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Could be worse, will be next time?

09 June 2016
Richard Kemmish

The FCA recently published a typically thoughtful piece that touched on some practices within the Debt Capital Markets business. Two of the topics that they looked at were particularly relevant to the covered bond market: the (ab)use of league tables and reciprocity – you give me a trade/ I give you a trade. Their conclusion on both of these was a guarded ‘its ok at the moment’ with a fairly hefty hint of ‘but we are watching how this develops’. The latter usually suggests that industry ought to address the topic before the FCA addresses it for them. Take note.
League table manipulation is the first thing that they teach in DCM school. League table generating databases have so many variables that whilst it is impossible to fundamentally change the outcome, it is certainly possible to skew the outcome fairly heavily towards making yourself look good. A top 20 house can easily become a top 10 house with judicious criteria selection (and if you think the league table manipulation in client pitches is bad, you should see it when DCM officers are pitching for their bonuses, but that’s another story).

Do investors put much store in league tables? Usually they would say that a good league table position is necessary but not sufficient to win a mandate. In practice though they are much more of a source of reassurance for an issuer making a mandate decision on the basis that ‘no-one ever got fired for choosing IBM’.
Mild data manipulation is one thing (footnote: data relates to deals from 17th March to 23rd October for deals from 750 mn to get the picture), but league tables from a different era are more fundamentally misleading...”last year we were number 3 (then we sacked half of the traders and surrendered our prime dealership)”.

An obvious industry response would be to empower issuers to generate their own, objective league tables to help their decisions. But I doubt if DCM would take that suggestion well.

Reciprocity was also ruled ‘ok, for now’ by the FCA. But here I have more reservations. The FCA’s starting point was not, ‘is this in the best interests of investors and issuers?’ but ‘is this restraint of trade?’

I have some sympathy for the bank who struggles to win mandates because they don’t have a captive issuer whose mandates they can trade for other mandates. But I have far more sympathy for the investor who gets worse secondary market liquidity or the issuer who gets worse advice because of a) the cosy club of mandated banks (if I get you into my issuer’s deal you are hardly going to offer a pricing or timing opinion that contradicts me) and b) some of the book-runners just aren’t good enough to add any value (the small mortgage bank with its own ‘investment bank’ on the top line. 

Next time the FCA looks at the topic they might not be so accommodating. Probably best if industry acts before that?

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