Fintech threatens the big banks’ grip on the primary markets
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Fintech threatens the big banks’ grip on the primary markets

Fintech may not disrupt capital markets as quickly or as profoundly as it has retail financial services, but the incumbents should not be complacent. With regulators insisting on greater transparency and audit trails for investor allocations, the control of information that made the banks’ masters of these deals is already slipping.


Barely a day passes without some new fintech start-up announcing its latest idea to take retail customers away from the established banks by offering them a better, faster, cheaper way to hold, manage and transfer their money.

Fintech is now coming to the capital markets too, although just how far it will disrupt the small group of banks that dominate primary debt and equity capital markets remains to be seen.

In January, Commonwealth Bank of Australia (CBA) issued a five-year sterling denominated covered bond in which investors and banks for the first time all used Ipreo’s Investor Access channel to deliver orders and communicate final allocations. 

Controlling the flow of information during the book-building process, promoting to issuers their own superior inside analysis of price indications versus real investor demand and finally matching allocations against a supposedly ideal register of equity or bond holders: these have long been the ways that banks presented themselves as masters of the art of the deal.

Taking the control of that information flow out of the banks’ hands and allowing for much greater transparency and fuller audit trails of every conversation, from the moment an investor first indicates interest in a new issue to being allocated a piece of it, therefore represents a big potential diminution in the banks’ power. 

The banks do not want to give that power up, but they can see the regulators honing in on new issues. 


In the heyday of investment banking, especially in the years before the financial crisis, capital markets were the extraordinary hub where banks ruthlessly played both ends against the middle. Banks could shamelessly charge issuers for the privilege of supplying them with the very inventory they needed to satisfy (at a tidy mark-up) their investor customers clamouring for assets. Sometimes what looked like a competitively priced deal for an issuer was really sourcing of back-book proprietary positions for the bank’s own internal hedge funds or a loss leader for the juicy margins on a derivatives hedge.

The banks face a struggle trying to play these games today.

Demetrio Salorio, global head of debt capital markets at Société Générale Corporate & Investment Banking, tells Euromoney: “Banks need to ensure now that the primary market is transparent for its users, namely for investors and issuers. As part of that, for instance, banks are making issuers aware that the latter own the allocation decisions and that the bank syndicates’ primary duty is to issuers and not to investors.”

So this otherwise unremarkable CBA deal marked an inflexion point as the culmination of a two-year development effort to build a system for the debt capital markets: one that alerts investors to new-issue announcements, delivers structured information on deal terms and conditions, lets investors submit and manage orders electronically and receive notification of allocation and pricing details, along with other deal-related information such as the prospectus and final terms. 

 Bill Sherman-160x186

 Bill Sherman, Ipreo

It does not look like a disruptive application of new technology that might transform the capital raising process. Rather it is an efficiency play, but a sign nonetheless that long-established ways of doing bond deals are suddenly changing. 

“Investment-grade bonds are usually a one-day market with a lot happening very quickly as investors seek to capture the deal terms, evaluate them and submit their orders, which may vary in size at different levels,” Bill Sherman, head of the global markets group at Ipreo, tells Euromoney. “With a lot of bilateral communication of orders between banks and investors, on days when there may be half a dozen deals in the market at the same time, each with at least two lead banks and maybe as many as seven, and often with multiple tranches, it can become very difficult to accurately capture all the order data. 

“And remember that investors may be refining those orders several times a day throughout the price discovery process, and that all of this will be communicated by phone, over email or via chat.”

The potential for errors is obvious. 

“It was the banks that first came to us almost three years ago asking if we could devise a better solution for communicating orders and allocations to the buy side, and it began with 11 sponsoring banks,” says Sherman. “Today there are 20 banks using Investor Access to alert investors to new issues and take orders. And we very quickly attracted a buy-side user group to complement the sell-side and to ensure investor requirements were being addressed.”

From going into production in the second half of 2016, the system is now becoming a means to record and broadcast not just investor orders but also allocations that – so smaller investors have complained during the desperate hunt for yield in recent years – have unfairly favoured the biggest asset managers and biggest payers of spread to bank dealing desks. 

The question becomes how much transparency is enough to restore confidence in the process?

“One of several key components to the Investor Access system is the ability for each participant in a deal to control what is communicated when and, more importantly, to whom,” Sherman tells Euromoney. But the unspoken point of any audit trail is that regulators can follow it.

Just days after the CBA deal, Investor Access managed its first deal in euros, a five-year EMTN [euro medium-term note] offering for Sumitomo Mitsui Financial Group, led by BNP Paribas alongside Barclays, Goldman Sachs and SMBC. There is a clear expectation that this will very quickly become the way in which more bond deals will be run.

“We’re delighted to have started offering this new facility and look forward to expanding our support for Investor Access for other issuers, deal types and currencies to bring greater efficiencies to our investor clients,” says Fred Zorzi, global head of syndicate at BNP Paribas, who adds that, with the system, “both the collaboration with other syndicate banks and the demand collection direct from investors now benefit from the clarity and speed of structured electronic communication.”

Privately, some banks harbour misgivings. Euromoney hears rumours that at least one big US bank, which has been a prominent user of Ipreo’s services, is considering building its own proprietary system for electronic order submission and book-building in DCM, so as to retain control of this highly sensitive credit risk data. Others may go the same way.

 jody drulard-160x186

Jody Drulard, Dealogic

In equity capital markets, the exact same thing is happening. Dealogic is, through its Dealogic Connect, providing pretty much the same service for the electronic submission of orders into the central order book for equity capital markets deals that Ipreo is in investment-grade bonds. (Euromoney’s parent company owns a minority stake in Dealogic).

“At the start of this year, we confirmed the first electronic delivery from the dealing desk at Fidelity of an indication of interest on an IPO to the syndicate banks’ order book,” Jody Drulard, chief product officer at Dealogic, tells Euromoney. “Our belief is that inside a year, this will very quickly become the way that most ECM deals are done. We have been developing the service for two years, initially at the request of institutional investors concerned about manual errors and fat-finger mistakes in submission of orders. Now with Mifid II in Europe, from January next year, investors will be much more closely regulated and the buy side and the sell side will have to be able to reconstruct all the interactions that led up to an investment decision, such as subscribing to a new issue. Our service allows for a full electronic audit trail.”

Drulard is confident that Dealogic will remain at the centre of this technology transformation in ECM. “We already have 120 of the world’s leading bookrunners of equity capital markets – which is pretty much all of them – using earlier iterations of our deal manager service, which we are now extending to the buy side. For now, this is a bigger priority in Emea, given Mifid II, and in Asia Pacific, given the use on so many deals of multiple bookrunners. We will take it to the US last.”

Are none of these bookrunners worried that this might be the start of a disruption that brushes the banks away from their dominant position as the spiders at the centre of the equity capital markets web?

“A number of banks had initial concerns about disintermediating their sales traders, but the sales traders are still fully engaged in the process and are alerted to any submission, cancellation or refinement of an indication of interest or order,” concedes Drulard. “We believe adoption will be quite rapid.”

As Euromoney went to press, two more ECM deals were about to price using Dealogic Connect, with more asset managers pushing for the system, which is due to launch soon in Asia, to be used regularly.

“The buy side and the sell side will have to be able to reconstruct all the interactions that led up to an investment decision, such as subscribing to a new issue. Our service allows for a full electronic audit trail”

-Jody Drulard, Dealogic

The transfer of order submission and communication of allocations to third-party networks looks like a change designed to improve the way capital markets work in two ways that are useful to incumbents. It makes the whole process more efficient, less prone to human error and less time-consuming for highly paid bankers doing mundane tasks. It also keeps the regulators at bay by bringing in a degree of transparency and showing a willingness to establish those audit trails.

But new technology always changes behaviour in ways beyond the initial intention. 

For institutional investors, a full electronic record of communication around new issues promises a store of data to analyse against final outcomes. So, for IPOs from a certain group of private-equity sponsors say, or for deals run by each of the top five ECM bookrunners globally, what combination of early submission of interest, meeting management or simple submission of large price-insensitive orders leads to a final allocation closest to the desired amount?

Investors will be able to analyse all this and adapt behaviour accordingly. Banks, similarly, will have data points to justify recommendations to issuers of final allocations – allocations which those issuers decide of course, as it says in the fine print, but invariably after taking advice from their bankers – based on investors’ recorded contribution to price discovery. 

A lot of the intuition and ability to predict likely behaviour of different types of investors that great capital markets bankers used to carry in their heads will now reside in banks’ or third-party computers. It’s the way of the world. Most secondary-traded markets moved like this years, if not decades, ago. 

It is something of a surprise that fintech disrupters have, to date, failed to make much of an impact in cutting investment banks out of the capital markets process by linking the investors who have money to underwrite and provide funding directly to the issuers that want to borrow it. 

That is the point where Origin, a new private placement platform that was launched in January, enters Euromoney’s discussion with a senior capital markets banker. First conceived as a means for issuers to distribute target funding terms directly to investors, but subsequently refined to put banks back at its core, Origin went live in beta form with 20 international borrowers and six dealers.

“Cutting out the middle man in capital markets is an obvious and technologically easy objective at a time when a few big asset managers have risen to dominance and banks’ balance-sheet commitments to the secondary market in particular are de minimis,” says a banker. “But the banks are very powerful and absolutely determined to preserve their role at the centre of the capital markets,” the source reminds us, before calling us up short. “You know that even Euromoney itself tried it?” 

Our memory banks appear to run blank. “Yes,” the banker insists. “There was a proposal for a joint venture maybe 15 years ago or more to build a platform for frequent issuers of private placements off MTN programmes to distribute price curves directly to asset managers for them to lend against. But somehow it never quite took off and became instead MTNware, a data tool for the banks.” 

The banker has consoling words: “Never mind. Everybody else had the same idea too – Dow Jones, Thomson Reuters, Bloomberg, which was looking to auction new issues at the end of the 1990s – and none of them succeeded either.”

“We do have a vision and believe that it would be healthy if bonds that are originated through new digital means are then traded through digital means so that aftermarket coverage continues” -Vuk Magdelinic, Overbond

What do senior managers running capital markets businesses today make of the vulnerability of their occupations to fintech disrupters? It seems safe to say that they feel unthreatened.

“Fintech is more challenging for retail banking and for wealth management,” says Samir Assaf, chief executive of global banking and markets at HSBC. “In the wholesale businesses, blockchain is very important and could be a real revolution in clearing, settlement, custody and trade finance. But it may be five years or more before it becomes fully transformational.”

Assaf says that the biggest change wrought by advanced technology in markets business has been the rise of algorithmic trading, where new kinds of high-speed traders have taken the place of the traditional bank intermediaries among the top 10 market makers in US treasuries for example. 

“But that has already happened,” says Assaf. “In capital markets, the new technology tools we see will be facilitators for existing businesses that may help them reduce costs and improve efficiency but not threaten disruption.”

In the years since the financial crisis, the reduction of banks’ collective balance sheet commitment to secondary bond markets has inspired scores of new trading platforms, many aiming to transform the market structure through new all-to-all trading protocols, with investors filling the traditional market-making role abandoned by banks.

New primary market platforms can be counted on the fingers of a single hand. Origin, focusing on private placements, is one; another, focusing on public bond deals, is Toronto-based Overbond, which claims to be the first fully integrated platform for the bond origination market that directly connects corporate and government issuers with dealers, institutional investors and select retail investors.

Founded in 2015, Overbond first focused on improving pre-deal communication between investors and issuers, allowing large sophisticated asset managers to express indications of interest to buy a certain type of credit at a certain yield and to initiate conversations with potential issuers that might be household-name companies but come to the bond markets just once or twice a year to do large balance-sheet funding.

In this way, Overbond is almost like a primary market version of Algomi, which links investors and dealers to enable discovery of secondary markets trade opportunities.

It is sometimes overlooked that for issuers, accessing the primary markets has got a lot tougher thanks to the regulatory crackdown on bank conduct since the crisis and the subsequent revelation of so many market manipulation scandals.

Spencer Lake, former vice-chairman of global banking and markets at HSBC and currently chairman of the International Capital Market Association and vice-chairman of Fenergo, explains: “At the large banks today, the strict conduct and compliance agendas make it complicated, if not impossible, for a fixed income salesperson to speak to a trader, or a trader to speak to the syndicate desk, syndicate managers to their peers at other banks, etc. And they all know that all their conversations are always closely monitored and policed. So, when an issuer now needs a read on the market for the likely level of a new issue, it’s much harder to obtain. As a result, the corporate treasurer can’t just call his lead bank and expect the bank to deliver a consensus on terms. The treasurer’s staff has to perform this discovery process on their own.”

The time is obviously ripe to use technology to link issuers more directly to investors. The only question for the banks is whether or not this can be done in ways that do not disrupt their role.

“Frequent issuers that have to raise billions of euros or dollars each year will likely not be willing to automate all of that,” says Lake. “They will always want to speak to their dealers and to investors. But having a trading venue, say, also offering an automated primary market capability, where those issuers can address a large blind pool of potential investors for standardized deals with off-shelf documentation, could be a big help to borrowers, and reduce significantly the cost for banks of the front to back of primary activities.”

Vuk Magdelinic, chief executive of Overbond, explains to Euromoney how this creates the ground for a new approach to the primary market: “The treasurer of a big company doing a large annual or biannual financing needs to develop confidence in market tone, in likely lead investor demand, in pricing for a given size and optimal timing. Facilitating conversations with large investors that are increasingly sophisticated in their own analysis of the pricing and timing of individual portfolio adjustments and willing to give out indications of target terms helps to deepen relationships with issuers and build their confidence before launching a deal.”

 Vuk Magdelinic-160x186

 Vuk Magdelinic, Overbond

This is what Overbond has been working on for the last two years, attracting a rapidly growing issuer client base of more than 100 borrowers that includes Burger King, Molson Coors, Couche-Tard and Bell alongside investor clients that include Mackenzie Financial, Sprott Asset Management and CBC Pension. 

“We have been very careful in engineering the platform from a regulatory compliance point of view so that the indications of interest in a certain type of credit that investors might communicate do not expose them to being considered wall-crossed or insiders in any way,” stresses Magdelinic. “We didn’t build this platform with an initial focus on deal execution, but rather with a view to facilitating conditions in which more deals might happen.

“As well as increasing connectivity between investors and issuers, we have also overlaid that with integrated predictive analytics based on Thomson Reuters secondary bond market price data and DBRS credit analysis,” adds Magdelinic.

In late January this year, Overbond went the next step and launched OverbondX, a deal execution module designed to enable issuers of any size to digitally execute both private placement and public offerings, while letting investors and dealers submit and view orders within the Overbond platform, so reducing operational risk and transaction costs for all parties.

“Innovation in the securities market is not only long overdue, but essential in driving a more efficient and collaborative bond issuance process,” says Jacqueline Szeto, vice-president of Ontario-based fund manager, Canso Investment Counsel. “It’s very refreshing to see a fintech startup like Overbond delivering on its vision for a completely digital bond market that benefits issuers, dealers and investors.” 

Dealers would be naive not to feel uneasy at the prospect of any third-party platform making such a play of facilitating conversations between issuers and investors and executing deals. But Magdelinic says that Overbond is built for dealers, too, and aims to improve the health of the overall debt capital markets for all participants.

“We are very much aligned with what dealers want,” he says. “They know that the client coverage model is changing, and our platform enables more efficient digital coverage of issuers and investors. We want to provide a working environment for all participants in the primary market. We have no interest in trying to influence whether a deal should be public and underwritten or private and sold to a single investor. And we recognize that transactions that begin through conversations and confidence building on Overbond may eventually be executed off the platform.” 

He also sees a need for structural changes in debt capital markets that the platform may enable. 

“For whatever reasons – perhaps lack of efficiency around new issues due to dependence on old technology – the whole primary market has become quite focused on blockbuster benchmark deals,” says Magdelinic. “It might be healthier instead to have more issuers come more frequently in smaller size and so diversify their financing risk by size and time. After all, treasurers may have different financing mandates for different parts of their balance sheets. And while the traditional attraction of big liquid benchmarks is that they reduce cost, treasurers may have different constraints over financing for particular terms. Investors can now show a dashboard of potential pricing at different tenors and conditions for set types of credit that large issuers can view without being bombarded with reverse enquiries.”

Magdelinic and his team are looking to scale the company up in Canada and the US over the next two years. It remains to be seen what a platform like this might turn into, given the potential for data capture and advanced analytics. Could it turn its predictive analytics onto the propensity of a large specialist asset manager, given knowledge of how long it has held certain bonds and its mark-to-market profit and loss, to make a portfolio switch? Could it predict the likelihood of a target issuer selling new bonds within a set period of time? Could it then connect the two up?

“We do have a vision,” says Magdelinic, “and believe that it would be healthy if bonds that are originated through new digital means are then traded through digital means so that aftermarket coverage continues. It seems the primary and secondary markets in bonds have become quite detached, and it might be better if they could somehow be reconnected.”

“Today there are 20 banks using Investor Access to alert investors to new issues and take orders. And we very quickly attracted a buy-side user group to complement the sell-side and to ensure investor requirements were being addressed” -Bill Sherman, Ipreo

In wholesale financial markets, secondary trading of equity, foreign exchange and bonds has automated quickly, albeit with bonds lagging somewhat. Today, platforms like MarketAxess and Tradeweb already look a little like exchanges for bonds, and the established exchanges have taken note. 

In March, Euronext announced a $10 million investment in a minority stake in Algomi, provider of cutting-edge technology that links bond investors with dealers to improve the exchange of pre-deal information that leads to secondary market trades. Euronext and Algomi have formalized a joint venture designed to create a global network of centralized information venues, turning disparate data into trade opportunities. 

“This partnership with Algomi is central to our fixed-income ambitions and our wider FICC diversification plans,” says Stéphane Boujnah, CEO of Euronext.

An obvious next step in linking investors looking to take positions in a credit would be to include new issues.

“Trading platforms are well-equipped and improving at linking dealers to investors,” says Lake at Icma. “If they connected to issuers as well, then, for example, the automated re-opening of an outstanding deal becomes an obvious way quickly to satisfy investor demand for a credit.

“Right now, everyone thinking about the digitization of wholesale finance is focusing on the front end. For the banks to participate in this fully, however, requires an overhaul of middle-office processes and systems, which typically remain highly manual, needing inputs from myriad internal divisions – country officers, product teams, risk, legal, finance, compliance, operations – each often using clunky, old technology. The challenge is to automate all this, link it all up front to back internally and then see how to better connect it to both investors and issuers.”

Lake points to companies such as Fenergo and nCino, which have developed software-based solutions for the middle office. Fenergo has a regulatory savvy client onboarding and client lifecycle management proposition that dramatically improves efficiency and reliability for banks. nCino has developed a cloud-based bank operating system to work through many of the work flows of customer relationship management, loan origination and credit extension, risk monitoring and reporting, which holds out the promise of eventually being able to do all this much more efficiently and much, much faster than banks can today.

Banks in the much larger market for retail financial services are today gripped by the fear of finding themselves on the wrong end of a Kodak moment, when a new technology provider – Google or Alibaba – launches a banking service that goes viral and leaves all the incumbents looking redundant.

The banks show no fear that the same could happen in the smaller, more specialized revenue pool of the global capital markets. 

They should not be complacent.

“I’m not sure that any bank yet has a vision for it, but the wholesale businesses will eventually become digitized in similar ways to retail financial businesses,” says Lake. He holds up his smart phone and flicks at its screen. “The wholesale business is eventually going to look a lot like this… and you had better be on the first page of apps.”

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