Issuers planning to increase outstanding euro benchmark covered bonds by way of open marketing should communicate this in advance to ensure market participants have equal access to information and avoid market distortion, the ECBC and AFME said today (Thursday).

ECBC offices, Brussels

The recommendation on tap issuance by the European Covered Bond Council and the Association for Financial Markets in Europe (AFME) is intended to reduce the problem of asymmetrical information in the context of potentially market-moving transactions of which only those market participants involved in a trade are aware.

This can arise when an increase is launched that reduces technical shorts in the market, but not all market-makers are aware of the transaction so that some are left trading the bonds on the basis of the previous deal size and others on the basis of the larger volume.

Richard Kemmish, head of covered bond origination at Credit Suisse and chairman of the ECBC market related issues working group, said that the recommendation is intended to serve as a reminder to adhere to fair practice.

“This is geared mainly toward offered taps that are broadly marketed and which all market participants should know about at the same time to avoid distortion,” he said.

The ECBC and AFME have proposed as a solution that issuers announce in advance that a trade is about to take place, and said that this would benefit market-makers by making them aware that an increase is imminent and allowing them to price accordingly. The recommendation is that this should apply to all euro denominated covered bonds sold internationally.

Torsten Elling, co-head of rates syndicate at Barclays, said that there have been occasions in the past when traders have been at a disadvantage because they did not know about a tap at the same time that investors did.

“It’s only fair that issuers make a very broad approach to the market so that liquidity providers are alerted to the fact a tap is planned,” he said. “Increased transparency of this sort can only help future transactions coming to market.”

James Kotsomitis, head of AFME’s credit division, said that the recommendation is the outcome of efforts over the last 12-18 months.

“The consultation process, driven by AFME and the ECBC, has incorporated a comprehensive range of market participant views, particularly from the buy-side and sell-side,” he said. “We are confident that this key recommendation will be warmly welcomed by the secondary market.”

Issuers would not need to disclose the size of the increase but simply state that a trade is to take place, according to the industry bodies, with the timing differing depending on the whether the increase is marketed or not.

In the case of a non-marketed tap, the ECBC and AFME are recommending that the issuer should announce the transaction at the time of pricing. Kemmish said in the case of a bilateral, private trade it is not obvious when a transaction has been carried out and that from a practical standpoint pricing represents the earliest time at which it is reasonable to inform market participants that an increase has taken place.

However, when a trade is being marketed more widely through a syndicated process the announcement should be made when investors are first approached, the ECBC and AFME have recommended. This could happen via deal disclosure systems such as Reuters or Bloomberg, said the industry bodies.

Luca Bertalot, head of the ECBC, said that the recommendation is another sign of the covered bond industry’s commitment to enhancing transparency in the covered bond market.