The story dates back to the late 1970s and 1980s, a time when the democratization of finance really started to take off, due to the lifting of post-war regulations trapping capital within national borders, and an increase in institutional capital management. and the global integration of financial market clearing and settlement infrastructure.
It was a game-changer, ultimately allowing the masses, and not just the privileged few, to gain access for the first time to international capital markets.
Fast forward to today, and access to global markets has never been greater. Technological advancements and digitization are enabling this transformation, with the rise of crypto-assets even considered by some to be the symbol of a 21st financial revolution of the century.
In the traditional asset classes of stocks and bonds, technology has already brought about a revolutionary change, but the magnitude of that change differs between these markets. Trading and investing in equities, for example, has undergone greater democratization than trading and investing in bonds, which are still dominated today by large institutional investment funds. Retail investors hardly see it.
Another aspect is the primary market, where companies raise capital through the sale of stocks and bonds almost always with the help of investment banks. Yet, in both primary equity and bond markets, institutional investors and corporate issuers are pushing for a change in the practices and processes of raising capital.
This is particularly the case in the primary corporate bond market, where electronic connectivity between investment banks and institutional investors, as well as some of the workflows associated with the sale and purchase of bonds. , have not evolved with technology. Seen from another perspective, some practices and processes are outdated, too manual, and need to be modernized.
The bond market has seen some automation on the sell side, but further market integration is needed to bring more transparency and efficiency
Christopher Sztam, IHS Markit
For example, banks market an offer through direct negotiations with investors, typically by phone or email. As a result, the information transmitted is often inconsistent. In addition, banks generally seek to obtain the best terms for the issuer and ensure the security of transactions, but they are free to decide with which investors they wish to place the bonds.
This question is such that financial regulators are interested in it, in particular the International Organization of Securities Commissions – the regulator of the regulator – European regulators, the Securities and Futures Commission of Hong Kong and the American Securities and Exchange Commission (SEC). .
In a report last year, the SEC’s Office of the Investor Advocate (OIA), which looks after the interests of investors, wrote that while the new corporate bond issuance allows issuers to raise capital efficiently , “On closer inspection, the market does not work as transparently as one might assume.
“In recent years, many institutional investors have expressed concerns that the process of commercializing new issues does not give participants on the buy side an adequate opportunity to make informed investment decisions,” the report said.
A bond offer can be announced and evaluated during the day. However, the time between the announcement of a deal and the deadline for placing orders is sometimes as short as 15 minutes.
The Credit Roundtable, a 39-member trade association of investors with over $ 4 trillion in fixed income assets between them, has spoken out on the matter and wants some of the practices in the marketing process, pricing and distribution of new bonds be reformed. This includes the promotion of standardized offer protocols and benchmarks, which they believe would improve the ability of investors to assimilate information about offers more quickly.
Multiple systems will fragment the market for both seller and buyer side participants
Nick Hall, IHS Markit
Several technology trading platforms have sprung up in recent years to help solve some of these issues, including one called DirectBooks, which is owned by some of the biggest investment banks in the bond market.
This shows that banks are willing to tackle these issues, but there has been a reluctance to change, says Christophe Sztam, Managing Director and Group Head of Global Markets at IHS Markit, which also offers a suite of platform solutions for the new issue bond market.
The most recent is Investor access, which brings together investors and banks on a single platform, allowing them to participate in new issues and all workflows relating to the dissemination of transaction conditions and the communication of orders and allocations. The platform was primarily designed to address the issues – highlighted by the CRT – facing investors.
“One of our areas of focus is interoperability between execution or order management platforms and the primary bond market through InvestorAccess,” Sztam says, adding that the long side is “really excited about this. and is looking forward to having it “.
However, not all participants are equally enthusiastic. The opposition of some banks – especially those that promote their own system – to InvestorAccess or any other platform provider, can be understandable. But the risk is that “multiple systems fragment the market for both sell and buy participants,” says Nick hall, Managing Director and Global Head of Fixed Income at IHS Markit.
He adds that there will have to be some kind of compromise, where there is collaboration. “I don’t think the market wants two separate systems, which don’t talk to each other, doing the same thing,” he says. “Buyers don’t want that. And banks won’t want to have to choose which system they use depending on whether they are doing a deal in the United States, Europe, or Asia. They want either one platform, or at least multiple platforms that can interact with each other.
For Sztam, there is room in the market for a few different platforms, but ultimately, and for the benefit of all market players, “they have to work together – interoperability is fundamentally important”.
He adds that market players, including providers and consumers of capital, want collaboration in the process of capital formation and demand cooperation.
And if there is no movement on this point, the risk is that financial market regulators need to get involved, as the SEC reports.
Transforming the bond issuance process in the way necessary will take time, but it is critically important to “provide more efficient access to all market participants,” Sztam says. “The bond market has seen some automation on the sell side, but further market integration is needed to bring greater transparency and efficiency. “