11.18.2016
By Shanny Basar

New Standards Proposed for Fixed Income Issuance

This entry is part 11 in the series Corporate Bond Trading Content (9/16- )
 

New standards for the wholesale fixed income markets in Europe have been proposed which include banks being more transparent about their allocation policies and investors making sure their orders are a true representation of their demand.

The proposals have been made by the FICC Markets Standards Board, an independent body with members from investment banks, asset managers, exchanges, custodians and users. The board was set up following the publication of the Fair and Effective Markets Review by the UK Treasury, the Bank of England and the Financial Conduct Authority which was published last year.

The standard would apply to all widely syndicated offerings of credit products in the wholesale markets, including investment grade, high yield, securitization and emerging market debt.

Robert Rooney, chief executive of Morgan Stanley International and chair of the FMSB’s fixed income, spread products sub-committee, said in a statement: “These proposals are aimed at the wholesale fixed income markets in Europe but over time we think market pressures will lead to this standard being adopted more broadly internationally. This is what good practice looks like whatever part of the world you are in.”

The proposals cover the entire issuance process from the granting of a mandate, banks making allocations and investors submitting orders. Recommendations include issuer preferences in the allocation process taking priority; banks disclosing their policy on how they select investors for market soundings and roadshows and investors putting in orders that are not misleading but a true reflection of  their demand.

Comments on the proposals are due by 17 January next year.

Improved standards have become more important as there have been structural changes in the bond markets and the European Commission is looking to decrease the dependence on bank lending through the Capital Markets Union initiative.

Joanna Cound, head of Europe, Middle East and Africa  government relations and public policy at BlackRock, spoke about European fixed income markets to the International Capital Markets Association for its Asset Management and Investors Council Conference in London this month.

“The increased role of market finance is beneficial for non-financial corporations and banks alike, as corporates can diversify their funding structure, and banks can act as underwriters earning revenue without adding pressure to their balance sheets or taking on more risks,” she said. “That said, firms must be large enough to afford the fixed costs of issuing debt.”

Cound said companies have tended to issue bonds whenever financing needs arise or opportunities present themselves which has led to fragmented trading and liquidity across thousands of  bonds of varying maturities.

“Delivering MiFID II and MiFIR and ensuring that the provisions relating to post-trade infrastructure connectivity are fully implemented – and where necessary enforced – will go some way to address this situation“ she said.

In the European Union MiFID II, new regulations covering financial markets from 2018 , sets new pre-trade and post-trade transparency requirements for bond markets so both the sellside and buyside are looking at alternative ways of sourcing fixed income liquidity.

Cound recommended that the CMU should consider introducing measures to gradually increase institutional allocations into corporate bonds, and help institutional investors widen their corporate bond portfolios by allowing more flexible measures.

“Finally, by increasing investor demand, these measures should lower the cost of issuing bonds in the long run and would make bond issuance a more robust alternative to bank lending,” she added.

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