SSA Swindling?

Even in more niche financial instruments, there are a number of cases asserting allegations of secondary market and bid spread manipulation. This is true of the supranational, sub-sovereign, and agency bond market, better known as the “SSA” market. Since late 2016, 13 actions have been consolidated in In re SSA Bonds Antitrust Litigation, No. 1:16-cv-03711-ER (SDNY) (“In re SSA“). In this post, we focus on the facts alleged in In re SSA. In an upcoming post we will discuss the ongoing settlements and the motion to dismiss briefing in this consolidated action. At core, the allegations paint a picture of bank market maker collaboration and collusion to the harm of secondary market purchasers and participants.

What are SSAs?

SSA stands for supranational, sub-sovereign, and agency bonds. These bonds make up a niche portion of the international bond market, including bonds issued by those entities and projects straddling the lines between sovereign government issuers, and private credit issuers. The SSA market is highly diverse, but is chiefly made up of bonds issued by entities or institutions that are tasked by governments, or the international community, and international organizations, to further some public policy goal or initiative. This can include anything from infrastructure development, to economic stimulus, to export acceleration, to social security funds. Well known entities that issue SSA Bonds include the supranational organizations such as the World Bank Group and the European Investment Bank, sub-sovereign issuers, such as Canada’s provinces, and Germany’s federal states, and agencies, such as public banks, infrastructure development bodies, and major government owned entities and institutions like Germany’s Kreditanstalt für Wiederaufbau (“KFW”), a government-owned investment bank.

Overview of the Alleged Collusion

At core, Plaintiffs, buy-side funds such as pension and retirement funds, and asset management companies, allege that Defendants, large dealer banks including Bank of America, Barclays, BNP Paribas, and Credit Suisse, among others, being the only major sellers and market makers in the second over the counter (“OTC”) SSA bond market, took advantage of the opaque nature of price quoting for these OTC instruments, to share information and manipulate the bid and ask spreads for the sale of these instruments.

SSA bonds are not quoted on an open, anonymous exchange like the New York Stock Exchange. Instead purchasers are quoted the value of a bond from a dealer bank’s trading desk, primarily over the telephone, or through electronic chat messaging, often with a time gap of several minutes. To the extent electronic trading platforms were used, these used a “request for quote” protocol, that was not generally dissimilar to that of the phone and instant messaging systems. Investor purchasers, at the time of their request for quotes, would reveal their identity, the specific instrument they wished to purchase, the volume they sought to trade, and often even the trade’s direction. Individuals at the bond trading desks of the dealer defendants would then, rather than compete against one another, as Plaintiffs believed they were, instead allegedly share this information amongst one another, using this information against their clients.

In essence, according to the Plaintiffs, this primarily allowed dealers to rig the bond market in two distinct ways. First they served as a single monolithic cartel which set the prices together, rather than competing against one another to provide the best prices to their clients. Second, they used their clients’ trading information to discern their clients’ trading strategies and positions, and based on that information, set terms and prices to take advantage of their clients’ weaknesses, which were sometimes discernable from the information shared amongst the alleged cartel. Plaintiffs are alleged to have taken great efforts to hide their trading strategy and trading information so that dealers could not take advantage of them in this way, and the improper real time sharing of clients’ information entirely undermined that.

This post was written by Lee J. Rubin.

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