All material subject to strictly enforced copyright laws. © 2022 Euromoney Institutional Investor PLC group
CommentP&M Notebook

P&M Notebook: Dodged a bullet

The FCA’s review of the primary capital markets has mostly turned out fine. It doesn’t drink the industry Kool-Aid, but it does leave decades of hallowed market practice mostly untouched.

The main consequences of the FCA’s review are for bankers dealing with new equity offerings. This is usually a flash point for the capital markets, where the highest fees and largest new issue pops occur, and it concerns new, potentially naïve clients.

But the tweaks the FCA proposes are mostly somewhat cosmetic. The regulator wants issuers to publish prospectuses earlier, wants to see more opportunity for research away from the lead managers, and some limits on allocations.

Publishing a prospectus earlier is more challenging and stressful, because it comes with lots of required disclosure, though the market would likely adapt to the convention. Opening up IPO research is more likely to be honoured in the breach than in the observance, since competitor banks will have little incentive to spend time covering a company that they are not floating.

On allocation, too, it is unlikely much will change. It’s already illegal to specifically trade future commission income for allocation but it’s overwhelmingly likely that the clients that do trade a lot with lead managers will receive bigger allocations. These are probably the largest accounts, and the ones who give most help on price formation.

Other practices receive a vigorous finger-wagging, but no new regulation. The practice of manipulating league tables so that whichever bank is pitching, for example, gets a stern glare from the regulator, though it is generally seen by the market as wryly amusing, something of an in-joke, and a key data skill for any aspirant desk junior.

Clearly though, the modern environment for pitch books is much less forgiving. League table manipulation will live to fight another day, but the FCA warns that it could be misleading to certain clients, and if it gets worse, it’ll be regulated.

Similarly reciprocity in the covered bond market. Covered bonds has always been a clubbable market where reciprocity thrives, but the market has a tendency to look on it as sweet and charming, rather than a potentially anti-competitive cartel. The FCA, reluctantly, agrees, thanks in part to a study which founds a substantial minority of covered bonds where no reciprocity was possible.

Lending for mandates also received a passing grade. The FCA sniffed that smaller corporates with a limited number of lending banks might struggle to generate competition in an underwriting bank group. But didn’t find evidence that this harms the fees those companies got paid.

Nomura beats up equities

Nomura has always been a firm which does things its own way, and its restructuring is no exception. The bank announced last week that it was going to shut most of European equities, keeping a salesforce to distribute Asian product, and a point person for its thriving Japanese convertibles operation.

Equity capital markets, research and sales will be mostly dismembered, while there are also deep cuts to senior staff in leveraged finance, credit trading, and ABS. Nomura considers leveraged finance and credit trading to be strengths… but perhaps, not strong enough that they don’t need a little cost cutting.

Asia ex-Japan, was supposed to be largely untouched, suggesting Nomura sees itself as a super regional player, though facts on the ground look very different, with around 30 cuts in equities. GlobalCapital has harped on at length about the bank’s performance elsewhere, so we’ll stop now, but look at the last few years of missing profits, and you begin to see why Nomura has finally taken its tough choices.

Daiwa’s international operations, always smaller and less ambitious than Nomura’s, have also been shaken up. Head of fixed income Tony Baldwin is retiring, while head of investment banking Christopher Brown is also sort of retiring (he might be around to consult for Daiwa). Perhaps most significant, though, is a new co-head of syndicate in the form of Jez Walsh.

Clearly it’s a good time for any niche player to pick up some talent, with cuts at every large institutions (RBS, Walsh’s old shop, more than most). And for bankers themselves, even if they’re not likely to see tons of flow, it can be a smart trade to become a big fish in a small pond. Lorenz Altenburg and Derry Hubbard, both covered bond bankers by background, have made similar moves, to CaixaBank and Danske respectively.

If we needed a further barometer for the condition of the market, happily, it’s bank reporting season again, with JP Morgan and Citi publishing numbers. All the big banks have steered that it’s going to be ugly, so the market shouldn’t be too shocked — market turmoil in January and February will have kept primary revenues down as deals were put on hold, while credit, securitization and the other spread product presumably suffered too. The strong showing in March though, and promising beginning to Q2, means that it’s not just about cataloguing the nastiness, it’s about figuring out if it will last.

Will to win

There was a rare endorsement for Citi from the Federal Reserve and Federal Deposit Insurance Corporation — it only had shortcomings, not deficiencies, in its resolution plan. Living wills, as a concept, make little-to-no sense; bank executives tend to have a plan A of “don’t fail”, which also covers plan B to Z — but the Fed likes to regulate banks by giving them extremely difficult, arbitrary tests and publicly humiliating them when they fail. The Bank of England is also fond of tests but prefers its humiliation and correction to be behind closed doors, while the ECB and EBA go in for baroque, energy intensive exercises which everybody passes, but it’s just different strokes.

Aside from the FCA’s dubious wisdom, it’s been a rare week without blockbuster regulation. But it is worth pointing out ESMA’s view of direct lending — loans from funds, rather than credit institutions. It isn’t sexy, but it’s a crucial technical piece of work that should, eventually change the way capital markets work in Europe.

Tying loans to banks makes legal structures more complicated, pricing less transparent, and investing more difficult. It’s harder for banks to shift risks, and for non-banks to compete in the market. Vibrant non-bank lending in the UK and US helped those countries grow while much of continental Europe was credit-starved.

Alas, the ESMA paper argues for a restrictive, burdensome position. For the six countries that do not allow funds to originate loans at all, this would an improvement, but proposals like stress testing for loan funds, tight limits on maturity transformation (the fund would need committed capital for a longer term than the term of the loans), and strict limits on leverage, the use of derivatives, repo and short selling could also be in place.

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree