Davy closes bond desk amid crisis over market rules breaches

Davy is closing its bond desk, resulting in four redundancies, as the brokerage seeks to draw a line under the crisis triggered by a record Central Bank fine and rebuke over a breach of market rules in a 2014 bond deal.

The brokerage said that, following the move, none of the 16 individuals involved in the trade at the centre of the scandal are working for the firm.

The announcement came hours after the National Treasury Management Agency (NTMA)in an unprecedented move withdrew Davy's ability to act as a primary dealer of Irish Government bonds, as the State's largest stockbrokerage deals with the fallout from the scandal.

The board of the NTMA “reached its decision based on its assessment of the very serious findings relating to the firm that were made by the Central Bank of Ireland last week and following engagement with investors in Irish Government debt over recent days”, the agency said on Monday afternoon.

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Dealers

Davy was the only Irish-owned firm among the 15 primary dealers of Government bonds recognised by the NTMA, and would have been required to find buyers for State debt as the NTMA seeks to raise as much as €1.5 billion in a bond auction on Thursday.

Primary dealers typically break even at best handling regular auctions, but stand to make considerable amounts in fees in managing larger bond sales, or what are known as syndicated bond deals.

Davy would have made about €4.5 million in fees from being one of six managers of such deals in three major bond sales since the start of 2020, through which the NTMA raised almost €16 billion, driven by the Government’s need for funds to deal with the spiralling costs of the Covid-19 pandemic.

“A primary concern for the NTMA is to maintain the reputation of Ireland as a sovereign issuer in the bond market and the orderly functioning of the market for Irish Government debt,” the agency said.

“In this context, the NTMA believes that the behaviour described in the Central Bank findings falls substantially short of the standards expected from market counterparties, peers and colleagues in the bond market and is potentially damaging to Ireland’s reputation as a sovereign issuer.”

Minister for Finance Paschal Donohoe said the NTMA had made an “appropriate decision given the recent very serious findings of the Central Bank”.

Rules

The Central Bank fined Davy €4.1 million and reprimanded the firm strongly last Tuesday for breaching market rules in relation to the 2014 transaction where 16 Davy employees sought to make a profit by taking the other side of a bond deal involving a client in 2014 – without telling him or the firm’s compliance team.

Davy chief executive Brian McKiernan, deputy chairman Kyran McLaughlin and head of bonds Barry Nangle resigned over the weekend as Davy struggled to contain the biggest crisis in its 95-year history.

The Irish Times reported last week that all three, as well as former chief executive Tony Garry and one-time head of institutional equities David Smith were among the group of 16 Davy employees.

Davy named Bernard Byrne, a former AIB chief executive, as interim CEO on Saturday. Mr Byrne joined the brokerage two years ago.