Bankers who help companies and governments raise debt are starting to grapple with a little-noticed part of sweeping regulations set to come into force next year: a demand to justify decisions about which investors get to buy a bond.

The rule, part of the EU’s looming Mifid II regulation, is forcing banks to make sweeping changes to the way they sell bonds in the primary market as regulators push for greater clarity on how dealmakers operate.

The update to the Mifid rules takes effect in January and entails far-reaching implications across European financial markets, with much of the focus on the way banks charge for research and ensure transparency in secondary market bond trading.

“There has been so much regulation coming across syndicate bankers’ transom over the past few years, that many of them haven’t really begun focusing on the dramatic implications of Mifid II until recently,” said Ruari Ewing, a senior director at ICMA, the international capital market association.

Investment banks face having to be much more open about areas as sensitive as allocation and fee disclosure when selling debt for government entities and other issuers of bonds in Europe. And this fresh regulatory burden comes after banks already had to make significant changes to the way they market debt securities last year because of the EU’s Market Abuse Regulation.

“It’s important that we develop ways to comply with the new regulation that do not slow down the new-issue process or dissuade companies from raising bond finance altogether,” Mr Ewing said.

European debt syndicates are in varying states of preparedness for complying with the new rules.

The European Securities and Markets Authority, the EU regulator, has said that, under the new rules, bond syndicates “must provide a justification for the final allocation made to each investment client” and banks are developing drop-down menu systems to speed up this process.

But if banks try to do this for each investor while a deal is live, it will make intraday bond pricing unworkable.

General Electric’s €8bn raised last week drew about 300 orders for each of its four tranches, according to bankers. Even if it only took an extra minute to justify each investor’s allocation, it would have taken 20 hours to justify the 1,200 lines in the order book.

Bankers are hoping that they will be able to justify a broad approach by the same means, only having to justify individual allocations that deviate from the norm by a certain threshold. Crucially, many believe that they will have time after the deal closes to complete the process.

Mifid II will also mean that banks have to publicly disclose their fees for arranging bonds in Europe for the first time.

This already happens on SEC-registered bond deals in the US, where fees are more standardised, but generally higher, than in Europe. The need to disclose fees could dissuade banks from offering to do prominent deals for little cost, a practice that is rife in hot markets.

But just as Mifid’s “inducements” rule is affecting the practice of banks offering research for no charge, additional services that banks offer at low or no cost to important issuer clients, such as so-called “non-deal roadshows” and ratings advice, could come under scrutiny.

One banker said that his firm was already developing systems to automate and chain together the record-keeping of investor interaction needed to justify allocations. But he added that many smaller banks appeared to be very far behind.

“There’s some people out there who barely even realise that Mifid impacts primary [debt syndication],” he said. “It’s the one-man-and-a-dog syndicate operations that are really going to suffer.”



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