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U.K. lawmakers debate bill to break up Bank of England’s dominance in the bond market

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British lawmakers debated Thursday a bill to overhaul the country’s market for Class 2 government bonds, known as Covidien.

The bill will merge two bills, one passed by the House of Commons and another passed by the upper House of Lords, into one omnibus measure that would end the near-monopoly of the U.K. government’s biggest investor — the Bank of England — on Covidien. The legislation also would create a new trust to manage the bond sales, in effect preventing the U.K. central bank from directly bidding in the sales process.

The bill is the result of recent recommendations made by an independent task force set up by the government to examine the market for Class 2 bonds, which are Treasury-issued paper known for their relatively low risk and relatively low yields.

In 2011, The Times reported on the perception that BoE officials were at the time trying to lift prices of the bonds by actively bidding in the market.

The task force, led by Michael Baird, a former associate governor at the Bank of England, focused on how to improve competition in the Covidien market and put in place reforms to prevent officials from approaching traders directly in an effort to manipulate pricing.

The task force recommended a three-tier structure for Class 2 bonds, with the bank’s existing designation as “major investor” and its priority to be the primary agent for all new investors. The bill would give investors confidence in the integrity of the process by putting in place an oversight panel of experts to make sure the bank adheres to those terms.

The change in investor status would lead to a significant price drop, however.

The bill has been proposed for more than two years and is aimed at prodding the Bank of England to use its leverage to create more competition in a market that has just four primary dealers — including the BoE — and 8.3 percent of British government bonds outstanding.

The government said last week that the top three primary dealers for Class 2 government bonds — The Bank of England, Deutsche Bank and Goldman Sachs — are holding 41 percent of all such government bonds. The “dealer model” incentivizes Britain’s central bank to buy bonds, but discourages primary dealers from competing against the bank for business.

The new bill seeks to “separate and clarify the relationship between primary dealers and the Bank of England” by eliminating the “mandatory firewall” that currently exists between the central bank and the primary dealers, the government said in a statement.

The panel recommended changing that basic model and having primary dealers compete directly for new business and manage ongoing bond issues. The new bill would eliminate that firewall.

This piece is based on a report by Mark Landler and Stephen Castle.

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