Corporation of Foreign Bondholders

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 restructurings.

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 Bourses 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.

References

• The Corporation of Foreign Bondholders, Paolo Mauro and Yishay Yafeh, IMF Working Paper WP/03/107, May 2003
• Guildhall Library Manuscripts Section - newly catalogued collections, December 2003
• State Insolvency and Foreign Bondholders, Edwin Borchard and Justus S. Hotchkiss, Beard Books, 1951, ISBN 1587980452, p.203-212