LONDON, Feb 24 (IFR) - Market participants have reacted
warily, and a little wearily, to news that activities such as
the hedging of new issues in swaps and bond markets will be
looked at in detail this year by the standards board for fixed
In an interview with IFR, the board's chairman, Mark Yallop,
said it would like to scrutinise the potential impact of new
issues on related secondary markets.
This will include hedges which are often provided to
issuers, including rate locks or spread locks, to guarantee what
interest rate or spread they will pay before a new issue prices.
But the ways these hedges work are fraught with conflicts of
"Hopefully we don't get an outcome that stops our ability to
give issuer clients the service they want," said a senior debt
The FICC Markets Standards Board (FMSB) was set up in July
2015 to improve conduct and practice in the wake of a series of
banking scandals, including manipulation of benchmark interest
rates and foreign exchange markets.
Last year, it published a transparency draft on new issuance
that dealt with how bonds were allocated and how information on
order books was managed, but stopped short of looking at areas
such as hedging. Although not quite finalised, this proposed
standard has already been felt in market practices. It is set to
be unveiled in its definitive form later this month.
"Looking at allocations - they needed to set some rules.
That was a very delicate matter," the same bank official said.
"But rates and spread locks - these situations are not
Another banker went further, arguing that this could open up
a can of worms in what are part of the basic tools of managing
He also voiced concerns that it could lessen the ability to
manage risk and attack the efficiency of markets.
As part of the same standard, the FMSB is also looking at
how to manage the potential conflict of interest when a
secondary trading desk assumes responsibility for bonds that
have just been issued from the syndicate desk.
If that desk knows it is going to receive unsold inventory,
at what point can traders start hedging their positions? There
could be a situation where syndicate is trying to sell bonds to
investors at the same time the secondary desk is shorting them
in the market.
Can they hedge it as soon as they know think the issue will
possibly be coming, or do they wait to hedge until it is
launched into the market? Or does the desk have to wait until
the primary period has ended?
In a separate analysis, the FMSB will examine the
ramifications of loan trading on related markets, an area with
many conflicts of interest, similar to new issues.
(Reporting by Alex Chambers; Editing by Philip Wright)