New issue process in BoE's sights

By Helene Durand

LONDON, Oct 28 (IFR) - The Bank of England is looking at how the new issue process could be made more equitable as part of a wide ranging review on the fairness and effectiveness of fixed income, foreign exchange and commodities markets.

The UK regulator released a 67-page-long document on Monday night that looks at a range of issues across various parts of the market.

As part of this review, the BoE said it would like feedback on the new issue process and the structure of the corporate bond market.

"The new issue process for syndicated bonds has also been raised with the Review by many market participants as being 'unfair', especially to smaller investors," the Bank of England wrote.

"A lack of transparency around the allocation process has been a particular area of concern, with some alleging that some investors receive greater allocations because they are either favoured clients of the arranging bank or a large market participant. There is also a perception that when smaller investors receive a full or higher than normal allocation it is because the bond is not faring well with large investors and expected to perform poorly after issuance."

For some, these words will have an all too familiar ring. Investors have been getting more and more vocal of late after new issues tanked in the secondary market.

A EUR1bn dual-tranche bond from Adidas (Other OTC: ADDDF - news) attracted harsh criticism after investors were allocated a large percentage of what they asked for.

Investors routinely receive only small chunks of their orders in bond issues - especially deals like Adidas' that are reportedly oversubscribed. As a result, accounts often pad their orders beyond what they really want to ensure a decent fill.

The Bank of England said it would like to hear from respondents about additional measures that could enhance transparency in the new issue process.

"These might include publication of final allocations, or the use (or integration of) some of the features of an auction process to determine the clearing price and allocations," it said.

The Bank said it was also interested to hear from market participants as to whether standardising corporate bond issuance would help improve liquidity.

"Some market participants argue that standardising corporate bond issuance would help reduce the problems associated with variable secondary market liquidity, by concentrating market activity in a smaller number of bonds with similar features, improving price transparency for investors, reducing the scope for market manipulation and possibly also resulting in cheaper funding for issuers," it said.

"However, issuers place a high value on being able to choose specific maturity and coupon structures to match their underlying cash flows, and this presents difficulties for moving to a more standardised model. Indeed private placements are often sought for that very purpose."

The review is interested to know more about whether greater standardisation of corporate bonds could occur in the issuance process, how this might be achieved, and the extent to which it would affect the ability of end-users to meet their funding needs (or fully hedge their exposures). (Reporting by Helene Durand, Editing by Helene Durand)