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 income.
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 interest.
“Hopefully we don’t get an outcome that stops our ability to give issuer clients the service they want,” said a senior debt banker.
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 controversial.”
Another banker went further, arguing that this could open up a can of worms in what are part of the basic tools of managing new issues.
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)