Reliance on more manual and voice processes for trading bonds during Covid-19 exposed the constraints of the traditional fixed income markets, particularly in relation to secondary market trading. As volatility rose, a lack of risk capital and scaled-back balance sheets on the sell-side left many asset managers struggling to exit positions in a timely manner. This created a sense of urgency on the buy-side to be ready for any future episodes of volatility and led to wholesale reviews, upgrades and automation of current workflows wherever possible.
While the secondary debt markets have benefitted from greater use of technology and automation, as well as, new alternative providers stepping up during the pandemic, the primary markets seem to still be sitting on the sidelines. Yet, according to PWC, €178bn in European corporate debt was raised in the third quarter of this year across 287 deals. In addition, AFME reported that EU governments accumulated €893bn in bonds and bills issuance during the second quarter of 2021. It is obvious that the resilience of this market segment is critical, given the reliance across Europe on debt issuance in a post-pandemic recovery environment.
Access to the primary market has long been considered too manual, opaque and prone to errors; an outdated process requiring asset managers to dedicate large amounts of time to build and review allocations. In a low-interest environment, competition for new issuance is fierce; and while a solution could be seen as the holy grail from the buy-side, the question is whether debt capital markets (DCM) desks at banks are willing to concede some control to overcome the impediments slowing the emergence of a workable solution, namely data, technology and access.
Standardised issuance identifier
Standardisation of data will likely forever be at the centre of making financial services more efficient, and the issuance process is no exception. To make the automation of the primary process a reality, the industry first needs to agree on a standardised identifier for use from the moment of issuance. Yet, the delay taken in producing an ISIN, typically 24 hours, has exacerbated the challenges of a manual process, requiring asset managers to rekey information in multiple systems and increasing the likelihood of errors. New workarounds are emerging such as the use of a Financial Instrument Global Identifier (FIGI) as a steppingstone.
“Liquidnet uses the FIGI as a common identifier early in the new issue process. We make this available to our members via our New Issue Announcement dashboard and electronically straight to their OMS [order management system]. In addition to the FIGI, this dashboard contains the terms of the deal in an actionable structured format. The benefits to the buy-side are clear ..not only can they create the shell security earlier in their OMS than if they had to wait for the ISIN, the common identifier enables the electronic passage of updates and information tied to that deal, earlier trading opportunities and ultimately the ability to send orders from, and receive allocations back into, their OMS,” said Jonathan Gray, Liquidnet Primary Markets.
Interoperability of platforms
A handful of platforms including DirectBooks, IPREO and Liquidnet, have emerged in recent years aimed at streamlining the flow of information, improving transparency, and increasing efficiency. These new initiatives will all benefit the buy-side but only with seamless interoperability and interconnectivity of these systems. Multiple entry and exit points, as well as, the need to navigate multiple systems and onboarding processes for new issuances, will make data consolidation more difficult and fall short of the hope to achieve straight-through processing (STP) in the primary.
Fair and transparent access
Ensuring fair access is another challenge; primary allocations remain dependent on the historical relationship asset managers have with the investment banks. Lack of transparency around the allocation process and how it is implemented perpetuates the idea that larger managers can rely on stronger relationships with the banks to access primary allocations, leaving small and mid-asset managers on the side. Technological innovation can offer greater transparency in the allocation process by ensuring every asset manager receives the allocation at the same time. In addition, while unbundling has been focused on the separation between research and execution, there is a case for considering unbundling execution services altogether to ensure fairer access to the primary market. Only increased transparency alongside regulation will help ensure fairer access to deal books to all asset managers regardless of their size.
Greater use of analytics around the primary workflows will allow buy-side firms to understand the quality of their allocation.
“If I get allocated on a bank lead deal, on average, does my deal perform or not? Am I being allocated the dogs or the winners systematically? There are data analytics integrated with the primary workflow that are potentially interesting. However, the data is only useful if you can analyze it and integrate it into your workflow,” said Chris Murphy, Ediphy.
Yet, the tech stack in place in most asset management firms remains fragmented and fraught with legacy issues, slowing down the possibility of greater integration of analytics in the primary workflows.
Looking ahead
Further electronification of the fixed income markets will be key to make them more robust and able to withstand shocks, like equities post the 2008 global financial crisis, which in turn will provide improved support to governments and corporates and their borrowing efforts. Competition in the new issuance technology space is increasing and the first steps to re-stitch the primary landscape will be to focus on automating a manual process and providing transparency. The emergence of new book building technologies including direct platforms for corporates to promote their new issues, operating in a similar fashion as Amazon or Netflix could enable to widen the scope of potential participants to retail and wholesale investors.
This could represent the future and “encourage issuers to come to the market more frequently,” added Murphy. “Could technology encourage more tapping of the market on a more frequent basis? It doesn’t necessarily need to lead to smaller issuance sizes per ISIN but if you had a more seamless approach on the primary, it would allow to tap issues more frequently. It could just help make the whole process from issuer to investor much more efficient.”