The primary bond markets might be free of scandals so far, but they are a permanent source of complaints for investors.
Small accounts complain they don’t receive allocations; large accounts, notably BlackRock, have suggested reordering the whole process around fewer, larger, more liquid issues. Others back auction methods or automation, rather than the opaque-seeming syndication process.
That means regulators keep investigating the process. The US’s Securities and Exchange Commission has examined the allocation process; the UK’s Financial Conduct Authority has examined competition for mandates, while the Bank of England’s Fair and Effective Markets Review dealt with pages of complaint from asset managers about the way the sell-side treated them.
Those in primary markets should be rightly proud that these enquiries have repeatedly found nothing worthy of a scandal. Conventions such as ‘reciprocity’ — I’ll mandate you if you mandate me — would struggle to pass the sniff test of the average Guardian reader, but there has been ample opportunity for regulators to uncover any real dirt, and they have so far found nothing.
That doesn’t, however, absolve the market of the need to act. If large numbers of investors find the process painful, or think it seems unfair, that’s already a problem. It isn’t enough simply to point to the continued pipeline of priced new issues as evidence that the market needs no improvement — long term, a market where all participants believe they are treated fairly is a stronger, fairer, and more functional market.
That’s the point of the new FMSB’s standard for new issues. Spun out of the Fair and Effective Markets Review’s Market Practitioners Panel, the FMSB is an opportunity for the industry to get its own house in order, and swerve any future attempts at official intervention.
It’s a short document — seven pages — and it’s mostly common sense. Banks should have allocation policies, policies for selecting investors for soundings and roadshows, and deal announcements should be made in a standard format.
Other parts simply endorse existing practice, or even regulatory requirements. Investor orders should reflect real demand; lead managers should send out deal stats. There are two months for comment, if any of this seems controversial.
Where it departs from existing practice is in insisting that much of this is public. The lead manager strategy on book disclosure, the allocation policy, the policy for selecting investors should all be publicly available, on the basis that sunlight is the best disinfectant.
If banks comply with the requirements in a cursory fashion, public disclosure will make that obvious to investors — and, of course, to the specialist bond market media. Sometimes transparency in markets achieves very little (Basel’s ‘Pillar 3’ disclosures, supposed to expose banks to the discipline of investors, come to mind) but in this case, transparency is exactly what’s needed.
In a process without obvious scandal or blatant wrongdoing, but with a low level of trust, opening up is the right way to show there is nothing to hide, and to rebuild investor confidence. It shouldn’t mess with existing syndicate practice – certainly no more than European market abuse rules or technological change already have.
Beyond boilerplate
The standard should be seen as the beginning of a larger, broader project. It is supposed to apply to best efforts syndications in investment grade, high yield, securitization and emerging markets, and it is supposed to apply across the globe, not just to London-based Eurobond desks.
That, however, needs another, more detailed layer of market guidelines, matching the 400-page primary markets handbook the International Capital Market Association circulates for investment grade Eurobond syndications.
Perhaps not every market needs this level of detail or of standardisation. But it’s not a coincidence that the criticisms of syndicate desks grow louder when more complicated products are concerned.
Many issues in yieldier markets feature fewer investors, who may have closer, more complex relationships to the banks on the deal. Syndicating a full capital stack of a securitization to 25 investors over three days is a very different process to syndicating a vanilla corporate bond to 300 investors in three hours — not necessarily easier, and requiring a different set of market standards.
The relationship between banks, too, needs a different set of codes when one firm has been structuring the deal for months while the others were appointed the previous day. Markets have their conventions around arrangers, global co-ordinators and left-leads, but nothing as codified and generally agreed as ICMA’s work in investment grade.
That needs to change, which will be hard and inconvenient for a while. Committees will have to form, drafting needs doing, and busy market participants will need to donate their time for no immediate benefit. Then everyone will need to comply with it.
But in the long term, it will mean more trusted, more orderly markets that serve issuers and arrangers, as well as investors, better. And better to get on with it before regulators get there. The FMSB has arrived; now the whole market should make sure it delivers.