Concerns have been raised that the pricing of billions of dollars of bonds issued by Treasury may have been subject to market manipulation. Photo / Mark Mitchell
Concerns have been raised that the pricing of billions of dollars of bonds issued by Treasury may have been subject to market manipulation. Photo / Mark Mitchell
The Financial Markets Authority has confirmed it received complaints last year about a local bank’s role in a 2022 government bond sale. What it won’t say is what action was taken, one year before its equivalent in Australia embarks on a separate investigation.
New Zealand’s financial regulator received complaints lastyear claiming traders at a major local bank had manipulated the sale of government bonds, costing the taxpayer $33 million, the Herald can reveal.
Responding to Herald questions, a spokesman for the Financial Markets Authority (FMA) would only confirm that the regulator had received complaints and would not comment on whether any investigation took place.
“We cannot comment any further on the matter,” the spokesman said.
The revelation comes as Australia’s corporate regulator, ASIC, investigates ANZ over concerns its traders manipulated Australian government debt last year following a complaint from the Australian Office of Financial Management.
Those allegations, widely reported in the Australian media this month, focus on whether ANZ’s trading unit forced an increase in the interest rate on a A$14 billion bond sale last year.
If proven, the market manipulation would have cost the Australian taxpayer up to A$80m in extra borrowing costs, the Australian Financial Review reported.
It is unknown which New Zealand bank was complained about to the FMA last year, but the Herald understands at least one complaint centred on the syndicated pricing of New Zealand government inflation-indexed bonds on August 22, 2022.
At that time, four banks were appointed joint lead managers to assist NZ Debt Management (NZDM), part of Treasury, to issue new inflation-linked bonds through a process known as a “syndicated tap”.
The four banks appointed by Treasury were ANZ’s NZ branch, BNZ, UBS and Westpac NZ.
The process involves those firms managing orders from investors, with NZDM setting the final price. The syndicated tap is where the issuer is issuing additional bonds in an already existing bond series.
The fixed-income market has limited visibility in New Zealand but there are significant amounts of money involved.
In this case, Treasury said on August 25 2022, that $2.5b worth of September 2035 inflation-indexed government bonds had been issued via the tap.
At the same time, $1.5b of September 2025 bonds were repurchased.
The 2035 bonds, with a coupon rate of 2.50%, were issued at a spread of 57 basis points over the 2030 bond, at a yield to maturity of 2.19%.
The total book size, at final price guidance, exceeded $3.5b.
The 2025 bonds, with a coupon rate of 2%, were repurchased at a spread of 126 basis points under the September 2030 bond, at a yield to maturity of 0.36%.
Samantha Barrass, chief executive of the Financial Markets Authority. Photo / Dean Purcell
The Herald understands the complaint to the FMA identified unusual price action occurring between the allocation release and the deal pricing of the 2035 bonds with a swing of about 10 basis points.
The upshot was an effective repricing that cost the taxpayer $33m in extra borrowing costs, it was claimed.
The scenario appears similar to what ASIC is investigating in Australia right now.
According to the AFR, that investigation is focused on whether ANZ deliberately forced down the price of bond futures contracts, which increased the cost of borrowing money by the government. No charges have been laid.
ANZ has said it is co-operating with the regulator and takes its obligations seriously.
The FMA spokesman said it was aware of the news across the Tasman.
When asked if the FMA had the resources to monitor and investigate this sort of trading activity in New Zealand, he said the agency allocates resources on a needs basis.
“We believe we are well-positioned to manage complaints/investigations with the resources we have. The FMA does have the power to investigate and, where appropriate, use its regulatory tools or take enforcement action in relation to this type of conduct, and we again refer you to our 2017 guidance which outlines the legal framework that applies.”
That guidance, issued in October, referred specifically to trading that sets the Bank Bill Benchmark Rate and closing rates.
“To avoid any perception of manipulation, orders and trades should only be placed when the intention to buy or sell is genuine, and a trade should never be used to set a price for a financial product,” the guidance states.
The bond market is important to investors, with most KiwiSaver providers holding significant allocations of low-risk government bonds.
Sam Stubbs, founder and CEO of KiwiSaver scheme Simplicity, said the government bond market was less transparent than the sharemarket.
“There’s nothing that we’ve specifically seen … but we’ve only got about $500m of government bonds so we are a bit player.
“These are instruments that get traded on spreads so there’s no pricing fee, it’s all built into the price. So, market manipulation of these things is harder to prove and show but can be more easily disguised than with a product in the sharemarket, where there is a public price and a commission paid.”
