The troubling thing about the language used by money market and FX traders, exposed in reams of FCA evidence material, is how normal it appeared to be to rig benchmarks in some markets. The tone of some of the material is not conspiratorial or secretive; it is doing a favour for a mate, helping out a bit, scratching my back while I scratch yours.
Some traders took it beyond that. UBS appeared to have institutionalised the manipulation of Libor, and paid actual bribes through its Tokyo office. But the matey tone predominates.
The stark realisation for the banks, and for traders still working in those markets, is how different it all appears in the cold glare of public scrutiny. Politicians caught with their pants down must have something of the same feeling — the messages they sent in private, in the context of a trusting relationship, exposed in newsprint, and a dawning awareness of just how wrong the world thinks you are.
The Bank of England, with its Fair and Effective Markets Review, has committed to investigate and clear out these markets, with a combination of private sector initiatives, public sector encouragement, and regulation where necessary. Just for fun, the fixed income and commodities world was included too, with some emphasis on the new issue process.
Now there is no suggestion that the bond market overall, let alone the civilised world of the new issues, will turn out to be a hotbed of scandal. But the question is not whether there is wrongdoing, it is whether the market can prove all of its practices are above board.
To take two examples dear to the hearts of origination professionals: fee discipline and reciprocity.
If you look at either practice through the eyes of a crusading regulator or banking standards commissioners, both look pretty grubby.
Fee discipline sounds an awful lot like collusion — a smallish club of institutions using cultural and social norms to encourage prices in their market to stay high.
There are good reasons to like a predictable fee structure — paying a bank like a long term corporate finance partner rather than renting its distribution platform for the morning might well deliver better outcomes — but it’s easy to see how fee discipline discussions might look ugly taken out of context. Fee discipline in Europe is perhaps honoured more in the breach than the observance, but that doesn’t matter. It’s about perception, not reality.
Reciprocity, too, might struggle to pass the regulatory smell test. Passing mandates back and forth between financial institutions gets the investment banking arms of the institutions paid, but from the pockets, ultimately, of shareholders.
Again, there are good reasons why the practice has arisen, and it might, long term, improve rather than damage competition in the primary markets. Banks which want to develop their origination platforms can use the flow of reciprocity fees to break into the business, for example.
Other issues, including calculating reference rates, passive bookrunners, and buying league table, could just as easily look dodgy in a certain light. And it would be naive to presume that every single bond sale or mandate was won without use of of what might appear to be some form of corruption or grubbiness.
The question is not whether a practice is, as a point of fact, wrong, or unfair or anti-competitive. It is whether anyone could believe it was. That means trying to look at the culture and practices of the bond markets from the outside, and making sure they are cleaner than clean.
Securities underwriting is one of the most regulated industries on earth, and compliance is already burdensome. Syndicates have been placed behind physical, as well as Chinese walls. All communications are monitored. But it is not going to get better, it is going to get worse.
If there is a practice that might not look quite right at first glance, the regulator is unlikely to listen to pleas about common market practice, or unprovable claims about how it works better in the long run. Banks will be guilty until proven innocent — and that means collecting the proof, and demonstrating, in exhaustive detail, that the primary markets have nothing to hide.
Those in bond markets may think they have no reason to suspect a Libor-style debacle. But there is also no reason to be complacent. Those sat inside glass boxes shouldn’t throw stones.