Wednesday, 18 July 2018

Serious business

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SwissInvest strategist Anthony Peters lays into Messrs Jobsworth & Partners of the compliance group.

YOU CANNOT BE serious! That famous exclamation by the then “super-brat” John McEnroe has become part of the English language. And I can’t help but share that view when watching how some of the rather other-worldly regulations that have been raining down on us since 2008 are being interpreted by compliance and legal departments.

That was precisely my reaction when, over a coffee, a senior sales operative from one of the better cut of investment banks told me, with some incredulity, of an unnamed but I think Europe-based institution that had wished to sell corporate bonds – I suspect they might have mainly been financials – and which had sent a BWIC (Bids Wanted In Competition) to no less than 35 counterparties.

If true, the mind boggles. No doubt the compliance department had got a bee in its bonnet about best execution and Messrs Jobsworth & Partners of the compliance group had decided that the more prices are seen, the better the execution must be.

I have developed a bit of a reputation as a critic of investment banks in general and of syndicate desks in particular. But what is often missed by those on whose toes I tread is that I see the principal problem as the way the authorities have intervened and how they have, theoretically in the cause of investor protection, caused disruption that ultimately costs the end-investor a lot more than the odd missed opportunity. I’ve no idea how the portfolio manager or execution desk in question came to think that requesting competitive bids from 35 market-makers was going to help his or her cause but I have to assume that satisfying compliance rules must have been the prime motivator.

You don’t need a PhD in “bondology” to work out that spraying the same enquiry around the Street does nothing at all beneficial for price formation, least of all if using an OWIC or BWIC system, which lets all and sundry know just how just many houses are invited into the process. The firm in question quite likely pushed the price of the securities that it was offering for sale down by something in the region of a half a point and then, having traded at the supposedly best price, will have locked in that loss for the sake of satisfying those grand masters of subtle market practice in the control and compliance department.

Anyone who thought clipping the wings of the open market was a free lunch had better think again

EVERYONE IS NOW obsessed with covering their rear end at the expense of, as usual, the very people for whose protection the regulation was supposed to have been introduced. The cost of compliance and control has to be borne by someone and that someone is either the poor shareholder or it is the investing institution that, in one form or the other, is representing Joe Public. Anyone who thought clipping the wings of the open market was a free lunch had better think again.

Possibly to this day and surely well into the future, the most misguided bit of regulatory nonsense was perpetrated by the SEC against Bank of America. During the takeover of the totally bankrupt firm of Merrill Lynch, secret agreements were apparently struck to protect the Merrill operatives’ bonuses. Shareholders were not informed ahead of the vote on the takeover and the undisclosed guarantees formed the basis of a scandal that led to Bank of America being fined for misleading its shareholders.

So having been legged over once by overpaying for the hungering herd, the shareholders were then fined for having been deceived by way of incomplete information supplied to them by the board. Doh! The poor shareholders are the investors who are supposed to be protected by the legislation but then they end up having to pay for breaches in protocol against themselves.

This little story might initially appear to be a bit of a non-sequitur but it goes some way to remind ourselves how easy it is to get caught every which way and to be shot from both sides at the same time.

I MUST CONFESS to not having caught the entire story – we were having coffee in a noisy cafe in Canary Wharf – but as far as I could gather, the seller was still obliged to somehow print out a screen of Bloomberg’s “All Quotes” page in order to prove that trades were executed within “the context” of the market. How that could be achieved once the world and his wife had seen the bid list and duly marked the paper down escapes me, but where there is a will there is no doubt a way.

Sitting in my comfortable chair and sniping at investment banks as I do from time to time is cheap and easy but if I were a trader faced with a buy-side account with so little skill and sensitivity when it comes to trading bonds, I too would have to be scratching my head. If it were for a few hundred bonds I’d be tutting and sighing but this event supposedly took place in several hundreds of millions of dollars. They really cannot be serious … or can they?

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