View from City Road: Time for the debt traders to abide by rules

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Like all new markets, trading in the debt of distressed companies has its hole-in-corner merchants offering suspect deals and talking their own books like mad.

And even when perfectly reputable speculators emerge as creditors of companies in trouble, their presence in large numbers can undermine rescue efforts, making it harder for mainstream bankers to co-ordinate talks. The speculators may want to help, but it will take them time to get up to speed on a company's problems.

Debt traders certainly added creative tension to the rescue of Queens Moat Houses and may do the same for Euro Disney. It is not surprising central bankers find it hard to smother the urge to regulate that is built into their genes.

Pen Kent, a director of the Bank of England, took the first step yesterday by suggesting a code of good practice for debt sales, which would ensure that a buyer of debt in the secondary market behaves as responsibly towards the company as the original lender. A blunderbuss alternative would be to ban banks from selling debt during restructuring negotiations. Both suggestions sound like common sense but will be hard to achieve.

It was clear from Mr Kent's comments that his motive for regulation was to bring debt traders inside the London approach for coordinating company rescues, and to stop them causing trouble to hard-working bankers. He was not referring to regulating the way the debt market works, which may be just as urgent.

A traders' association has been set up in New York to set standards, and moves are afoot in London to persuade the market to accept a code of conduct for its own dealings. One problem is that it takes as long as six weeks between striking a deal and completing documentation, during which time the price may move against the buyers. In the worst cases, they renege, claiming contract problems.

Bankers Trust has suggested to the Bank of England a number of improvements in procedures, including a standardised 13-point check list of contract details to be agreed on the telephone before a deal is struck, removing the excuse to back out later.

The Bank of England is right to worry about what happens to company debt at times of crisis. But if the secondary debt market is to exist at all, trading should also be open and honest. The brokers and investors involved in it need rules, too.