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IHS Markit (Nasdaq: INFO) is pleased to provide its comments
regarding the European Central Bank (ECB) consultation paper (CP)
on a potential mechanism for issuance and initial distribution of
debt securities in the EU; European Distribution of Debt
Instruments (EDDI). We are responding as a solutions provider of
comprehensive product suite that facilitates the execution of
primary market transactions - from origination to settlement work
flows - allowing efficient collaboration between issuers, banks and
investors.[1]
Introduction
IHS Markit is a world leader in critical information, analytics
and solutions for the major industries and markets that drive
economies worldwide. The company delivers next-generation
information, analytics and solutions to customers in business,
finance and government, improving their operational efficiency and
providing deep insights that lead to well-informed, confident
decisions. IHS Markit has more than 50,000 key business and
government customers, including 80 percent of the Fortune Global
500 and the world's leading financial institutions.
IHS Markit, which acquired IPREO in 2018, provides a number of
services to global debt capital markets, particularly in
pre-issuance markets that offer significant benefits to the market
in terms of standardisation and efficiency. For example, IssueNet
is a pre-issuance platform that services over 180 banks. It allows
banks to price deals sooner, removes risk from the issuance process
and has also implemented many innovations that have benefitted the
industry such as unified bookbuilding and standard deal terms.[2]
Summary
IHS Markit supports moves to improve debt capital markets in the
EU. There is scope for development in the EU market for debt
securities as can be seen in the way that funding of European
business is skewed heavily towards loans rather than debt, in
contrast to some other economies like the United States of America.
A more diversified funding market would undoubtedly benefit the
European economy. IHS Markit has also been a supporter of the EU
Capital Market Union initiative, engaging actively with the
European Commission on a number of related issues.
While we support the initiative to improve debt markets in
Europe, it is important that the ECB fully understands and builds
on global harmonisation that has taken place over the last 15
years, particularly in pre-issuance. Therefore, our main messages
to the ECB are that:
IHS Markit would generally support initiatives to promote
harmonisation and efficiency in the debt capital market;
the ECB should be fully cognisant of how the global market has
developed harmonisation over recent years (particularly in
pre-issuance) and understands the role of existing global
platforms; and
any action taken by the authorities in debt markets should
ensure existing harmonisation is not unwound or fragmentation
reintroduced by adopting European approaches out of line with
existing global markets.
IHS Markit would be very happy to share with the ECB our
experience and expertise of operating a pre-issuance platform in
debt markets, something that, we believe, would be useful to the
development of this policy area.
Answers to CP Questions
Q1.Please provide your views on the description of
the European ecosystem for the issuance of debt instruments, in
particular as regards whether you deem other actors, elements or
processes relevant to complete the picture.
Although we agree broadly with the description provided in the
CP, we believe it is worth providing a further explanation of the
role played by IHS Markit.
IHS Markit provides pre-issuance platforms as represented in
Chart 1 of the CP.[3] Its IssueBook and IssueNet products combine
to provide a pre-issuance platform which is used to run the vast
majority of all primary market issues globally, including in the
European Union. There are over 180 banks involved in the primary
market and they all use the platform to run their primary issues
for a broad range of issuers (including SSA, Corporate, FIG).
IssueBook and IssueNet have played a significant role in the
primary market for over 15 years and, in that time, have promoted
the adoption of standards that have created greater homogeneity
across the global market.
Q2a.Do you think that there is a structural issue
in the current debt issuance and distribution in the EU, seen from
the perspective of a single capital market? If so, what is your
view regarding the underlying causes of this structural
issue?
One example of a structural issue would be the process of
assigning security identifiers. Delays in obtaining a security
identifier for new issues slows down the transition from primary to
secondary markets and therefore the speed with which trading can
begin in the secondary market.
Another example would be the distribution of deal terms to
investors. The current process requires human intervention, which
means the distribution process is not always optimal. More
specifically:
Syndicates determine which sales people to send deal terms to
and those sales people determine which investors to send to. The
result is that some investors may not see deals that they might be
interested in. IHS Markit products allow for everything to be sent
to everyone (subject to marketing and selling restrictions) and let
the investor filter for what they want to see; and
Sales people typically distribute deal terms to static
distribution lists. This can be a laborious process for sales
people who are increasingly focused on providing value or insights
to the buyside in a resource-constrained environment.
Electronification of this process through IHS Markit's IssueLaunch
product allows the use of embedded logic to ensure that deal terms
reach the correct investors and critical sales team resources are
optimised.
Q2b.Do you face problems or see problems for
issuers when reaching out to a pan-European or international
investor base? If so, please specify.
As explained in the answer to question 2a above, the traditional
process for distributing deal terms is reliant on human
intervention, which can mean the distribution process is not always
optimal:
Issues are often reliant on syndicates to determine which sales
people to send deal terms to and for those sales people to
determine which investors to send to. The result is that some
issues may be missing potentially interested investors. IHS Markit
products allow for everything to be sent to everyone (subject to
marketing and selling restrictions) and let the investor filter for
what they want to see.
These sales people ordinarily distribute deal terms to static
distribution lists. This is a relatively basic mechanism for
ensuring that deal terms are distributed in accordance with
marketing and selling restrictions and the bank's own KYC status.
Again, issues may therefore be unable to reach potential investors
internationally. Electronification of this process through IHS
Markit's IssueLaunch product allows the use of embedded logic to
enable deal terms to reach a wider range of appropriate
investors.
In addition, electronification ensures that the distribution
process can scale as deal volumes in the market continue to
increase.
Q2d.What is your view on the statement that there
is a need to improve competition and level playing field conditions
regarding the access of banks, investors and CSDs to debt
securities?
With regard to the banks, public league tables for European debt
capital markets activity indicate healthy competition among a broad
range of banks, certainly vis-à-vis the US domestic market. This
indicates a strong level of competition among the banks.[4]
Q3a.Do you think that there is a need for further
harmonisation and standardisation in the area of debt securities
issuance?
IHS Markit believes that pre-issuance processes would benefit
from further harmonisation. For example, standardisation of book
states and deal timing would benefit all market participants and
can be provided through technology solutions like IssueNet.
Existing harmonisation efforts, such as the standardisation of
deal terms, could also be expanded. IHS Markit's IssueLaunch
solution already provides an effective way to facilitate this,
having developed a set of mandatory deal terms, in consultation
with banks and investors. This has now been adopted by the market
and is used on 95% of Euro denominated investment grade deals.
In addition, it is worth noting that ICMA and FMSB have both
published best practices which have yet to achieve widespread
adoption.[5] Having already established a standard
issuance workflow across all markets, IssueNet could be used to
provide market participants with an efficient way of implementing
these guidelines.
Q3b.Should the work on
harmonisation/standardisation cover the full transaction chain,
i.e. from pre-issuance to post-trade?
IHS Markit would agree that the full transaction chain should be
considered. However, harmonisation of the pre-issuance process is
further advanced than post-trade so we would recommend a focus on
this area.
Q3c.What are your views regarding the pre-issuance
harmonisation items/topics? Which processes should be looked
at?
Over the course of the last 15 years IHS Markit's IssueNet
product has already established a market-wide process for
bookbuilding and allocation, including standards on terminology,
rounding and order formatting. IHS Markit would welcome the
opportunity to expand this to other areas, something which would
benefit the market. IHS Markit also believe the ECB should learn
from how the market has already worked together to address some of
these topics, rather than restart or duplicate such approaches.
Q3f.Do you see any other efforts that could help
resolve the current market fragmentation?
Market fragmentation is more prevalent in the post-trade
process. In pre-issuance, one platform (IssueNet) is used by all
banks, across all markets to issue bonds from all Issuer types.
Therefore, the ECB should focus on how greater harmonisation can be
brought about in post-trade processes and avoid introducing
fragmentation (whether regional or between asset classes) in
pre-trade processes.
Q4b.Do you think that this service, as described
above, exists today in the EU? If not, should it be offered by a
private entity or a public entity, and why?
Debt capital markets tend to be global and IssueNet provides a
global, not just pan European, service. It already provides a
harmonised issuance platform which all banks active in this market
use (over 180 banks use the service). It allows banks to price
deals sooner, removes risk from the issuance process and has also
implemented many innovations that have benefitted the market (such
as unified bookbuilding and standard deal terms). The increase in
deal volumes in recent years and in particular the increase in deal
sizes (both number of orders and number of banks in the syndicate)
would have made it increasingly difficult for banks to execute
primary deals if IssueNet had not delivered the efficiencies and
standardisation that it has.
Whilst run by a commercial entity, IssueNet has retained the
market utility principles established by ICMA when they created the
platform in 2003 (for example, common pricing for all
participants). As such, it combines positive elements of both
private and public management and has developed a reputation for
innovation and reliability.
Q4c.Is there a need to combine both approaches,
i.e. a Europe-wide harmonisation initiative and the provision of a
European market infrastructure service, and why?
The existence of market infrastructure services makes
harmonisation easier to implement. The IssueNet service has
standardised the bookbuild process and there are numerous examples
of how this has helped harmonise the processes used across all
deals (for example, the establishment of a standard order format).
Equally, IssueLaunch has enabled harmonisation of terms
distribution to investors, with the platform able to ensure
conformity with sales restrictions and enforce the distribution of
required terms at each stage of the deal. IHS Markit would welcome
the opportunity to work with the ECB to establish further
harmonisation through enhancement of the IssueNet and IssueLaunch
platforms.
Q5a.What is your view regarding the inclusion of
the pre-issuance and post-trade functions in a potential EDDI
initiative?
The IssueNet service is a global pre-issuance platform that
services the whole of Europe, with over 180 banks onboard. It
allows banks to price deals sooner, removes risk from the issuance
process and has also implemented many innovations that have
benefitted the market, such as unified bookbuilding and standard
deal terms. As explained in the answer to question 4b, the increase
in deal volumes in recent years and in particular the increase in
deal sizes (both number of orders and number of banks in the
syndicate) would have made it increasingly difficult for banks to
execute primary deals if IssueNet had not delivered the
efficiencies and standardisation that it has.
Building another platform would increase fragmentation of the
market and make it harder to drive harmonisation and align market
practices. It would also cause divergence between European and
global processes which have been established by banks, issuers and
investors over the last 15 years. This is likely to lead to further
inefficiencies in the European market.
Q6a.What are your views on the expected impact of
EDDI on the market in general and on your institution in
particular?
As we have set out above, the IssueNet service is a global
pre-issuance platform that services the whole of Europe, with over
180 banks onboard. It allows banks to price deals sooner, removes
risk from the issuance process and has also implemented many
innovations that have benefitted the industry such as unified
bookbuilding and standard deal terms. The increase in deal volumes
in recent years and in particular the increase in deal sizes (both
number of orders and number of banks in the syndicate) would have
made it increasingly difficult for banks to execute primary deals
if IssueNet had not delivered the efficiencies and standardisation
that it has.
Building another platform would increase fragmentation of the
market and make it harder to drive harmonisation and align market
practices. It would also cause divergence between European and
global processes which have been established by banks, issuers and
investors over the last 15 years. This is likely to lead to further
inefficiencies in the European market.
[1]
We agree with the publication of any related personal data included
in the comments on the internet. We declare that we have obtained
consent for the publication of such personal data from the involved
persons.
Posted 11 July 2019 by David Cook, Executive Director, Regulatory Affairs, IHS Markit
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
