Traditional bond market processes are, let’s face it, a bit Old Economy. The whole procedure, from origination to issuance, settlement and secondary trading, is still heavily manual – especially the first two bits – and not only ripe for disruption but clearly overdue a shake-up.
Many initiatives have been proposed to drag this most traditional of financial market processes into the digital age. The problem has not been conceptual – everyone can see the greater efficiency and more convenient execution that ought to come with a digital solution – but agreeing on a product and achieving critical mass in it. Most solutions have opted to take on a segment of the chain but not the whole thing.
One new platform with a better than reasonable chance of success is FIX Marketplace, Asia’s first fully digital and automated fixed-income execution platform. Driven by digital leader DBS, it creates a new primary issuance distribution channel by giving issuers an interface through which they can directly issue their own bonds into the marketplace, without direct intervention from a bank. Investor orders can be made directly, allocation is transparent and the documentation and trade confirmation is quick and digitalized.
The idea is that Asia’s commercial-paper market will be boosted, in efficiency as much as in volume, by allowing corporate issuers a simple digital method to issue and giving investors a wider range of instruments to invest in. It ought to mean lower transaction costs, greater funding alternatives and wider investor access, even if it does appear to be eating the lunch of the investment bankers who are pushing it in the first place.
“FIX is the first of many steps in the ambition of the digitalization of the capital markets,” says Clifford Lee, global head of fixed income at DBS.
DBS’s chief executive Piyush Gupta has long taken his digital lessons from the likes of Amazon and Alibaba, and one of them is the idea that it is OK to launch something that isn’t complete: a beta version, if you will, which can then be refined continuously from experience.
In that spirit, DBS launched what it calls a minimum viable product version of FIX Marketplace in Singapore in June 2021, getting long-time client (and fellow Temasek investee) Keppel Corporation on board that month. Keppel self-executed its maiden three-month commercial-paper issue on the marketplace in August, the first live trade.
Ecosystem
DBS had first approached Nivaura – the European technology provider to banks and to digital capital markets platforms that pioneered a general-purpose legal mark-up language that makes legal documents for new issues machine readable – two years before this.
The two firms passed ideas back and forth.
“A lot of those were about go-to-market strategy,” says Scott Eaton, chief executive of Nivaura. “What was great about working with DBS is that they absolutely understand their position in the ecosystem. Issuers and investors naturally come to banks rather than to new technology platforms. And DBS realized that if they could make this a shop front window, they could really advance automation and digitization of the new issue process.
DBS realized that if they could make this a shop front window, they could really advance automation and digitization of the new issue process
“It was particularly intelligent to begin with commercial paper, which is such a thin margin business that it might really benefit from the efficiencies if it becomes a simple process of issuers opening and filling in drop-down windows and investors responding,” Eaton adds.
While partly symbolic, the first big corporate deal was a useful proving ground. It showed that the technology works: Keppel self-issued and investors subscribed directly. Since then, more clients and issuers have been brought on board, and more issues were completed across multiple currencies.
Although DBS won’t give precise volume numbers, it disclosed in January, when GLP, a global investment manager and business builder in logistics, data infrastructure, renewable energy and related technologies, self-executed its maiden S$100 million ($72.2 million) six-month commercial-paper issue on the platform, that FIX Marketplace had seen S$7 billion of issuance in its first seven months, denominated in US, Singapore and Hong Kong dollars.
Many of these transactions have been small. GLP’s inaugural issue of S$100 million of six-month commercial paper was then the largest single deal on the platform. But many issuers doing small deals is a good way to start.
As a regional banking leader, DBS counts many smaller Asian banks as its clients, and these are natural issuers of short-term paper. Even before the landmark Keppel transaction, over $300 million of dealer-led bank certificates of deposit issuances had been transacted on the platform with direct investor subscriptions.
The next steps will be to use the platform to issue longer-term instruments – DBS has always called it a bond platform – and to see if digital placements can become traded bonds.
“The first steps have been taken: the creation of a platform where issuers, lawyers, investors and other banks can work together directly,” says Lee. “We were testing the pipes: short duration, low credit risk, high grade. Then this year we will take the next steps.”
Expansion
Specifically, in the second half of 2022 the product range will be expanded to include medium-term notes and new methods of price discovery and allocation will also be introduced. After that, the ambition is for the platform to be a multi-bank solution all market participants can use and then to embed the various other bits of the ecosystem – credit research, data analytics, rating modelling and hedging.
“The technology does what it says on the tin,” says Eaton. "DBS has proved the business case. It is now for the market to take it up."
But the biggest battle, as everyone knows, is buy-in. DBS is big in Asia, but will the largest banks in the global debt capital markets come on to its platform?
While FIX Marketplace allows issuers to sell direct to investors, it is not a pure disintermediation play. Borrowers can still issue through dealers. But it seems a stretch to imagine that other leading arrangers will use FIX Marketplace unless, having launched and scaled it, DBS invites more banks to own equity and share governance.
In the early days, leading banks don’t want to anoint a competitor as the winning developer of the digital DCM platform of the future. At least DBS has had the courage to step up with a platform that it believes will benefit clients, even at the risk its own groundbreaking effort may eventually be bypassed.
FIX Marketplace could become an independent platform. Lee has described it as the first step on an ambitious journey to democratize the capital markets for better transparency and broader financial inclusion. This can only be done effectively in consultation and collaboration with other market participants, including arrangers, issuers, investors, lawyers, auditors and clearing houses.
Banks may each develop their own automated digital capital markets systems that all talk to each other. But they are not just reluctant to endorse a competitor’s platform, they are also highly sensitive over data and loss of control of issuer and investor relationships. If other big banks do deals on FIX Marketplace, does DBS see the data? Even worse, does it own the data?
These are big issues to wrestle with in future. But the key question is whether, in becoming a first mover, DBS has met an actual need. The old system of capital markets may not be terribly efficient, but it does work.
“We conducted an independent survey to find out: do people really want it?” says Lee. “A lot of tech solutions, nobody wants it and it costs you a lot more than you save.”
The survey told them that there was a definite need.
Engagement
DBS is looking and hoping for this engagement on a number of fronts right now: its digital exchange, its carbon exchange, the Partior payments platform and trade-finance blockchain consortiums.
“Whatever solution we have, we must allow for the old and new economy to interact,” says Lee.
Eaton sees concerns ahead for banks caught between developing capital markets platforms on traditional technology and on blockchain. DBS says that FIX Marketplace supports issuers in generating digital bond-ready transactions that can be listed and traded on the DBS Digital Exchange that it set up in 2020.
Whatever solution we have, we must allow for the old and new economy to interact
We are on the edge of tokenization and radical change, perhaps with delivery versus payment through Partior, which came out of the Monetary Authority of Singapore's Project Ubin that explored central bank digital currency. JPMorgan is partnering with DBS on Partior along with Temasek.
Many capital markets participants see blockchain as the future, but few want to go all-in on the new tech.
“How many blockchain bond deals have there been?” asks Eaton. “Maybe 10. It is still innovation theatre. It is not business as usual, and most of those bonds don’t trade. What happens if you launch your bond on Ethereum and an investor buys it, but the next potential investor is on Corda or some other blockchain and so needs to find a bridge?”
There is a clear risk that the new technology becomes as messy as the old. But participants are also wary of resting on the clearly antiquated legacy technology.
“It may be that new platforms will at least need DLT [distributed-ledger technology] on-ramps and that there will be hybrids between the existing tech stack and blockchain,” says Eaton.
A glance at the global DCM league tables shows them led by the big five US banks, followed by the Europeans. DBS deserves congratulations for taking this key step forward in digital capital markets. It will require some of the leading DCM banks to take the next step and transform debt capital markets.
