International Organization of Securities Commissions Consults on Combating Conduct Risks in Debt Capital Raising12/16/2019The International Organization of Securities Commissions has launched a consultation on methods of addressing potential conflicts of interest and other conduct risks that arise from market intermediaries’ participation in the debt capital raising process. Responses should be submitted by February 16, 2020.
In 2018, a sub-committee of IOSCO commenced investigations into conduct risks in capital raisings, given the importance of market intermediaries adhering to high standards of conduct. The consultation paper follows on from these investigations, giving a broad overview of the capital raising process and the various roles undertaken by market intermediaries. The paper then sets out the key conflicts and conduct risks and harms identified for market intermediaries, which include:
- Conflicts in the pricing of instruments, caused by the intermediary’s need to obtain the best price for the issuer (e.g. through a lower yield) while potentially harboring a desire to obtain higher yields for investors, with whom they may be affiliated;
- Involvement of intermediaries in risk management transactions, whereby issuers and investors may enter into interest rate swaps to hedge against moves in reference rates; investors and issuers may use the intermediary involved in the bond issuance as the counterparty to such transactions, leading to potential conflicts in the management and pricing of the issuance;
- Failures in providing investors with adequate information about the bond offering, including where intermediaries give investors a very short time to read and digest disclosures or where they produce research on the issuer which could result in pressure to provide favorable analysis; and
- Conflicts arising from the allocation of securities by intermediaries who may be incentivized to prefer those investors with whom they have a relationship or may generate a favorable secondary market for the securities.
IOSCO sets out a series of proposed measures designed to combat each of the above risks, which include:
- Regulatory requirements for firms to manage pricing conflicts, including keeping issuers informed of key actions that may affect a pricing outcome and allowing the issuer to express a preference on pricing in the course of the pricing process;
- Requiring firms to disclose to issuers how risk management transactions will not compromise an issuer’s interest in relation to the pricing of the new issuance;
- Encouraging the timely provision of information to investors and regulatory requirements for intermediaries to have appropriate controls to manage conflicts involved in the provision of research; and
- Regulatory requirements for firms to establish allocation policies and controls to manage conflicts arising in the allocation process.
View IOSCO's consultation on conduct risks in the debt capital raising process.
Return to main website.TOPICS: Conduct & Culture, Financial Services, Securities
Financial Regulatory Developments Focus