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The ‘Cartel’ Is Back: 8 Banks Caught Rigging Government-Bonds

The 'Cartel' Is Back

First it was the Libor-rigging cartel, then the FX exchange-rate manipulation cartel, now, European regulators have moved on to prosecuting “anti-competitive” practices in euro-denominated sovereign bond markets. The ‘Cartel’ Is Back: 8 Banks Caught Rigging Government-Bond Markets

One month after the European antitrust regulators charged Deutsche Bank, Credit Agricole and Credit Suisse of being a part of a ‘bond trading cartel’, regulators are bringing a separate case against eight unidentified European banks alleging that they conspired to rigging euro-denominated sovereign bond markets.

Reuters reported Thursday that the European Union’s antitrust authority has charged the banks with operating the cartel behind 2007 and 2012.

Just like in past cartel cases, traders at the accused banks allegedly used chat rooms to share “commercially sensitive information and coordinated trading strategies” that they presumably used to rig markets to benefit their own trading books – and shortchange their “counterparties”.

If they’re found guilty, the banks could face fines equal to up to 10% of their global turnover.

“The Commission has concerns that, at different periods between 2007 and 2012, the eight banks participated in a collusive scheme that aimed at distorting competition when acquiring and trading European government bonds,” the Commission said.

“Traders employed by the banks exchanged commercially sensitive information and coordinated on trading strategies. These contacts would have taken place mainly – but not exclusively – through online chatrooms.”

Regulators told Reuters that they wanted to make one thing clear: The allegations aren’t meant to imply that euro-denominated bond markets are subject to pervasive “anti-competitive” practices (though maybe they should talk to Mario Draghi about that).

But don’t worry: We’re sure the information traded in these chatrooms fell neatly within the bounds of “market color.”

Meanwhile In The US…

Muni Mis-pricings Seen Stinging Taxpayers For Up To $25 Billion

Every time America’s states and cities sell bonds to build new roads, schools and bridges, they may be leaving a big chunk of money on the table. Investment banks, which governments hire to line up buyers for their bonds, routinely underprice the securities, delivering gains to early investors at taxpayers’ expense, according to a study by Fideres Partners LLP, a London-based consulting firm.

It found that bond prices increased by an average of 1.6 percent soon after they were first sold — indicating governments could have raised over $25 billion more from 2006 to 2015 if the debt was sold at those higher prices.

“The reason why these bonds trade so heavily and go up in price so much right after issuance is because people think the issuers overpaid — that that bond is worth more,” said Alberto Thomas, who worked on the study. “Someone in that process has not done their job properly.” The $3.8 trillion municipal-bond market is the key way that local governments finance construction projects, so any failure to adequately price the securities would be felt broadly. President Donald Trump has sought to encourage states and cities to pump more money into airports, roads and other infrastructure, some of which was neglected as governments dealt with the economic fallout of the Great Recession.

Other research has raised questions about the efficiency of the municipal market. A study released more than a decade ago by professors at Carnegie Mellon University found “substantial” underpricing of new issues. And others have asserted that governments could save money by selling their debt more frequently in competitive auctions, instead of the typical practice of relying on underwriters picked ahead of time.


Fideres, which also studied the rigging of the Libor benchmark interest rate and often prepares research for use in class-action lawsuits, looked at 8,000 tax-exempt bond issues sold between 2006 and 2015 worth about $1.1 trillion. It was limited to fixed-rate deals above $50 million sold through both negotiated and auction sales. The price increase from the day the bonds were awarded until the the settlement date was “abnormally high” compared to other asset classes, the report said. Corporate bonds rose about 0.64 percent — less than half as much as the munis — while U.S. Treasuries gained 0.33 percent, the firm said. Fideres has previously asserted that the gap shows that corporate debt is being “systematically underpriced,” too.

For municipal bonds, those early increases have been shrinking, potentially because low interest rates — which have pushed up debt prices — have given the securities less room to rise. In 2010, prices rose an average of 1.88 percent between the initial pricing and the close date, according to Fideres. That shrank to 0.85 percent in 2015.

The Securities Industry and Financial Markets Association, the trade group for underwriters, hadn’t seen the study and declined to comment, spokesman Katrina Cavalli said. Underwriters may have a reason to underprice securities: They often retain a portion of the bond issue after a sale, which means they’ll benefit if the price climbs, the report said. “Knowing a bond price will increase shortly after issuance allows them to generate trading profits, incentivizing them to set lower issuance prices,” the report said.

Updated: 5-22-2019

Companies Slow to Adopt Libor Replacement

Borrowers led by Fannie Mae have sold $105 billion of floating-rate securities linked to SOFR since it made its debut nearly a year ago.

Companies are dawdling in their adoption of the Federal Reserve’s preferred replacement for the interest-rate benchmark underpinning trillions of dollars in financial contracts.

Borrowers led by Fannie Mae , the federal mortgage finance agency, have sold $105 billion of floating-rate securities linked to SOFR, the secured overnight financing rate, since it made its debut almost a year ago, according to CME Group Inc. In that period, according to Wells Fargo & Co., companies have sold more than $900 billion of debt tied to the London interbank offered rate, the old benchmark for variable-rate debt.

Libor, used to underpin everything from home mortgages to corporate loans, was slated for replacement in 2021 after a manipulation scandal and finding a replacement is a key challenge for banks, companies and investors. Each wants a reference rate that reflects the risks from short-term lending and is supported by a liquid market that behaves in a predictable manner. Properly setting the rates on business and consumer loans can determine whether such loans are affordable for borrowers and profitable for lenders.

Regulators and banks, including Bank of America Corp. , Citigroup Inc. and JPMorgan Chase & Co., in 2014 formed a working group—known as the Alternative Reference Rates Committee—to help create SOFR. The group is ahead of schedule in meeting its key goals, said Brian Grabenstein, who leads Wells Fargo’s Libor transition efforts and is a member of the committee.

While the group says adoption is happening at a rapid pace, “that’s not really the sense I get when speaking to our clients,” said Mark Cabana, head of short-term interest-rate strategy research at Bank of America Merrill Lynch.

Companies are in “a state of paralysis” as they await the creation of longer-term SOFR rates, he said.

Fannie Mae has sold $15.5 billion of SOFR senior unsecured debt since last July and no Libor debt. But it continued to use Libor when selling $10 billion of mortgage and risk-transfer securities.

“We think it’s important for not just Fannie Mae, but for other market participants, to prepare for a world without Libor,” a representative for the mortgage company said in response to emailed questions. “Each product is evaluated independently given that they trade in different markets and have different investor bases.”

In October, Toyota Motor Corp. raised $500 million in the first nonbank SOFR commercial paper offering. While it continues to sell Libor-linked debt, “we are aware that Libor may cease to be quoted after 2021,” said Nicholas Ro, manager of sales and trading for Toyota Financial Services. “That’s why we took steps to use SOFR starting in 2018 to begin our transition process.”

SOFR is seen as more reliable than Libor because it is derived from the rate to borrow cash overnight using U.S. government securities as collateral. These trades are known as overnight repurchase agreements, or repos. Libor is set by a group of banks in London that provide estimates of the rate at which they could lend to other banks over various periods. Those estimates take into account the risk the borrowers won’t repay the debt.

The repo market is also vastly larger than the market for short-term bank loans, which has shrunk since the financial crisis.

The Fed’s working group is also reaching out to designers of accounting and trading systems about speeding development of products that can function with the new rate. Many investors and companies can’t buy or sell debt linked to SOFR because their accounting and trading systems aren’t properly configured for it, said Venetia Woo, principal director of North American regulatory strategy at Accenture.

“The reality is, people want to trade and people want to hedge,” Ms. Woo said. “Physically their infrastructure is not ready for it.”

The Fed last month released a paper written by two central bank economists describing a method to calculate longer-term SOFR rates using prices from futures contracts. Analysts have said this kind of term structure could make selling floating-rate debt linked to SOFR more attractive for companies.

Fed officials are seeking more trading data on SOFR-linked futures and interest-rate swaps because they are reluctant to push new structures to market without ensuring they work, analysts said.

However, collecting repo trading data isn’t a simple matter, especially for the smaller, more diffuse market of repo trades that are longer than overnight, so-called term trades.

Many players in the repo market—such as hedge funds and asset managers—aren’t regulated by the Fed. Officials have met with vendors in the repo market to discuss data collection, but it isn’t clear how quickly that effort might come together.

“Market participants are not uniformly comfortable in sharing those data with the broader market,” said Glenn Havlicek, a former banker who is now chief executive of GLMX, a technology company that provides tools to repo trading firms. The ‘Cartel’ Is Back, The ‘Cartel’ Is Back,The ‘Cartel’ Is Back, The ‘Cartel’ Is Back, The ‘Cartel’ Is Back


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