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    IOSCO Finalizes Guidance for Addressing Risks in Debt Capital Raising

    September 21, 2020

    IOSCO published final report on the guidance to help IOSCO members address potential conflicts of interest and associated conduct risks that market intermediaries may face during the debt capital raising process. These market intermediaries are typically banks, broker-dealers, or other types of corporate finance firms. The guidance also seeks to address specific concerns observed by certain regulators during the COVID-19 crisis that may affect the integrity of the capital raising process. Finally, the report explores the potential benefits and risks of blockchain technology in addressing conflicts of interest in the debt capital raising process.

    The report describes the key stages of the debt raising process and identifies where the role of intermediaries might give rise to conflicts of interest. It also provides a detailed description of debt capital raising involving traditional corporate bonds, including the participants and the various stages of the process, in addition to providing an overview of the legal and regulatory framework in certain jurisdictions. The guidance is in the form of nine measures, with each measure designed to address one or more of the key risks. The consultation report (published in December 2019) on the guidance, which was published prior to the COVID-19 pandemic, had set out eight measures. However, the final report includes a ninth measure to address concerns that emerged from the COVID-19 crisis. It seeks to address the potentially problematic conduct of lenders that may opportunistically leverage their role during debt capital raising to pressure corporate clients into awarding them future mandates. Hence, the guidance now comprises nine measures grouped according to the four key aspects of the debt raising process—namely the guidance to address conflicts of interest in pricing, quality of available information, allocations, and preparations for raising debt finance. While the guidance focuses on traditional corporate bonds, it may prove useful to IOSCO members considering raising capital through other types of debt securities. 

    As part of its general approach to monitor the digital transformation of the financial industry, IOSCO has undertaken various strands of work on distributed ledger and blockchain technologies. To explore the benefits and potential risks of Blockchain in debt capital raisings, the relevant IOSCO Committee posed questions in its consultation report to gather public feedback on the potential of blockchain in reducing conflicts of interests in debt capital raisings. Annex 2 to the final report presents a summary of these responses. In general, respondents indicated that blockchain technology is still nascent and it is too early to provide any definitive conclusions on its potential for reducing conflicts of interests in debt capital raisings. Respondents also identified the potential benefits and risks of using blockchain technology to address conflicts of interest in debt capital raising process:

    • The cited benefits included increased transparency in the capital raising process, simplification of the process and increased efficiency, reduction in cost and administrative burden, and confidential treatment of non-public information.
    • The cited risks included operational and IT risk, smart contract risk and cyber considerations, liability risk (arising from failure to perform due assessment of potential legal liability), risks related to the integrity of the issuance process, and the irreversibility risk (making it difficult to identify and correct transaction errors).


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    Keywords: International, Banking, Securities, Conduct Risk, COVID-19, Credit Risk, Blockchain, Debt Capital, Governance, Conflicts of Interest, IOSCO

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