By Liz Hoffman
A group of banks, asset managers and corporate bond issuers Friday proposed new guidelines to make debt sales more transparent in the trillion-dollar market.
While it is unclear how widely adopted the guidelines willbecome, the group endorsing them includes big banks such as Goldman Sachs Group Inc. and UBS AG, investment giants such as BlackRock, and companies such as Royal Dutch Shell and Vodafone PLC. It was set up at the urging of the U.K. Treasury and Bank of England, following a 2014 review of the fixed-income market after a series of scandals.
The guidelines would, among other things, discourage banks from doling out bonds to favored customers and would require them to answer honestly when asked about the demand for a particular security.
Bond sales are often a delicate negotiation laced with haggling and half-truths, as banks try to raise funds for corporate clients at the cheapest price possible, while still ensuring there is enough leftover demand from investors to allow the bonds to trade well.
The group, the FICC Market Standards Board, stands for fixed-income, currencies and commodities, and is a catchall term for the trillions of dollars in debt securities that are issued each year.
Regulators have been scrutinizing how those securities are doled out and priced. The Securities and Exchange Commission and Finra, a brokerage-industry-funded regulator, in 2014 investigated whether banks steered bonds to the biggest money managers, which would give those accounts unfair influence over pricing and hurt smaller investors.
A Finra spokeswoman and SEC spokesman declined to comment.
The proposals are aimed at European offerings, but over time "market pressures will lead to this standard being adopted more broadly internationally," Robert Rooney, who runs Morgan Stanley's international business and worked on the guidelines, said in a statement.
Essentially, Friday's proposals would require more honest dealings from both the banks that underwrite these securities and investors who buy them.
Bank disclosures about a deal's demand should be "not misleading," said the proposal published by the group. Investors sometimes complain that bankers gin up orders by suggesting offerings are hotter than they are.
But investors also could be more upfront, the working paper said. The guidelines said investor orders "should be a true representation of their demand." Investors sometimes ask for more bonds than they want because they fear getting none, industry participants say.
That distorts true demand and can make for wobbly trading, which reflects poorly on underwriters, the group said.
The proposal is a draft of suggested "best practices" and has no enforcement mechanism if the participating banks don't follow the guidelines.
Its success likely depends on companies insisting that their banks adopt them. Royal Dutch Shell's treasurer said that the company -- a major issuer of corporate debt -- "would like to see all our syndicate banks and investors adopting this standard."Still, corporations may not like the outcome of injecting too much transparency into bond allocations. Forcing banks to be honest when demand is weak could doom offerings altogether -- meaning companies don't raise the money they are seeking, or have to pay higher rates.
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(END) Dow Jones Newswires
November 18, 2016 15:39 ET (20:39 GMT)
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