Fears of collusion, market abuse and a new round of conduct fines have rocked the market. Regulators are demanding chat records, emails and phone logs from trading desks at the banks.
According to several market sources, Bank of America Merrill Lynch, Crédit Agricole, Credit Suisse and Nomura have been asked for information by regulators, ahead of a possible official investigation into trading in dollar SSA bonds.
The request is at an early stage and no wrongdoing has been alleged. But, until now, the bond markets have been largely free of the scandals and market manipulation that have dogged foreign exchange and money market trading. That means the investigation has prompted a round of soul-searching.
“This will definitely affect our business,” said one senior supranational, sovereign and agency (SSA) banker. “All banks will be looking at internal controls again and in many cases tightening them up.”
A head of SSA debt capital markets said: “This risks morphing into something far larger that everyone is nervous about. People have been talking about Libor and FX for the last few years, and everyone in banking has always thought they’re going to look at every business.”
The US Department of Justice launched the inquiry last year, but it centres on London traders authorised by the UK’s Financial Conduct Authority, and GlobalCapital understands the two countries' authorities are working together. Neither was willing to comment.
The investigation is said to focus on co-operation between four individual traders at the four firms. All the banks declined to comment.
Traders under fire
According to four sources, the traders associated with the investigation are Hiren Gudka from Bank of America Merrill Lynch, Amandeep Manku from Crédit Agricole, Shailen Pau from Credit Suisse and Nomura's Bhardeep Heer.
Gudka joined BAML in April 2014, as part of a double hire from Deutsche Bank with syndicate director Adrien de Naurois, intended to expand the bank’s business. The conduct under investigation is believed to run up to 2014. Gudka lost his FCA authorisation at BAML on November 25 last year.
Three market sources said Gudka ran one of the largest SSA trading books in the market, in contrast to the other three traders, who were relatively small players. Gudka was a managing director while the other traders were directors.
The Nomura trader, Bhardeep Heer, dealt SSA bonds, covered bonds and government bonds. He retains regulatory authorisation at Nomura, and there is no accusation of any wrongdoing at this point, but Heer is off the trading desk indefinitely.
Heer moved from a back office role at Nomura to the trading desk in 2004. A former colleague described him as “the meekest guy you’ll ever meet” and “not your stereotypical govvie trader”.
A former colleague described Pau as “a superb trader”, though he was made redundant in late 2015. Credit Suisse has stopped market-making in European government bonds, and has been widely expected to shrink its SSA trading effort.
Amandeep Manku, known as Aman, worked at Crédit Agricole from 2013, but lost FCA authorisation at the firm on December 2 last year. Before that, he worked at Bank of America Merrill Lynch and HSBC.
None of the traders responded to GlobalCapital’s requests for comment on the investigation.
The consequences of the SSA trading investigation will depend on what sort of conduct emerges — and how far, if at all, the banks themselves are drawn in.
In some previous investigations, banks have been incentivised to race against one another to blow the whistle on themselves and their competitors, hoping for more lenient treatment because of their co-operation.
For the banks, the consequences may depend on how their compliance departments have performed. Regulated financial institutions can receive civil fines for failing to perform according to their regulated status, as well as for control failures that lead to unauthorised action.
But several previous investigations into traders wrongly co-operating with each other have invoked competition law, which comes with criminal penalties and unlimited fines.
Co-operating explicitly to fix prices, share market or customer information, rig bids or limit outputs is a cartel, which is a criminal offence in the UK. No proof of dishonesty is needed to make the charge stick. It carries a maximum five year prison term and an unlimited fine.
Tom Hayes, the UBS trader at the centre of the Libor scandal, was convicted on the more challenging charge of “conspiracy to defraud”, which requires the actions to be “dishonest by the ordinary standards of reasonable and honest people”.
One head of SSA DCM said: “SSA dollar trading desks don’t make a lot of money. How much will they be fined? Not many dollar desks make more than $5m-$10m [a year]. If they get fined more than that, then what happens?”
A cleaner market
So far, the bond market in the purest sense has been largely free of the major scandals that have hit banking, partly because it lacks readily manipulated benchmarks such as Libor or the WM/Reuters fix.
However, regulators have increased scrutiny across the financial markets. Investigations are under way into competition in the primary markets, allocations of corporate bond new issues, and the US Treasury bond market.
“There is a danger that capital markets will be tainted by this,” said a global head of DCM. “Having avoided any scandal thus far, it is frustrating that we are having to deal with this now. The market as a whole has really sharpened up over the last two years, as far as conduct goes. We are in a completely different place now to where we were a couple of years ago.”
“This is the last thing the SSA market needs,” said an SSA banker away from the situation. “Liquidity levels are already low and this is only going to make it worse.”
An SSA DCM head said the news would push bank management teams to review each of their SSA traders and make sure they have nothing to hide — and to sound the alarm if they do find something.
The Libor rigging scandal generated entirely new regulatory efforts, including the IOSCO Principles for Financial Benchmarks, the European Benchmark Regulation, and indirectly, the UK’s Senior Managers Regime and the Bank of England’s Fair and Effective Markets Review.
The Fair and Effective Markets Review theoretically included bond markets, but in practice, most of its recommendations focused on FX, money markets and benchmarks.
It did establish a FICC Market Standards Board, which is supposed to “define and sustain good practice standards for wholesale FICC markets and raise standards of behaviour, competence and awareness across those markets and among participants”.
However, the investment grade and SSA bond market already has a forum to do this — the International Capital Market Association.
One syndicate head said: “One thing to remember is that this market does self-police itself remarkably well. Every quarter the 25 or so ICMA members get round the table to discuss what needs to be tightened up, and what needs to be stamped out. It is an incredibly proactive market in this respect.”
In 2016, for the first time ICMA will run an Ethics and the Capital Markets training course, noting “if trust and integrity are to return to centre stage in the capital markets then mere compliance with the rules is not enough. This workshop aims to help market participants re-establish and redefine their moral compass.”