16 January 2015

ICMA responds to Fair and Effective Markets Review consultation document

A recent ICMA study suggests that, while there is scope for more trading activity to migrate to electronic trading venues, this is not a substitute for the liquidity provided through the traditional market-making model. From the point of view of corporate issuers, the treasury function is under a corporate governance obligation to manage its funding in the best interests of the company’s business. Corporate borrowers today mostly choose to issue international corporate bonds on a syndicated book-built basis.

Borrowers hire a syndicate of banks (lead managers) to help them collect orders and then to price the issue to demand. Borrowers, who are also financial market “end-users”, have a strong interest in deciding which investors will receive bonds on issuance. An auction process does not enable a borrower to decide this. Lead managers seek to account for the interests of their borrower clients when allocating bonds on new issues. Borrowers may choose to rely entirely on their syndicate’s proposal, suggest amendments or even elaborate their own allocation plan.

Specific allocation considerations include early, proactive and useful feedback on what the transaction size/yield could be; track record of investing in the borrower, sector or type of issue concerned; likely holding horizon; and any apparent order size inconsistency with assets under management or prior investment history (which might indicate order inflation). It is relatively common today, though by no means universal, for lead managers to make deal statistics available to investors.

These itemise the transaction’s distribution by geographic segments and by investor type. However, going beyond that to the publication of individual allocations raises questions of statutory or contractual confidentiality in relation to both investors and borrowers that would need to be addressed (notably under MiFID client-facing rules). When considering alternative issuance processes, it is important to ensure they work in changing market environments and for under-subscribed bond issues as well as for over-subscribed ones.

Other key points include:

• ICMA believes that there are significant risks in case well intentioned regulation inadvertently leads to undesirable effects on the functioning of fixed income markets
• Eurobond borrowers can and frequently do change the lead managers that participate in their underwriting syndicates, without any investor or market reaction or comment (though borrowers do see an advantage in having relationship firms in the syndicate who already have a good understanding of their needs)
• ICMA considers that much has already been done in a short space of time to improve the robustness of benchmarks and notes that further adjustments are already in train. It appears reasonable to believe that some time is now needed to allow all this to become more fully bedded down and any further action should only then be based upon observation of the new regime which leads to the identification of any remaining shortcomings

ICMA’s experience is that, beyond formal rules and requirements, there is a highly valuable role that can be fulfilled by the market itself drawing up practice guides, which should fill in any gaps in the formal framework, and help to make clear how market activities can efficiently and effectively be conducted within the applicable formal framework.

Full press release

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