The Bond Market Association's new framework for fixed-income research could change the way analysts go about their duties, according to several researchers. They said two of the more noteworthy guidelines are that analysts should not actively participate in road shows but that structured finance analysts can have bankers review their work.
Allowing researchers to interact with structured finance issuers perpetuates a direct conflict of interest because researchers' firms maintain a banking relationship with the issuer, according to a Banc of America Securities analyst. But Walter Schmidt, head of MBS research at FTN Financial, countered that sharing information with issuers is useful for verification of the loan underwriting standards and default rate analysis on mortgage pools. He also stressed the importance of analysts sharing data with traders for accuracy.
The more structured the asset class, the grayer the guidelines are, according to analysts. For collateralized debt obligations, for example, researchers tend to discuss broad asset classes on an educational basis. Arturo Cifuentes, managing director and head of CDO research at Wachovia Securities, said it is "entirely appropriate" for analysts to discuss structural issues with bankers given the complexity of the transactions. Even though they acknowledged research is by its nature meant to support an underwriting franchise, analysts don't recommend specific securities, as they could in other, wider asset classes. "Within the context of CDO research you would never write an article saying, for example, 'the mezzanine piece of deal XYZ managed by ABC that closed in 1999 is a good buy at 98.' That type of focus just does not make sense for the CDO market," Cifuentes said.
The BMA's framework, released last week, discusses each major fixed-income sector and the research functions performed for it. Although fixed income is a different animal to equity, market participants said the BMA is adopting the guidelines as a preventative measure to avoid the scrutiny of regulators.