So news that US and UK authorities are investigating four banks, Bank of America Merrill Lynch, Crédit Agricole, Credit Suisse, and Nomura, over unauthorised cooperation in the dollar-denominated SSA secondary market, shouldn’t come as a total shock.
There is no wrongdoing alleged, and enquiries are at an early stage – collecting chat records, emails, phone logs and trade blotters, not throwing around accusations. The scope also seems fairly limited – four traders working together, but not institutional corruption of the sort that seemed pervasive in the money markets.
But these things have a way of forcing the market’s hand. Existing drives to heavier compliance will accelerate. More parts of the market will become automated, electronic, and readily reportable. Senior management will want to tighten their oversight of trading – there’s just no point taking the risk any more – and they will want to be damn sure that there are no other skeletons lurking in the closet.
Banks could also see substantial fines, if the probe finds any fault. Cooperation between traders at different firms means antitrust or cartel law could apply – meaning potentially unlimited fines. The desks in question might not make more than a few million a year, but the formula for fines has little to do with bank or personal benefit. As far as GlobalCapital can tell, it’s something like size of market multiplied by how embarrassing the chat messages are.
The market’s reaction to the probe has also been fascinating. Although it looks so far like four traders, all friends, simply helping each other out, the investigation has kick-started a discussion about the whole market structure.
SSA bankers have queued up to denounce some issuers using turnover statistics to hand out primary mandates, arguing that it links trading desks too closely to primary P&L, and encourages the purposeless “churn” of bonds subsidised by underwriting fees.
The complaint has a certain pedigree – two sources GlobalCapital spoke to highlighted shenanigans on the EuroMTS trading system before the crisis – but that doesn’t make it any less worrying. In these times of thin real liquidity, anything that encourages false, puffed up liquidity is unhelpful. If bonds are going to be illiquid, issuers, arrangers and investors need to confront that truth honestly.
Bankers also complained about the pressure from certain borrowers to reveal secondary flow. Regular issuers, like the major SSAs, understandably want to know where demand is for their bonds, and whether investors are ditching them in secondary, but there’s a fine line between traders giving colour and breaches of client confidentiality.
The market is also musing on what the business impact is for the banks involved. SSA underwriting means securing business from the cleanest of the clean – even buying a treasurer a sandwich can break anti-bribery rules – so what might it mean if a bank is censured by the US and UK regulatory authorities?
At first, nothing. Most borrowers GlobalCapital contacted adopted an “innocent until proven guilty” approach. During previous outbreaks of scandal, Libor-manipulating banks continued to write Libor-linked swaps for SSA clients, even following guilty pleas to criminal charges. DCM bankers might have to field a few questions, but it’s probably going to be business as usual.
Away from the investigation, the first business week of the year didn’t bring any new news on bank restructurings – no giant job cuts or five year strategic visions – but banking politics carried on playing out.
Deputy chief executive Mike Rees’ decision to leave Standard Chartered should be a surprise to absolutely nobody – at 59 years of age, with 26 of them at the firm, it’s time to make a graceful exit, rather than try to butt heads with the new regime.
Similarly, Colm Kelleher’s apparent victory in taking over Morgan Stanley isn’t going to shake up the established order much – his grip on the investment bank has never wavered, and taking over wealth management as well is a natural move. The news brought extensive chin-stroking about whether Morgan Stanley is an investment bank with a wealth manager attached, or a wealth manager with an investment bank attached; Kelleher’s appointment as president suggests the former, but it’s a hair-splitting discussion.
Elsewhere in the markets, there have been a clutch of senior exits from various firms. It’s not exactly the usual season for voluntary departure, but the rules are being rewritten as bankers seek exits from a shrinking industry.
Mike Turnbull, for example, who left his job as StormHarbour’s head of capital markets after only a year, is said to be heading to the buyside. Turnbull’s job there had a heavy dose of infrastructure (Turnbull’s last gig before that at BAML was head of infrastructure financing) and the firm is said to be looking for someone with a similar skill set.
Tim Drayson, deputy head of the corporate debt platform at BNP Paribas, was another major departure – perhaps the consequence of the usual investment bank power struggles.
Robin Stoole, however, proved there are ways back into the market. Stoole used to run syndicate at Lloyds until 2012, but hasn’t had a banking job since. ICBC Standard Bank, however, have hired him as head of syndicate and head of EMEA primary markets.
At first glance, experience at Lloyds doesn’t look like a perfect fit for a firm focused on Africa, and, since the ICBC acquisition, on distributing China product, but watch this space – with a $3.5tr balance sheet, one doesn’t want to write off ICBC’s capacity to shake up the market.