The Bank of England last week launched a wide-ranging review of the fixed income, currencies and commodities markets, providing smaller investors with an opportunity to vent their long-running complaints about new issue allocations.
The regulator announced a consultation into a range of issues in FICC with the aim of defining what is fair and effective.
The Fair and Effective Markets Review, which has already had some initial conversations, will receive formal submissions by January 30 2015 prior to publishing recommendations in June.
While the range of issues under examination is potentially enormous, the review’s interest in the new issue process and the structure of the corporate bond market will be of particular concern to fixed income market participants.
“The new issue process for syndicated bonds has also been raised with the review by many market participants as being ‘unfair’, especially to smaller investors,” the Bank of England wrote. It even suggested it would examine some of the techniques used in auctions.
“A lot of the issues are very well-known and understood … Obviously we’ll be making a submission,” said Ruari Ewing, senior director, primary markets at the International Capital Market Association.
Ewing said that the consultation would provide an opportunity to air and debate issues in a transparent manner.
One DCM syndicate official told IFR that while smaller investors might voice unhappiness about syndication practices, borrowers had the right to decide who they sell their debt to. Their objectives are to lower their cost of capital by ensuring strong aftermarket performance, and encouraging the continued engagement from longer-term investors.
Earlier this year it emerged that the US SEC was looking at new issue allocations following complaints in the US that the biggest investors received unfair allocations as a result of their size and because they were dealers’ key clients.
Nothing has emerged from that inquiry, with US dealers generally unconcerned due to strict compliance put in place after the industry paid hefty fines on unfair allocations procedures in equity market IPOs in the 1990s.
Nevertheless, there is real concern among DCM syndicate pros in London that the Bank of England review could seek to support smaller investors at the expense of the big players, especially in light of the attention given recently to the potential systemic risk posed by the biggest investors.
The Bank also said it was looking for answers on structural deficiencies within FICC. For example, BlackRock is one market participant that has asked whether standardising corporate bond issuance would help improve trading liquidity.
On this, most dealers dismiss the idea that concentrating market activity into a smaller number of bonds with similar features would work. Indeed, the review recognises the potential drawback this could have on borrowers funding strategies.
In addition to looking at industry-led standardisation of FICC assets, the review wants to examine and improve transparency through electronic trading, to boost competition and improve benchmark designs.
In light of the multiple failures of conduct in foreign exchange and money markets, the efficiency of market discipline with regards to market abuse will be another big theme in the report.
It is also likely to ask whether concentration seen in some FICC markets poses risks and whether there are market-led initiatives, technological or structural changes that could boost competition.