By Stanley D. L. Ross, deputy chairman and chief executive, Kidder Peabody Securities, London
It was a warm spring evening in the Bois de Boulogne. The strains of the orchestra from the fashionable Pre-Catalan restaurant drifted out over the May blossom, heightening on arrival the pleasurable anticipation of attending this, the first of the official AIBD functions, a splendid cocktail party arranged and provided by the French regional banking members. This setting, for what is becoming an increasingly important occasion, was, in my view, to set the tone for the three or four days of social activity between well over a thousand delegates, wives and girlfriends, attending this year's annual general meeting of the Association of International Bond Dealers. Since the first tenet in the association's statutes is to "promote friendly relations between members and their delegates", this year's meeting must be rated a success.
There are those who are now beginning to wonder, however, whether these meetings have not become so successful, in terms of attendance at least, that the numbers of delegates in future years should be restricted. While there are, I am sure, some grounds for this viewpoint, my opinion is that as long as large numbers do wish to attend, our present board should resist any move to limit the attendance, always provided, of course, that adequate accommodation can be provided. I have to admit, however, that if the interest in the Association grows as dramatically over the next two years as over the past two, it would perhaps not be surprising if the only suitable venue for the 1979 London meeting would have to be either the Albert Hall or Wembley Stadium.
It is fitting that the 1979 AGM be held in London. It would then coincide with the tenth anniversary of the first formal elections to the board, or to the executive committee, as it was then called. The origins of the association might, however, perhaps be traced even further back to the May of 1967 when half a dozen of us first met at the offices of Weeden & Company with the intention of setting up an informal Association of that handful of London dealers who were then trading in the new market in tax-free bearer bonds, that President Kennedy's introduction of the Interest Equalization Tax had brought into being. In fact those very early meetings resulted in little more than a few drinking sessions, which, pleasant though they were, produced nothing concrete.
Indeed it was not until late 1968 that Rothschilds in London, then one of the most active of the European issuing houses, took the initiative by calling a formal meeting of those then believed to be the most influential houses in the business. That is when the AIBD really began. It might be of interest to record that (unless my memory is at fault) those founder members then present numbered 19, from no more than a handful of countries. A steering committee was formed, charged with the duty of formulating the aims of our Association and with setting up the mechanism for the first elections to an executive committee which was to be held in the spring of 1969. As it turned out our new market had got its timing absolutely right.
To understand the importance of the AIBD's work it is necessary to look at the background of those early years. Between 1963 and 1967 the market was hardly known, let alone understood by the majority of investors who were still turned on by what now seems, with hindsight, to have been the almost terminal illness of the cult of the equity. However, by 1968, when President Johnson's voluntary guidelines on US corporations investing abroad became mandatory, the entire picture changed. The Eurobond market boomed into a frenzy of activity with US corporations bringing out a wave of issues, many of them convertibles, almost as fast as the printers could prepare the prospectuses. As the market took off, banks, brokers and financial institutions of all kinds jumped on the secondary market bandwagon and volume soared.
Very quickly, however, the market's shaky settlement mechanism became grossly overloaded – today's superb clearance systems being then only a gleam in the eyes of some of those at Morgan Guaranty Trust in Brussels. You must understand that at that time we had to cope with the phenomenon of the majority of the bonds issued particularly by US houses, being first made available in New York. They had then to be either physically mailed to Europe or moved around between the various New York banks representing their European counterparts. Moreover, as those of you with long memories will recall, the years 1967-1969 produced what came to be known as the New York Paperwork Crunch. Many of the New York banks, overwhelmed with back office problems relating to domestic activity, virtually abdicated their responsibility towards the new-fangled Eurobonds. As a result many a European firm was crucified by the widespread policy of the banks accepting bonds (to the debit of one's dollar account of course) but failing completely to deliver against payment which would thus put one's dollar account in balance. Inevitably overdrafts soared and with overnight rates in double figures, the financing of positions in convertibles with, say, 4½% coupons and straights with, say, 7%, the whole exercise was somewhat difficult to explain to one's corporate treasurer, who was, of course, looking anxiously into the till every now and again.
As the market took off, banks, brokers and financial institutions of all kinds jumped on the secondary market bandwagon and volume soared
To illustrate the sheer size of the problem in those early days, I recall venturing down into the vaults of a bank in New York (which shall be nameless) and having my worst fears confirmed by finding all acceptances for our account duly made (whether instructed by us or not, incidentally), while virtually no deliveries out against payment had been effected. Sitting there with my head in my hands muttering, “I'll sue the b…’s, I'll sue them”, a hand fell on my shoulder and a deep voice said, "Never mind, Stan, the first week is the worst". It was a fellow trader from Europe who had been working down there himself for one month to move stock, and in that time had turned a $15 million debit into an $8 million credit. Not a bad month's work in those days, particularly when you consider the level of interest rates then. Indeed, the settlement problems of the time were, in general, so widespread and so complex that the firm who was then perhaps the biggest trader of all in Eurobonds, Weeden & Company, was forced to withdraw from the Eurobond market altogether with a New York fail position of some $50 million. So bitter and so traumatic was that experience for them, that it has taken nearly a decade for that company to return to the price making arena.
It was against this chaotic background then, that the original AIBD board was given the mandate at its first London meeting of, incidentally, around 100 delegates, to try to bring some order into the chaos. For example, bonds were often delivered anything up to a year after the theoretical value date, which itself might conceivably vary depending upon the firm you dealt with. Moreover, when the bonds finally arrived they were often minus one and sometimes two or three of the coupons to which one was entitled. Coupon losses therefore were huge, often amounting to hundreds of thousands of dollars for even moderately active firms. Incredible though it may seem, many were not even aware of their losses until audit time came around at end year. Moreover, many clients used to pay on value date, thus giving the seller what amounted to virtually a free loan of capital during the months of non-delivery. You needed some cash? Sell a million bonds or so! On value date the funds appeared like magic. I promise you it was a very hairy market indeed. These and many other problems threatened to strangle the industry which was then, as indeed it incredibly still is ten years later, expanding rapidly. The task of reform was thus both urgent and formidable.
For those first executive committee members who were actually involved, it was a question of an immense cost in terms of personal sacrifice of time and energy, not to mention the very large capital outlay incurred by their various firms in employees' time and travel expenses. An immeasurable debt of gratitude is owed by all of today's market participants for the dedication not only of those early traders-turned-administrators, but for the willingness of their companies who have freely contributed and indeed still do contribute, large sums of money by way of air fares and hotel expenses plus the value to such companies of the time lost by what are undoubtedly their leading employees.
But that equates, of course, to what is after all, only money. One might reasonably say perhaps, that in order for the business to have survived, the firms involved were doing no more than protecting their investments. It is perhaps not quite so easy to say the same about some of those original board members; certainly they had a vested interest too, but clearly the sacrifice that some made was above and beyond the call of duty. Of all those who worked so hard I would like to use this opportunity to say that in my view there were two people perhaps more than any others, who gave up an incredibly large percentage of their own private and personal time over a period of years preparing the foundations upon which our entire market structure stands so strongly today. Those two people were Walter Koller and Armin Mattle. Indeed the sometimes irascible but very widely admired Walter, being involved right from that original steering committee to his present-day position on the board, nears a decade of service to the association. I wonder if, as he looks around him at the meetings these days, he feels as I do, that the participants, just like our policemen, seem to get younger every day.
For my part, having served a six-year stint on the original executive and having been responsible as chairman of the market practices committee for various trading rules and regulations, as well as for the first members' register and the then hotly disputed AIBD Yield Book (to say nothing of the early attempts at the marketmakers' register), I know at first hand the thoroughness with which the original statutes, rules and by-laws were laid down. Indeed, as René Jacquet observed at this year's meeting in Paris, the original rules were framed with such care that today they only need occasional amendments to meet changing market conditions. I remember, too, an SEC commissioner from Washington coming to address us a few years back, who, in commenting on the board's achievements, professed profound astonishment at the fact that the immense amount of groundwork done had all been voluntary. "The first thing we would have done in our country," he said, "would have been to have hired a whole bunch of people at top salaries to draw up all the operating guidelines – you on the other hand have done it all for nothing – I congratulate you." We now have, and not before time, a secretariat that takes care of much of the board members' workload – for example in organizing the now mammoth conferences – but still a great deal of work is shouldered by individuals, in particular the board's small executive committee. In my view this is exactly as it should be.
Voluntary framework of the AIBD
The association then was conceived, was born, and has flourished mightily, in an environment of freedom enjoyed by no other capital market in the world. That is precisely why it has been able to grow so far and so fast, simply because the dead hand of bureaucratic control has never been at its helm. However, with its transactions even in the early days transcending all national boundaries, it was clear that some form of regulation and control had better be in place, before in one fashion or another, the sheer size of the market caused it to be imposed. The members, noting the voluntary nature of their board, the simplicity and logic of the rules and regulations which evolved, and which were, of course, structured to help the members and not to hamper them, by and large warmly embraced the concept of self-regulation, in spite of some stormy meetings when minority self-interests occasionally got in the way. The resulting rules which have been said to be “just as comprehensive as the rules of any major stock exchange" are rarely broken, in spite of the fact that some cynics might say that "the association has no teeth to enforce them".
The power of self-regulation should not be lightly dismissed. Clearly the market's ability to regulate itself demonstrates not only that it has indeed come of age, but in my view it did so some time ago
In order for teeth to be effective one needs to have clear definitions upon which such teeth may bite. In retrospect, the association's virtual refusal to agree upon the definition of a marketmaker might not be considered to have been so harmful when you note that New York's over-the-counter market Nasdaq, has a marketmaker rule in existence that stipulates that any quote shown by a marketmaker has to be good for a minimum of a hundred shares. Of what real value is that in counters where something like 100,000 shares might change hands on the usual price quotation? It's like an insistence that to be a bond dealer one must make a price when challenged in a minimum of $10,000 nominal. This might well be in a bond where a half point price in a million might, under normal circumstances, be perfectly appropriate. So much for teeth. In all events the membership, comprising as it does some of the greatest names in the banking, brokerage and investment dealing world, is a market safeguard of a kind in itself, since public expulsion from the Club – the ultimate weapon – could in theory be a traumatic affair.
Indeed, in all my six years on the board I know of only one case where the arbitration mechanism even looked like being invoked – and as soon as both parties knew that board members had been approached, the matter was immediately settled between the two houses. The power of self-regulation should not be lightly dismissed. Clearly the market's ability to regulate itself demonstrates not only that it has indeed come of age, but in my view it did so some time ago.
The boom rolls on
At the time of writing the market continues to flourish as never before. There'll never be another '76 we all said and yet before 1977 is half over, we are on track, annualizing this year's figures that is, to end 1977 with a volume of around 30% higher than that previous all time record. The market seems unstoppable. Every day new participants appear from the most improbable places around the globe.
The world is awash with funds that seem to have one objective in mind, to get into Eurobonds. As the money rolls in, the market's primary sector is continually buttressed by the entry of more and more secondary market-making firms who seemingly can't wait to take their first (usually long) positions. Some of you may remember at the Berlin meeting in 1975 my congratulating Georges Gason on having found about 50 market-making houses for his register, and my predicting from the floor that when we next met in Stockholm in 1976 the number would be nearer 100. I was a year ahead of my time – it was to take another year till May's Paris meeting, for the trading list to expand to the present 96 houses. With all this growth then, all these trading institutions, the global spread of primary and secondary activity, the world has undoubtedly become the Eurobond market's oyster. But let us not forget the fact that the 50 or so trading names who have listed themselves over the past two years, have experienced only an unflagging Bull market. They have not been tested in the crucible of negative spreads between short-term money and longer-term bonds ranging anywhere from 400 to 800 basis points. (Doesn't that make your flesh creep?). Maybe such days are destined never to be known again. But all we have experienced over the past two years is the euphoria of a 200 to 400 basis points positive advantage. I personally still find it difficult to adjust to these balmy days – though of course I'm trying hard.
The status of the AIBD now unquestionably stands at its highest level since its inauguration in 1969. Its prestige has been enhanced not only by the inclusion on its members' register of an increasing number of eminent houses, but also, in my view, by the election to the chairmanship in 1975 of one of the best known and most widely respected names throughout the investment world, Stanislas Yassukovich. With his appointment I feel that the AIBD's long, hard struggle for recognition was over. That a man of his stature and calibre would give his time and energy proved the association's value. If I were asked at this point "what should the association do now," I would answer: "First of all it should get its name right". Some years back at a board meeting I suggested that the name be changed to "The International Bond Association". I note with interest that this idea is once again being canvassed. We should recognize that transition from the simple trading association that it undoubtedly was at the outset, has long ago been made and this now needs to be reflected in the association's title. Perhaps, too, if this were to be done, the statutes might be changed to allow other institutional access to membership. After all, since many may well be the end buyers, they too have a substantial stake in how the business should develop. Meantime, the major role of the association continues to be to try to keep pace with the runaway boom we still have on our hands. This can best be achieved by continuing to adapt older, and framing newer legislation, to meet the changing market environment. Great care, too, should be taken in the selection of new members since traditionally a booming market often attracts the wrong kind of participants.
Whether we like it or not, automation is here to thrive. We ourselves now utilize it as a common-place in a way undreamt of only five years ago, whether it be in contracting, payments and deliveries, Eurobond advisory or even as an aid to dealers
If one had a criticism of that meeting in Paris it was over the curiously negative attitude adopted by the assembly generally (the board included) towards the debate on whether automated trading systems will ever feature in our market-place. I think they will. Whether we like it or not, automation is here to thrive. We ourselves now utilize it as a common-place in a way undreamt of only five years ago, whether it be in contracting, payments and deliveries, Eurobond advisory or even as an aid to dealers who cannot possibly keep track of who did what in the hundreds of daily trades with the hundreds of different counterparts. Clearly it is only a question of time before all these now separated automated functions are linked together in one computer terminal, which will embrace every aspect of a transaction from its entry to final payment and delivery. This should be looked upon simply as one more technical aid, which I believe the competitive and intelligent trader will be able to utilize to his benefit.
In the meantime I respectfully submit to the board that the assembly should not again be treated to the somewhat less than edifying spectacle of financially motivated concerns endeavouring to score points off one another in promoting their own particular brand of hardware in a supposed debate. It may have seemed like fun, but in truth it got us nowhere. The board should now give the most urgent priority to formulating its own in-depth study of these matters in order that it may advise the membership, upon which system we should focus our attention. Again, the voluntary nature of our association is of value. The board will not, since it cannot, seek to dictate, only to give its honest assessment in the market's best interest. Considering the calibre and diversity of the minds generally to be found on our board and its committees, I shall be surprised if their findings do not save us all a great deal of time and money. Hopefully at next year's meeting we will attain much more definitive information on this all important topic.
The AIBD should also continue the excellent informative policy it has so successfully carried out over the past two years. The current monthly price list is a veritable mine of information available in no other marketplace. Its value is not so much in who trades in what, but more for records of price levels at given dates, running, maturity, and average life yields, sinking and purchase fund information, call dates, etc. etc. The latest official publication The International Bond Manual contains a record of virtually all issues ever made in the Eurobond market in all currencies with every conceivable piece of information you could wish for, all in one volume. My colleague, Bob Smith, who is on the present board, has been the force behind both this particular publication and the monthly register and his problems with them over the past few months have been daunting. But I venture to suggest that no capital market anywhere is at one and the same time better regulated, better informed and better served by what is, after all in the end, only a semi-official governing body.
Perhaps one of the most important tasks of all is to enlarge the interest in the now firmly established training programme. Here again, as on so many other occasions, the idea was originally conceived and doggedly executed, regardless of the burden it placed upon him, by the indefatigable Walter Koller. In an expanding industry with some tens of thousands of participants world-wide, the various AIBD diplomas are coming to have an increasing value in assessing the all-round merits of aspiring young executives. It was highly indicative of the global nature of such basic interest in our market that those who attended the seminars and sat for the exams this year came from 17 different countries; indeed the highest achievement this year was attained by a young man from Hong Kong. Long may this splendid work continue.
Finally, one word of warning. The members themselves should guard against what is perhaps one of the greatest dangers inherent in any successful enterprise and that, of course, is apathy. I personally think that it is very sad indeed that out of over 100 London delegates only one nomination was received for the position of the London representative. Far more disturbing, however, is the fact that around 25% of the voting delegates at the Paris meeting did not even bother to turn up to cast their vote for the new committee – admittedly the time of 8.00 a.m. was a bit early. But with the regional representation (with which I personally do not agree, preferring the old system of a straight vote) just a handful of names can make all the difference between the better candidate failing to be elected because of the regional consideration. Those who think it is too much trouble to vote, unquestionably endanger the structure built up so painstakingly over the years. What we have now was very hard won. It gives many of us a very high standard of living indeed in a fascinating and constantly expanding industry. Isn't it worth getting up early in the morning, just once every two years to help to preserve it... ?