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Friday, 20 October 2017

EXCLUSIVE - DoJ investigates bond traders over market-rigging

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Probe into four London-based traders on possible market manipulation

Four traders of sovereign, supranational and agency debt are being investigated by the US Department of Justice for possible manipulation of bond prices, according to several sources.

The traders under investigation, all London-based, are Hiren Gudka of Bank of America Merrill Lynch, Amandeep Singh Manku of Credit Agricole and Bhardeep Singh Heer of Nomura and Shailen Pau of Credit Suisse.

All four have vacated their desks pending the outcome of the investigation. Pau’s position was put at risk of being eliminated by Credit Suisse in late 2015 as part of a wider restructuring of its business.

Gudka and Manku have been inactive on the FCA register since the start of December.

BAML, Nomura and Credit Suisse declined to comment. Credit Agricole did not reply to requests for comment. Gudka, Manku, Heer and Pau did not respond to attempts made by IFR to contact them, or proved impossible to contact directly.

The DoJ is investigating allegations that SSA traders at different banks agreed prices and shared information on certain US dollar bonds in chatrooms they established for the purpose, the sources said. The DoJ also declined to comment.

The bonds were issued by sovereigns, and agency borrowers such as German-backed development bank KfW, and supranationals like the European Investment Bank.

One source who trades SSA bonds said that the use of permanent Bloomberg chatrooms within market sectors was commonplace in the City but after a series of major scandals investment banks stopped the practice. He added that the group created a new chatroom each day to discuss activity and prices.

The US DoJ is looking into whether any of the discussions in those chatrooms amounted to manipulation of market prices, said the sources.

Bloomberg reported last month that the DoJ was examining possible manipulation in the SSA market. It said the DoJ was focusing on activity by London-based traders primarily before 2014, but did not name any person or bank under scrutiny or details of the probe. Until he joined BAML in April 2014, Gudka worked at Deutsche. Deutsche declined to comment.

The size of the SSA market is substantial, with global SSA issuance volumes hitting US$843.35bn last year. But the fees borrowers pay for new issues are often puny.

Volatile

The DoJ probe comes at a time when bond prices have been extremely volatile in secondary market trading against a backdrop of divergent monetary policy in Europe and the US.

“I really would not want to be a secondary trader [of SSA debt] right now. You have one or two big investors who are dictating prices in the market,” said one SSA syndicate official.

“So if you can speak to another trader and agree to sell a bond at a certain price and not below, then that makes a big difference.”

Furthermore, the SSA investor base is relatively narrow, dominated by around 30 important central banks and a few hedge funds, which experts say puts pressure on borrowers to ensure investors receive a good service from banks in secondary trading.

Primary gain

Also, when issuers such as KfW and EIB choose banks to manage the fee-paying issuance of new bonds they tend to favour those banks that can show that they have traded their bonds in large volumes in the secondary market, said the SSA syndicate official.

“Issuers conduct empirical measurements and publish a chart. They use these charts to award business … So say, you are bank Z, you will get told by the issuer where you rank on that chart to incentivise you to do more secondary business,” said one former banker who used to work at one of the banks named by IFR.

Clearly, such practices increase the pressure on banks focussing on winning SSA mandates to ensure their traders are actively trading SSA paper in the secondary market.

“Like all responsible issuers, we too monitor our secondary market liquidity and turnover. In other words, we also monitor trading performance of dealers,” an EIB official told IFR.

“Whilst trading capability is important, this is neither new nor surprising. Highlighting it as the criteria for choice of lead managers would be inaccurate,” the official said.

A KfW official said that its selection of lead managers is “predominantly … driven by the distribution power of intermediaries, ie, good access to investors worldwide and a common view regarding the shape of the market, the choice of the tenor and currency.”

When BAML made a big push in the SSA sector in 2014, it did so partly by hiring Gudka.

Thomson Reuters data show that BAML was sixth in the league table for global SSA issuance in 2015, managing US$47bn-equivalent of business. This compared to the US$40.37bn of league table credit gained in 2014, when the bank finished eighth in the table.

Its market share shot up to 5.6% in 2015 compared to 3.9% the year before.

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