Commenting on the European Commission’s proposals for Sovereign Bond-Backed Securities (SBBS), announced today, Victoria Webster, Director of Fixed Income at AFME, said:

“AFME supports continuing discussion regarding the creation of a European “safe asset”. At the same time, we believe that a number of essential criteria to successfully develop a market for SBBS have not yet been met. In order for such instruments to be workable, more analysis by a variety of market participants is needed.

“We therefore encourage EU legislators to consider further consultations with Debt Management Offices, Primary Dealers and investors before deciding to progress this initiative further.” In particular, some elements that would need to be taken into account are

(i) demand, as investors can already build portfolios replicating what would be the underlying portfolios of SBBS, with the ability to shift risk more easily than if they were holding tranches of SBBS, and

(ii)  its structure, as the fixed blend of national bonds and the high contagion risks between the bloc’s countries without risk-sharing measures are likely, therefore trust in SBBS will be lowest when they are most needed in times of crisis.

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