Fiscal Agent

A fiscal agent is a financial institution, usually a bank, that an issuer of bonds appoints to carry out the administrative tasks of the issue. Its central job is to receive money from the issuer and pay interest and principal to bondholders when due. It also keeps records, publishes notices and coordinates the other agents involved. The fiscal agent acts solely as the agent of the issuer. It owes no fiduciary duty to bondholders and does not represent their interests.

This is the key difference from a bond trustee, which is appointed to act on behalf of holders. A bond issue is normally set up with one structure or the other. Fiscal agency arrangements are common for sovereign bonds, supranational issuers and highly rated companies in the international markets. The term is also used in public finance for a bank, typically a central bank, that manages a government's payments and debt.

The fiscal agent is appointed under a fiscal agency agreement between it and the issuer, which is summarised in the offering document. Its duties typically include the following.

• Payments. Acting as principal paying agent, it collects funds from the issuer shortly before each due date and passes each coupon payment and redemption amount to holders through the clearing systems. See bond redemption.
• Authentication and issuance. It authenticates the global note that represents the issue and arranges its deposit with a depositary for an international central securities depository.
• Record keeping. It records payments made, bonds cancelled and the amount outstanding, and for registered bonds may maintain or liaise with the bondholder register.
• Notices. It delivers notices from the issuer to holders, for example on redemption, rate fixings or meetings.
• Calculations. It may act as calculation agent, setting the interest rate on floating-rate issues.
• Meetings. It makes practical arrangements for a bondholder meeting when the issuer seeks consent to a change in terms.

These are mechanical functions. The fiscal agent does not monitor whether the issuer is complying with its covenants, and it has no power or duty to act if the issuer defaults.

Under a fiscal agency structure, the bonds are a direct contract between the issuer and each holder. If the issuer fails to pay, each holder may declare its own bonds due and sue individually, although the terms often require holders of a set proportion of the issue to act together for acceleration. No single party is charged with enforcing the bonds for everyone.

Under a trustee structure, the issuer's promises are made to the trustee, which holds them for the benefit of all holders under a trust deed or bond indenture. The trustee monitors certain obligations, can waive minor breaches, and takes enforcement action on the instructions of a specified majority, with the proceeds shared among all. Individual holders generally cannot sue on their own unless the trustee fails to act. The trustee structure protects the issuer against scattered lawsuits and gives holders a collective voice, at a higher cost.

Issuers of strong credit standing prefer the cheaper and simpler fiscal agency form, since default is thought unlikely. In the United States, a law of 1939 requires a qualified trustee for most publicly offered corporate debt, but foreign governments are outside its scope, which is one reason sovereign bonds under New York law have traditionally used fiscal agents.

The choice of structure has mattered most when governments restructure their debts. Under fiscal agency agreements, individual holders who refused a restructuring were free to sue for full payment, and specialist investors bought distressed bonds for that purpose. Litigation of this kind followed several restructurings, most prominently Argentina's after its 2001 sovereign default. In response, official bodies and market associations recommended that sovereigns include collective action clauses and consider trust structures, which centralise enforcement and require recoveries to be shared. Many governments have since shifted to trustees for bonds issued under foreign law.

The fiscal agent is chosen by the issuer when the bond issuance is arranged, and is paid an acceptance fee and annual fees. Large custodian and corporate trust banks dominate the business. The agreement allows the issuer to replace the agent and the agent to resign, provided a successor is in place, and requires that an agent be maintained in a specified financial centre for as long as the bonds are outstanding. Funds held by the agent before payment are usually not held on trust for holders, so until the money reaches them, holders remain exposed to the issuer.

In public finance, a fiscal agent is the institution that acts as banker to the government. In the United States, the Federal Reserve Banks serve as fiscal agents of the Treasury: they hold its main account, process federal payments and collections, and run the auctions, issuance and redemption of Treasury securities. Most other central banks perform a similar role for their governments, sometimes alongside a separate debt management office. This function is distinct from monetary policy, although the two interact through the government's cash balance at the central bank.