Explanation-How does the EU banning the sale of bonds to 10 banks affect the markets and banks?

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File photo: The European Union flag flies outside the headquarters of the European Commission in Brussels, Belgium on May 5, 2021.Reuters / Eve Herman / File Photo

June 17, 2021

By Yoruk Bahceli

London (Reuters) – 10 banks have been excluded from selling European Union syndicated debt to support up to 800 billion euros ($ 996 billion) in Brussels’ COVID-19 recovery fund due to past violations of antitrust laws.

What this decision means for EU debt sales, bond markets and affected banks is:

Which banks will be affected?

Banks around the world are affected. The list includes US lenders JPMorgan Chase and Company, Citigroup Inc., Bank of America Corporation and UK peers Barclays Plc and NatWest Group Plc.

In continental Europe, Deutsche Bank AG, Natixis SA, Crédit Agricole SA and UniCredit SpA are concerned. More Nomura Holdings of Japan. All banks declined to comment.

The whole is on the list of 39 primary dealers responsible for managing bulk debt sales (summary and auctions) and managing debt transactions on the secondary market.

Many of them are the most reliable European banks in the public sector bond market. According to Dealogic, seven companies have been in the top ten in terms of syndicated loan sales in this market since 2020.

What did they do?

The ban is linked to lenders who have been part of three cartels in the past three years. Between 2007 and 2013, many banks were fined for tinkering with the forex spot market. Another bank found that between 2010 and 2015, many banks agreed on trading strategies and pricing for government-affiliated bonds. The third relates to the cartel of traders of various banks in the primary and secondary markets of European government bonds.

How big is the loss?

To move away from the syndicate that an investment bank is hired by an issuer to sell its debt directly to the end investor is to lose advantageous commissions. Banks on Tuesday deducted 20 million euros (0.1% of 20 billion euros) of costs of their first bonds, according to calculations by Reuters.

The fees vary depending on the maturity of the debt. The longer the deposit, the higher the fees.

According to Reuters calculations, the average of all maturity fees of the remaining 60 billion euros of long-term debt issuance this year will be converted into a pool of 66 million euros if all of that debt is unionized. According to Dealogic, only JP Morgan earned the largest $ 224 million from the sale of European public sector debt, which was synergized from early 2020, as it will be distributed to all banks. participants. It is a relatively small amount of money compared to.

The EU also pays lower fees for recovery fund debt than European sovereigns. However, it’s a commission that banks don’t want to miss, as they now issue all of their debt through unions and are much more reliant on debt than sovereigns, even after the auction started in September.

The exclusions also mean that smaller lenders may see an increase in their share of the costs. Graphics: EU syndication fees: https: //fingfx.thomsonreuters.com/gfx/mkt/azgvooddjvd/4Xyrm-eu-syndication-fees-for-recovery-fund-bonds.png

How long will the ban last?

No timeline is given. European Budget Commissioner Johannes Hahn said the Commission would work on how the banks dealt with the problem “as quickly as possible” thanks to the information provided by the banks.

Sources told Reuters that some banks had already submitted the information and the rest would follow soon. This could mean that some of the banned banks could get the green light to join bond sales, sources said.

A non-banned main broker, Senior Debt Bunker, has said it expects at least some banks to be reimbursed by September, when European auctions begin.

Will it hurt liquidity?

The ECB’s bond purchases have stolen some of the liquidity from the bond market en bloc. Liquidity is important for investors, which makes trading easier and cheaper.

Syndication fees are an important factor in motivating banks to participate in auctions which are much less profitable but important for maintaining liquidity.

The European government has lost its primary dealer in recent years because the banks have determined that their business is not profitable.

The decrease in the number of large banks remaining to undertake syndication may also pose a risk to the EU.

(Reported by York Bahceli, Abhinav Ramnarayan, Dhara Ranasinghe, Iain Withers in London, John O’Donnell in Frankfurt, Foo Yun Chee in Brussels, written by Karin Strohecker, edited by Chizu Nomiyama)

Explanation-How does the EU banning the sale of bonds to 10 banks affect the markets and banks?

Explanation-How does the EU banning the sale of bonds to 10 banks affect the markets and banks?

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