The average size of trades has been shrinking, pushing the thorny issue of assignment fees to the fore. These standard $3,500 payments to the administrative agent on a loan when it is traded are cutting into the upside for desks. "When you were doing $20 million trades, it didn't matter," said Jon Weiss, head par trader at Bear Stearns. "But on a $2 million trade, it does."
Dealers said the average size of trades this year has dropped from $10 million to $1-2 million, for a variety of reasons. One is that in this hobbled economy investors are nibbling, and collateralized loan obligation managers who want portfolio diversity and fear credit defaults are hedging their bets in small doses. Another reason is that most trades are now coming out of fund managers' accounts, which are distributed into four or five different accounts. Each sub-account is viewed as a separate legal entity. Therefore, if a desk that is not the administrative agent were to buy $5 million from the fund manager, the desk would be charged for the separate accounts. "While technically it's a single trade, I have to pay $3,500 four times over," one trader at a big firm noted. "I don't mind paying them $3,500 once."
The pinch is igniting anew the call for a standard approach to waiving assignment fees. As it is now, most desks will waive fees for buyside clients on trades when they are the administrative agent and they'll pay for the customer on deals where they are not the admin agent. But the waivers do not extend to rival banks, and traders are saying it is becoming an issue. "With the amount of trading I do, [the fee] is a direct hit to me. I'm talking seven digits," said Clay DesJardine, head par trader at Deutsche Bank. But it would not make sense for one desk to waive fees for competitors if it wasn't done across the board. "The entire market has to adopt something. I'm not trying to help other desks; I'm trying to help buyside clients," DesJardine noted.
J.P. Morgan and Bank of America lead the bulk of the deals in the primary market and would bear the brunt of an across-the-board waiver. Officials there declined to comment as did officials at Bank of America.
Waiving fees outright could be tricky. One dealer noted there are legitimate costs associated with processing paper. Another dealer called for making fees a percentage of the trading piece, which levels the playing field. "[A firm] said they'll waive fees if you trade with them, but you're punishing the people who don't trade with you and not allowing the market to compete on prices." Another dealer asked the buyside to step up and call for changes in how desks are charged assignment fees. "[The big banks] won't listen to us," one trader said. "But they'll listen to the buyside."