64. The conventional auction method was rejected by the market. The auction could not be identical to a Gilt auction as the GGBs are a spread product. The auction would, therefore, have to be a spread auction. Investors in Eurobonds by convention tend to subscribe for an initial placing of bonds all at the same price or spread. The auction would probably, therefore, have had to be an auction where all bidders bought at a single price rather than the type of auction currently used in the conventional Gilt market.
65. Although we believe it would have been technically possible to use an auction, we also believe it would have had certain drawbacks:
■ there was an assumption that the auction would be a cheap method of distribution. Gilt auctions are only "cheap" because they are managed by the DMO. The GEMMs are also essential to the process, providing liquidity in the market. There is no reason to believe that the GEMMs would have taken on the sale of the GGBs on the same basis (i.e. for no fee) unless the GGBs had been formally deemed to be Gilts and subject to GEMM privileges;
■ generally, institutions put in their bids at auction at the very last minute. If in the case of the GGBs, investors were intending to sell Gilts against their new investment, it would have been much more difficult to manage volatility in the Gilt market;
■ in an auction process, it would have been much more difficult to assess how successful the sale would be and the final pricing.
66. LCR might, therefore, have discovered that it had saved fees but paid more on the spread for the bonds.