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As capital markets innovators, one area where we've spent
considerable time recently has been new issuance. At first glance,
improving this part of the market seemed like "no brainer" - no one
seemed particularly happy with the archaic methods of communicating
deal terms and placing orders, and all parties seemed to have
something to gain from thoughtful innovation. To a large extent,
this was true and was proven by strong adoption of our Investor
Access platform. In just over two years, 42 banks and over 300
investors have come on board, using the platform to analyse deals
and place orders on over 90% of investment grade corporate bond
issues in the EUR and GBP markets. As far as a product launch goes,
it was a success, and to continue the analogy, it achieved escape
velocity and a stable orbit. We're not done yet, but we learned a
few lessons along the way, and this seems like a good point to
reflect on what we learned.
One of the reasons the market accepted a new platform in a
highly competitive space is because our thinking and design were
flexible. It would have been easier to build a closed system of
proprietary applications - but the reality is that syndicate banks
use a variety of technologies, from commercial book-building
software (that we'll happily provide) to sophisticated home-grown
DCM and syndication systems that they maintain themselves. From day
one, it was clear that Investor Access must integrate with the
technologies that each bank uses, not only to accelerate adoption,
but because it was the right long-term approach for the broader
market - a closed ecosystem would likely reduce the overall
community we were trying to serve.
On the buy side there is even more technical diversity. The
majority of buy-side OMS systems are outsourced, with multiple
differences between the capabilities of various solutions, and when
you add internal systems to the mix, it makes the buy-side equation
more complex than what the sell side faces. Here, again,
flexibility was key. We provide investors with several flavours of
the same core solution, varying mostly by how and where we
integrate. And the client determines this, based on their workflow
needs.
As a result, two things have happened: more participants are
able to join this new platform in a way that is sympathetic to
their existing workflows and technologies, and traditional methods
can co-exist with the improved workflows, minimising disruption in
the capital raising process.
Where do you go from here?
As we enter new markets, we've been asked to comment on our
thinking regarding competition in this space - specifically, what
would happen if competitors to this platform emerged? Wouldn't an
incumbent with a widely adopted platform be inclined to protect it
by walling-off the ecosystem we created? Our answer is no. It
simply isn't the best thing for the market, or for our
business.
What does the end state of this market look like? The real
answer here is that this must be decided by the market itself - and
markets have buyers, sellers, and suppliers. In the bond market
that means investors, syndicate banks, and issuers. As a solution
provider, we win by being in-tune with the market, anticipating and
meeting its needs.
The logic that we employed at the outset of this process is that
all current participants would benefit from increased efficiency
and a reduction in operational risk in the new issue process.
Creating barriers (intentionally or inadvertently) that would
exclude some of these participants would really be to the detriment
of advancing the progress of the broader market. So, we are
committed to being open. But what does that mean?
Guiding thoughts
All the ideas we are about to discuss are applicable not only to
primary markets but also apply to the broader topics of technical
innovation and competition. These are some of the key principles
that guide us:
"Don't force the user to make a technology bet or employ
multiple technologies"- a hallmark of good integration between
different infrastructures is that the end user can benefit from the
network and its core functions regardless of the technological
decision they make individually.
"Anyone on the network should be able to access anyone else,
assuming they want to be contacted"- so, an investor who has a
relationship with a bank should be able to get to that bank,
regardless of intervening infrastructure (and vice versa).
"Base integration on standards and a sound design centred on
performance, security and scale"- in other words, build your
platform from the start as if you might integrate someday - even if
it's not currently clear who that might be with.
Let's take all of that and apply it to something we do in our
everyday lives: when you send a text message to a friend, are you
concerned with the brand of phone they have, or the mobile network
they are on? No. If you simply know that person's contact
information, your message flows through the network and almost
instantly appears on your friend's device. You might prefer the
features of the texting application on your brand of phone, or the
terms of the messaging plan of your service provider - and you can
have that. You no longer worry about compatibility, because the
vendors in between have figured it out for you, and as a result,
not only do you get what you want at an affordable price, the
ubiquity of the solution has led to an increase in message volume
that few would have imagined. This thereby benefits the providers
in between, and we all benefit from a new and more efficient way of
communicating. If texting your friend required you to buy a
particular pricey new phone, or carry two devices, subscribe to
multiple networks, or simply even know which network your friend is
a subscriber to, we'd be in a very different place than we are
today.
To bring this back to the capital markets, we expect that now
that the new issuance process is benefiting from new technologies
and workflows, additional solutions are likely to emerge. That is
healthy and predictable - it is also likely to bring focus to other
specialised asset types and workflows that could benefit from
innovation. There is no reason why there must (or should) be a
single solution, provided that new solutions serve the needs of the
market and do not create additional hurdles for participation. The
idea that multiple services could communicate in a secure and
standardised way is truly exciting.
What does good look like?
I would argue that the principles outlined above could be used
as a quick litmus test to determine if a solution will benefit the
market or, is simply using technology to exert influence on how
deals get done.
Remember, investors, syndicate banks and issuers are all vital
to the new issue market and the needs of each should be considered
and balanced as this market evolves.
It is an exciting time in the primary markets: new technologies
are being applied, efficiencies are being realised, and risk is
being reduced. To continue the process and realise even more
benefits in the future, all participants must take an active role
in making sure that the technological landscape that is taking
shape is the right thing for the market as a whole.
To read the original version of this article, visit
here.
Posted 2 July 2019 by Herb Werth, Managing Director, 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.
