The Bank of Italy’s duties include supervision of the wholesale markets in government securities and of multilateral trading facilities for euro-denominated deposits. Given the type of trading performed, liquidity, and the large number of participant institutions, these markets are important for monetary policy transmission and financial stability.
Under the 1998 Consolidated Law on Finance, Article 66, the Ministry of Economy and Finance, after consulting the Bank of Italy and Consob, must regulate and authorize wholesale markets in government securities and approve their rules. The Bank of Italy and Consob also perform direct oversight of the wholesale markets in government securities, with diverse functions: the Bank supervises for purposes of overall efficiency and orderly trading, Consob for transparency and investor protection.
The Ministry is also assigned to determine, after consulting the Bank of Italy and Consob, the minimum operational requirements for multilateral trading facilities in government securities (Article 77-bis). Once authorized, these facilities are supervised continuously by the Bank of Italy after consulting Consob.
The Bank also monitors – alone – the efficiency and proper operation of organized trading of interbank funds in euro, as well as these facilities’ operators. By virtue of these powers, the Bank, after consulting Consob, has issued supervisory instructions for the regulated markets, wholesale multilateral trading facilities in government securities and multilateral trading facilities in deposits in euro and for their operating companies.
The Bank’s oversight of the money and financial markets (patterned after banking supervision and calibrated according to the proportionality principle) includes both off-site supervision and on-site inspection of the market operating companies as well as monitoring and overall analysis of the general performance of the markets. Monitoring and analysis serve to preserve the integrity of the market. The notion of “integrity” refers to such features as a price formation process that rapidly incorporates all publicly available information, “fair” access to trading for all investors, adequate liquidity, and mechanisms to deter and punish abusive conduct by intermediaries. In other words, preserving market integrity means safeguarding the set of rules, agreements and principles on which mutual trust among market participants and intermediaries is based. The objective of orderly trading follows also from that of market stability, in that the trading facility must be sufficiently robust to maintain the conditions for efficient functioning (two-way trading, price continuity, liquidity) in the face of exogenous shocks.
The markets that the Bank of Italy supervises are those operated by MTS S.p.A. and e-MID SIM S.p.A. Under the Consolidated Law on Finance, the Bank advises Consob on matters involving the regulation and authorization of private- and public-sector bond markets not in central government securities and markets in derivatives on public securities, interest rates and currency. Lastly, the Bank cooperates with the Ministry of Economy and Finance in evaluating market makers pursuant to Ministerial Decree 216 of 22 December 2009.
MTS and BondVision
MTS S.p.A. manages the wholesale market in government securities (MTS) and the wholesale market in government securities for institutional investors (BondVision). These two regulated markets are authorized by the Ministry of Economy and Finance and are supervised by the Bank of Italy and Consob.
Instituted in 1988 at the initiative of the Bank and the Treasury Ministry, since 1997 the MTS market has been managed by a private operating company (MTS S.p.A.). In 1998 it became a regulated market. At present MTS Italia has two segments, one for spot trades (MTS Cash) and one for repos (MTS Repo). Both segments make central counterparty services available on an optional basis, jointly supplied by Cassa di Compensazione e Garanzia S.p.A. (CC&G) and LCH.Clearnet SA.
MTS Cash is an interdealer market open, also on a remote basis, only to institutions meeting certain minimum asset and expertise requirements. It is a quote-driven market in which only market makers can quote prices. The market makers undertake to enter continuously, at the times and according to the procedures determined by MTS, buy and sell orders for specific financial instruments assigned to them by MTS.
In MTS Repo, by contrast, all participants can enter buy and sell orders. There are two segments: General Collateral Repo and Special Repo. In the latter, the parties to a trade agree to a designated collateral asset (that is, they specify the asset’s ISIN code). In the general collateral segment, the securities posted as collateral are selected after the trade from a basket of eligible assets (i.e. a list of ISIN codes).
Both the spot and repo segments offer RFQ (request for quote) functions, and the repo segment also has an OTC registration function.
MTS S.p.A. also operates BondVision, a spot dealer-to-customer government securities market in which the end users (institutional investors) can send bid and ask RFQs to the market makers (banks and investment firms).
e-MID SIM manages multilateral trading facilities for collateralized and unsecured deposits, repos and overnight indexed Eonia swaps.
The unsecured money market segment of e-MID is for trading in deposits denominated in euro, US dollars or sterling at maturities ranging from overnight to one year. It is also possible to trade non-standard maturities (broken dates) and to execute exchanges on a bilateral RFQ basis.
On the NewMIC collateralized interbank market, participants can trade anonymously, backed by a pool of eligible collateral posted with CC&G, which guarantees the successful completion of the trades. NewMIC derives from the old MIC, which had been formed in 2009 at the initiative of the Bank of Italy in cooperation with e-MID and ABI, the Italian Banking Association.
Finally, the e-MIDER market trades overnight indexed Eonia swaps.
The inception of NewMIC
At the start of 2009 the Bank of Italy, together with e-MID and ABI, created the collateralized interbank market (Mercato Interbancario Collateralizzato, MIC). This was a temporary measure to revive interbank trading and broaden the range of maturities. MIC was formed as a dedicated anonymous segment of the e-MID electronic interbank deposit market, allowing banks to trade funds while minimizing counterparty and liquidity risks. There were ad hoc safeguards against counterparty risk (an individual collateral pool established by participants and mutualistic contributions), and the Bank was called on to play a role in case of default: it would act in the interval between a participant’s default and the coverage of losses through sale of the collateral and payment of the mutualistic contributions. Anonymity enabled banks needing funds to make this need known without running the risk of being identified as short of liquidity.
In October 2010 the management of the market was transferred entirely to private parties and it was renamed NewMIC. CC&G serves as central counterparty guaranteeing trades.