Corporation of Foreign Bondholders
Encyclopedia
The Corporation of Foreign Bondholders (also known as the Council of Foreign Bondholders) was a British association established in London in 1868 by private holders of debt securities
issued by foreign governments, states and municipalities. In an era before extensive financial regulation
, and of wide sovereign immunity
, it provided a forum for British creditors to coordinate their actions during the financial boom from the 1860s to the 1950s. It created an important mechanism through which investors could formulate proposals to deal with the government defaults, particularly in the Great Depression
following the 1929 Wall Street crash, including several early debt restructuring
s.
The CFB was a not-for-profit organisation established in 1868. Its formation was triggered by a series of sovereign debt defaults in the mid-19th century. It was incorporated in 1873, under a licence from the Board of Trade
, governed by a committee of representatives from brokerages and banks. In early years, bondholders criticised the settlements that it reached with defaulting bond issuers. Decisions to accept a proposal were voted on at public meetings of members, but it was suspected that banks that underwrote
the debt were influencing these decisions.
To address these concerns, the CFB was reconstituted in 1899 under a Private Act of Parliament
, the Foreign Bondholders Corporation Act 1898 (61 & 62 Vict. c.149), which gave it the statutory duty to "watch over and protect the rights and interests of holders of public securities wherever issued but especially of foreign and colonial securities" (Article 4(a) of the Act). A new Council was created with 21 members - 6 nominated by the British Bankers Association, 6 by the London Chamber of Commerce, and 9 co-opted by the Council. Its officers were paid relatively small annual stipends, funded by its members.
To assist members to coordinate their actions, the CFB collected and disseminated information about the jurisdictions in which its members invested, including confidential information delivered by its agents in some countries. Its Annual Reports summarised the debt history of relevant countries, accompanied by economic data and political information. It also provided a reading room and library, and ran lectures. Most services were free to members, funded by the interest on an initial subscription fund, and, later by including its costs in any settlements made with defaulters.
Ad hoc committees were formed on request to deal with specific situations, where a country was through to be in difficulties. Representatives of the CFB would deal directly with a defaulting country on behalf of its members, giving it considerable influence. To ensure consensus decisions, one principle the CFB followed was equal treatment of all classes of bondholder.
The CFB worked with other British associations of investors, including the League Loans Committee, the Chinese Bondholders Committee, and the Committee of British Long-Term and Medium Term Creditors of Germany. In several cases, the coordinated its actions were coordinated with bondholders outside the UK. The CFB maintained good relations with bondholders in other countries, including the Bourse
s in Rotterdam and Amsterdam; Brussels and Antwerp; Frankfurt, Berlin, and Hamburg; Paris; and (to a lesser extent) New York. The CFB also maintained good relations with the British government, particularly HM Treasury
and the Foreign Office, although the government was generally reluctant to exert diplomatic influence on behalf of private investors.
The CFB's main mechanism to bring defaulting countries to the table was to make it difficult for defaulters to make further borrowings. The CFB exerted social pressure to discourage lending to countries in default until the default was resolved. The London Stock Exchange
would refuse to list new securities issued by defaulters, and in extreme cases could delist existing securities. In a few cases, where British diplomatic interests aligned with those of investors, gunboat diplomacy
was used - Britain occupied the defaulting Egypt
in 1882, and Britain, Germany, and Italy blockaded the defaulting Venezuela
in 1902. The differences in practices between investors in the UK and the US often led to conflicting desires, and the Monroe doctrine
often allowed countries in Central and South American to default with impunity until Theodore Roosevelt
announced in 1905 that Latin American countries could not use the US as a shield to avoid their debt obligations. More formal dispute resolution - mediation, arbitration, or litigation - were largely unsuccessful.
The CFB became less active after Second World War, and became closely aligned with the Bank of England
. It was formally wound up in 1988. Its archives are held by the Guildhall Library
in London.
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
issued by foreign governments, states and municipalities. In an era before extensive financial regulation
Financial regulation
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system...
, and of wide sovereign immunity
Sovereign immunity
Sovereign immunity, or crown immunity, is a legal doctrine by which the sovereign or state cannot commit a legal wrong and is immune from civil suit or criminal prosecution....
, it provided a forum for British creditors to coordinate their actions during the financial boom from the 1860s to the 1950s. It created an important mechanism through which investors could formulate proposals to deal with the government defaults, particularly in the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
following the 1929 Wall Street crash, including several early debt restructuring
Debt restructuring
Debt restructuring is a process that allows a private or public company – or a sovereign entity – facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its...
s.
The CFB was a not-for-profit organisation established in 1868. Its formation was triggered by a series of sovereign debt defaults in the mid-19th century. It was incorporated in 1873, under a licence from the Board of Trade
Board of Trade
The Board of Trade is a committee of the Privy Council of the United Kingdom, originating as a committee of inquiry in the 17th century and evolving gradually into a government department with a diverse range of functions...
, governed by a committee of representatives from brokerages and banks. In early years, bondholders criticised the settlements that it reached with defaulting bond issuers. Decisions to accept a proposal were voted on at public meetings of members, but it was suspected that banks that underwrote
Underwriting
Underwriting refers to the process that a large financial service provider uses to assess the eligibility of a customer to receive their products . The name derives from the Lloyd's of London insurance market...
the debt were influencing these decisions.
To address these concerns, the CFB was reconstituted in 1899 under a Private Act of Parliament
Act of Parliament
An Act of Parliament is a statute enacted as primary legislation by a national or sub-national parliament. In the Republic of Ireland the term Act of the Oireachtas is used, and in the United States the term Act of Congress is used.In Commonwealth countries, the term is used both in a narrow...
, the Foreign Bondholders Corporation Act 1898 (61 & 62 Vict. c.149), which gave it the statutory duty to "watch over and protect the rights and interests of holders of public securities wherever issued but especially of foreign and colonial securities" (Article 4(a) of the Act). A new Council was created with 21 members - 6 nominated by the British Bankers Association, 6 by the London Chamber of Commerce, and 9 co-opted by the Council. Its officers were paid relatively small annual stipends, funded by its members.
To assist members to coordinate their actions, the CFB collected and disseminated information about the jurisdictions in which its members invested, including confidential information delivered by its agents in some countries. Its Annual Reports summarised the debt history of relevant countries, accompanied by economic data and political information. It also provided a reading room and library, and ran lectures. Most services were free to members, funded by the interest on an initial subscription fund, and, later by including its costs in any settlements made with defaulters.
Ad hoc committees were formed on request to deal with specific situations, where a country was through to be in difficulties. Representatives of the CFB would deal directly with a defaulting country on behalf of its members, giving it considerable influence. To ensure consensus decisions, one principle the CFB followed was equal treatment of all classes of bondholder.
The CFB worked with other British associations of investors, including the League Loans Committee, the Chinese Bondholders Committee, and the Committee of British Long-Term and Medium Term Creditors of Germany. In several cases, the coordinated its actions were coordinated with bondholders outside the UK. The CFB maintained good relations with bondholders in other countries, including the Bourse
Bourse
Bourse may refer to:*exchange *stock exchange*Bourse : metro station, Paris, France*Bourse de Travail: French labor council-Exchanges:*Paris Bourse: Euronext Paris, historical Paris stock exchange...
s in Rotterdam and Amsterdam; Brussels and Antwerp; Frankfurt, Berlin, and Hamburg; Paris; and (to a lesser extent) New York. The CFB also maintained good relations with the British government, particularly HM Treasury
HM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
and the Foreign Office, although the government was generally reluctant to exert diplomatic influence on behalf of private investors.
The CFB's main mechanism to bring defaulting countries to the table was to make it difficult for defaulters to make further borrowings. The CFB exerted social pressure to discourage lending to countries in default until the default was resolved. The London Stock Exchange
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
would refuse to list new securities issued by defaulters, and in extreme cases could delist existing securities. In a few cases, where British diplomatic interests aligned with those of investors, gunboat diplomacy
Gunboat diplomacy
In international politics, gunboat diplomacy refers to the pursuit of foreign policy objectives with the aid of conspicuous displays of military power — implying or constituting a direct threat of warfare, should terms not be agreeable to the superior force....
was used - Britain occupied the defaulting Egypt
Egypt
Egypt , officially the Arab Republic of Egypt, Arabic: , is a country mainly in North Africa, with the Sinai Peninsula forming a land bridge in Southwest Asia. Egypt is thus a transcontinental country, and a major power in Africa, the Mediterranean Basin, the Middle East and the Muslim world...
in 1882, and Britain, Germany, and Italy blockaded the defaulting Venezuela
Venezuela
Venezuela , officially called the Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It borders Colombia to the west, Guyana to the east, and Brazil to the south...
in 1902. The differences in practices between investors in the UK and the US often led to conflicting desires, and the Monroe doctrine
Monroe Doctrine
The Monroe Doctrine is a policy of the United States introduced on December 2, 1823. It stated that further efforts by European nations to colonize land or interfere with states in North or South America would be viewed as acts of aggression requiring U.S. intervention...
often allowed countries in Central and South American to default with impunity until Theodore Roosevelt
Theodore Roosevelt
Theodore "Teddy" Roosevelt was the 26th President of the United States . He is noted for his exuberant personality, range of interests and achievements, and his leadership of the Progressive Movement, as well as his "cowboy" persona and robust masculinity...
announced in 1905 that Latin American countries could not use the US as a shield to avoid their debt obligations. More formal dispute resolution - mediation, arbitration, or litigation - were largely unsuccessful.
The CFB became less active after Second World War, and became closely aligned with the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
. It was formally wound up in 1988. Its archives are held by the Guildhall Library
Guildhall Library
The Guildhall Library is administered by the Corporation of London, the government of the City of London, which is the historical heart of London, England. It was founded in the 1420s under the terms of the will of Lord Mayor Dick Whittington...
in London.