The bond market has become ever more complex in recent years.
From the Euroclear revolution of the late 1980s, which allowed borrowers to hold tiny slices of multi-million-pound risks, to the bespoke bond revolution of the early 2000s, which enabled the creation of bespoke and highly complex structured bonds.
Today trillions of pounds of debt are traded through these instruments and they are an important part of how capital is raised the City.
This boom in structured products has been enabled by the banks offering investors liquidity in these products, so they can be cashed in whenever the investor chooses.
Investors have always understood that the major banks will buy back their structured products at the market price in a timely fashion, to suit the investor’s disposal strategy.
The banks have always honoured this fundamental obligation.
But there have been worrying signs in the market recently which indicate that banks may now be trying to evade their duties to investors in order to get out of having to provide a market for these complex debt instruments.
Secure Capital SA
Firstly, there is the case of Secure Capital SA v Credit Suisse AG, where it was found that an investor in longevity notes had no right of recourse against the issuer for breach of contract as the notes were in bearer form, and were held by a common depositary.
There seems to be a move among certain banks to misapply this decision in their dealings with investors, wrongly extending the judge’s findings to suggest that no investor in a structured bond of this kind has any recourse at all, even for negligence, and that a structured desk owes the investor no duties whatsoever.
Clearly, if this were correct and investors in this market had no protection, then the credibility of the UK debt market would be undermined, creating a macroprudential risk to the UK’s financial sector.
In my own case, we have been investing in and trading structured products with many banks for more than 15 years, but it is only recently that we have come across a major international bank in London which reneged on the fundamental and accepted practice of providing a proper market for our bespoke products.
The Bank of England and the FCA must act immediately to curb this tendency by the banks to not provide the liquidity they should, and which they use to entice investors to deal with them and make very substantial fees.
Otherwise investors will turn their backs on this hitherto popular market, which has become systemically important as a means for UK banks to raise capital - a vital need in these times where we hear that Brexit could cause another recession.