuesday, the EPDA said, "While issuers have influence over their primary dealerships, primary dealers may not be in a position to exercise control over third parties,.............They would be squeezed between the commercial pressure of their prime brokerage business and the inability to regulate the activity of third parties trading in the primary dealers' name. Lack of control could give rise to potential misbehavior by rogue traders."

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