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Time for an SSA deal fee rethink

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Benchmark bonds have always been the business end of the SSA fee scale, with banks providing arbitrage trades for little to no return — or even at a cost — in the hope of reaping the rewards later with a big mandate. But it might be time to change the model so that intermediaries are paid for the job done. Perhaps surprisingly, some issuers agree.

Public sector borrowers are always happy to snap up arbitrage funding — especially if the bank is paying the bill. But as usual, the freebie is offered on the expectation of payments to come.

While one might think this suits issuers down to the ground (who wouldn’t want to have potential suitors lining up to offer services for free, effectively?) it is not always the case.

In private, some borrowers point out that the banks offering arbitrage funding often do not win benchmark mandates simply because they want the dealers with the biggest balance sheets, investor reach and/or market expertise on there instead. A knack for Nokkie no longer means a payday in public markets.

Then, those arbitrage funding providers, in an effort to get paid, staff up in the manner of bulge bracket firms to compete for the big mandates at the expense of their specialist skills. That leaves borrowers with more than enough potential benchmark partners, but a smaller pool of specialist arbitrage players.

The solution, then, seems to be that rather than offering services for free in the hope of a payment down the line, banks should be paid for the work they have done.

Of course, that is easier said than done. Many issuers may well not want to pay up for something they are used to getting for nothing.

But the thinking appears to be shifting — and it might be time to debate this long established, but perhaps outdated, fee model.

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