The Eurobond Secondary Market and Clearing System

A capital market comprises two main parts — the new issue or primary market, and the trading or secondary market. The primary market is the mechanism through which new savings are mobilised and through which new securities are distributed. The secondary market is simply an exchange, where no new funds are raised. In a market in which securities are widely held, a well functioning secondary market is of crucial importance. In the first place active trading markets are indispensable to the effective marketing of new issues. In the second place, trading in outstanding securities is important in its own right, because wealthholders’ constant efforts to optimise their satisfactions from their portfolios are facilitated through ease of açset shifts. A capital market is thus a network of facilities for transferring long-term claims which provides a means for readjusting a given stock of financial assets and liabilities as well as a means for augmenting the flow of loanable funds, i.e. adding to the stock of financial assets and liabilities. The only case where a new issue market functions without a secondary market to back it up is in the case of a true private placement market where a complete security issue is placed with one or a small number of institutions for long-term investment purposes, i.e. where the liabilities corresponding to the assets are of a long-term nature and their timing and amount can be calculated, say, actuarially. Even in this case however, without a secondary market in similar securities (the public issue markets) it would be almost impossible to know what was the correct yield at which to sell such securities. Quick and cheap marketability of securities is a fundamental prerequisite to the raising of large amounts of funds directly from ultimate lenders who require that their investments remain liquid.