To handle wider syndicates and greater volumes of issuance, traders cannot rely on manual processes. Chris Hall investigates.
“There has been no real improvement in transparency or efficiency in a quarter of a century,” says Cathy Gibson, head of dealing at Royal London Asset Management, describing how underwriters share information on new corporate bonds with institutional investors.
Buy-side traders have become increasingly vocal about the pressures imposed by labour-intensive and error-prone processes involved in evaluating new issues and securing allocations. Help is finally arriving, with a handful of regulatory, industry-level and commercial solutions being floated to streamline new issuance information distribution. The whole industry seems to now realise the existing burdens on buy-side trading desks are unsustainable.
“The current process is fairly horrific and antiquated,” according to Bob LoBue, co-head of global fixed income syndicate, JP Morgan, speaking at a meeting of the US Securities and Exchange Commission’s Fixed Income Market Structure Advisory Committee (FIMSAC), last October.
To date, the rising volume of new issues and size of underwriting syndicates have left beleaguered traders struggling to decipher and respond to a blizzard of phone calls, emails and chat messages on heavy issuance days. More positively, the rapid electronification of the secondary market has highlighted the potential for technology to overcome entrenched market practices.
Also speaking to FIMSAC, Alex Sedgwick, head of fixed income market structure at T Rowe Price, commented on both the operational inefficiencies for his firm and the wider liquidity implications for a secondary market populated by multiple electronic trading venues and market-makers. “Electronic market-makers ultimately need this information to provide accurate pricing and accurate valuation for the prices that they are pushing out to the market. If this information is not available, that ultimately means liquidity providers may not be able to provide liquidity to us when those new issues are free to trade,” he said.
According to Peter Aherne, head of North America capital markets, syndicate and new products, Citi, “Increased standardisation of data and process is a necessity to ensure the buy side can manage their workflows and digest deal information efficiently, given the increase in both primary issuance volumes and typical syndicate size.”
Growth of the bookrunner
Against a background of low interest rates and asset purchases under quantitative easing policies, European investment grade corporate bond issuance topped Ä250 billion throughout 2014-2017, having averaged slightly more than Ä110 billion from 2004-2007. In parallel, underwriting syndicates have steadily increased in number for more than two decades, forcing buy-side firms to maintain relationships and communication channels with more sell-side firms in the hope of securing access to new issues. European and US corporate issuers typically needed the services of only one bookrunner in 1995 to launch a new bond. By 2018, this had risen to 3.3 in Europe and 4.4 in the US according to Dealogic.
A 2017 report by a European Commission (EC) expert group on corporate bonds cited weaker credit appetite, post-Basel III, as a key driver of larger syndicates, whilst market observers also note the increased need for corporate issuers to share underwriting business across relationship banks. Either way, the logistical headaches for buy-side trading desks caused by increased traffic have been intensified by steeper peaks and troughs in issuance activity in volatile market conditions, and a broad surge in buy-side demand. In such circumstances, desired allocation levels are typically only achieved by the institutional investors with the strongest and most extensive range of underwriter relationships.
“In some markets, like sterling, regular over-subscription means many new issues could be quickly locked up by real money accounts and may not see the light of day until maturity. In these circumstances, it’s hard for the sell-side to adequately balance the interests of issuers, investors and themselves,” says Gibson.
The analytical report from the EC expert group found that “demand outstrips potential supply by a factor of two to three” for European corporate bonds, resulting in final pricing routinely exceeding initial guidance. The group acknowledged the potentially negative impact on perceptions of fairness, but insisted in its final recommendations that new issuance allocation for investment grade bonds was carried out “in accordance with clear and transparent rules”, a situation since reinforced by MiFID II’s ‘allocation justification’ requirements.
Although the group called for “coordinated action” by regulators and market professionals to “discourage any artificial inflation of primary orders”, i.e. bond-buyers bidding for higher-than-needed allocations in anticipation of strong competition from other investors, there is as yet insufficient secondary market evidence to suggest a systemic problem.
Nevertheless, in the context of the frantic efforts of buy-side traders to secure complete and accurate information from multiple underwriters on multiple transactions (and then share data with multiple portfolio managers and analysts in order to reach valuation and purchase decisions), it is unsurprising that suspicions are raised.
“It’s impossible to say for certain whether the existing allocation process is fair due to the absence of transparency,” observes Gibson. To tackle these transparency and efficiency failings, efforts are focusing on improving the, accuracy, completeness and consistency of new issue data, and streamlining the channels of information distribution.
In Europe and the US, there are similar initiatives to standardise the terms provided to investors and other interested parties on the launch date of a new corporate bond. The Zurich-headquartered International Capital Markets Association (ICMA) is working with its issuer, underwriter and investor communities on initiatives aimed at accelerating the investment decision process, such as “agreeing a template of initial terms which should be disclosed when a deal is first announced, and minimising delays in ISIN provisions for new deals”. Noting the “lack of standardised disclosure of minor but critical information”, the ICMA’s Primary Market Investor Working Group has put together a draft list of standard announcement terms and is undertaking discussions with technology providers and data vendors.
“As investor data-management technology develops, there is greater focus on streamlining the data in public announcements for primary issuance,” says Ruari Ewing, ICMA’s senior director on EMEA and Asian syndicated new bond issuance market practice and regulatory policy. “However one needs to be careful not to over-simplify complex concepts or undermine the importance of official disclosure. This is an iterative process, but it should be possible over time for deal information to become more easily machine-readable, thus streamlining workflows for investors when evaluating and sourcing primary issues.”
In the US, the SEC’s FIMSAC has followed a similar path, with its technology and trading subcommittee (headed by MarketAxess CEO Rick McVey) recommending a new issue reference data service for corporate bonds, and drafting a proposed list of mandatory data fields. One likely outcome is for FINRA to augment the new issue data that the self-regulatory organisation already collates from underwriters to upload debt securities to its TRACE data feed to provide a central database similar to that already serving the US municipal bond market.
This might initially look like a regulator imposing a solution on the market, but that ignores the spread of market participants and service providers involved in the drafting exercise and the ongoing consultation process.
“Addressing this problem through a forum such as FIMSAC means that the proposed recommendation is based upon wide industry representation,” says George Bollenbacher, head of fixed income research at TABB Group.
Beyond agreement on standard deal terms, initiatives to improve the timeliness and efficiency of data communication must overcome both logistical and competitive barriers.
In mid-2018, the three largest US bond underwriters – Citi, JP Morgan and Bank of America Merrill Lynch – floated plans for a consortium-owned centralised platform for sell-side firms to communicate terms to investors and collect orders. In October, JP Morgan’s LoBue told FIMSAC that the 10-strong grouping could be “the right venue to connect with a regulatory body to standardise and disseminate electronically”. More details are expected to be released during Q1 2019.
To succeed, however, the US banks’ initiative may need to overcome the momentum already built up by Investor Access, an electronic primary market platform operated by Ipreo, a solutions and data provider initially backed by Goldman Sachs and Blackstone Group, now owned by IHS Markit. Launched in 2017, Investor Access has quickly gained traction in Europe and Asia, signing up 40 banks and more than 280 buy-side firms, executing 1350 deals in 2018. Ipreo managing director Herb Werth claims to be less concerned by the prospect of competition, than the need to ensure the streamlined connectivity that will enable deal information to flow.
“Solution providers need to ensure interoperability so that all market participants have the ability to invest in any deals brought to market without unnecessary technical hurdles. Providing a full set of APIs and FIX connections helps ensure that investors are able to realise gains in both efficiency and regulatory compliance, regardless of the precise mix of tools they use in managing primary issues,” he says.
Royal London’s Gibson is wary of the engagement cost of signing up to multiple new issue platforms, but is cautiously optimistic that the end of a quarter-century could be within reach. “To justify buy-side onboarding costs, new solutions must offer comprehensive access to the sell-side and seamless connectivity to our order management systems. The technology is already available and I expect the platforms to be able to drive the necessary change,” she says.
©The DESK 2019