Technology has made a dramatic impact in finance, yet the primary bond markets have been less affected. Its adoption in DCM will be piecemeal but it could become influential in some areas. By Nick Herbert.
According to an OECD report from 2021, Artificial Intelligence, Machine Learning and Big Data in Finance, technology is being increasingly deployed in asset management, algorithmic trading, credit underwriting or blockchain-based finance.
Its deployment has been enabled by the abundance of available data and affordable computing capacity. Technology drives competitive advantages by improving efficiency through cost reduction and productivity enhancement, it says, as well as by enhancing the quality of services and products.
While technology is realising its potential in many parts of financial service, operations in the debt capital markets have remained largely unchanged for decades.
“There has been some change; there's no doubt about it,” said Jens Hellerup, head of funding and investor relations at the Nordic Investment Bank. “But in the lead-up to launching a deal and in executing it, at least from an issuer's point of view, things are not that different. But perhaps we’re on the precipice of more widescale adoption.”
Fintech start-ups are queueing up to relieve some of the pain points in DCM and achieve those long-sought efficiencies, but technology is no panacea.
“There are different areas where technology can help,” said Hellerup. “But there are also places where it's maybe too early for technology to make an impact or, indeed, where it’s questionable if there needs to be a major change at all.”
Parts of the bond markets are adapting to technology, however, with secondary trading, for example, having developed into a largely automated exercise. There is nothing to suggest technology could not be employed in primary markets to achieve similarly effective advantages.
“You can draw some parallels to secondary,” said Stephan Gimpel, co-founder and CEO at Bots – Bond Origination Technologies.
“Trading has changed over time from high-touch voice trading by appointment, usually supported by regular email runs, to electronic platforms that initially just distributed quotes and are now increasingly turning into full execution platforms that handle the entire data and workflow piece.”
We are at the very beginning of finding those opportunities in the primary markets.
“The question is where the productivity gains can be made,” said Olivier Vion, head of SSA capital markets, Societe Generale. “There’s lots of room to be more efficient. That could be on the legal side or the sales side, and that is perhaps where the interaction with software could be best adopted.”
Technology has improved a bank’s ability to generate ideas and to service issuers in real time, a notoriously heavy manual process. There are also improvements in building order books and in the allocation process, but complete automation remains elusive.
“Bookbuilding is a place where there has been development,” said Hellerup. “You’ve gone from having to consolidate different spreadsheets from each top-line bank to using a shared book, and it's much easier to get an overview of the size of the book. The process is much easier and quicker.”
Documentation is another area where technology is tipped to increase efficiencies, as “to a large extent, the process is still very much based on emails”, said Hellerup.
“An automated system where the pricing supplement or term-sheet comes straight out of a machine would help a great deal,” he said.
Digitising an issuer's expanding clerical obligations would provide benefits to both the borrower and, in the case of impact reporting, to supporting the broader objective of financing the transition to a net-zero and just economy.
“Impact reporting is going to be much more important in the future, as investors need to look not just at risk and return but impact as well,” said Hellerup. “That is an area that could be better streamlined – getting your impact out to investors in the form they need – and technology can help.”
Bond markets are uniquely placed in the transition effort, since any labelled bond linked to sustainable activities needs to have its impact measured and verified.
“When we talk about ESG, we focus specifically on impact, as impact is what essentially quantifies the transition,” said Cecilia Repinski, founder and CEO of Green Assets Wallet, an impact tech company with a mission to redirect capital flows towards net zero economies.
“Many things are currently holding back the market from scaling up, one of them being the lack of trust in data,” she said.
Investors need to show verifiable impact from their investments alongside their monetary returns. They also need to analyse the performance of their portfolios and compare impact across different investments.
“There is clearly a bottleneck. We are just one piece of the puzzle to help clear this bottleneck,” said Repinski. “We use digital solutions to make it easy, transparent and cost-effective for investors to evaluate impact and make informed allocation choices, and for issuers to demonstrate the impact of their operations and so attract investors.”
The lack of harmonisation in the market, however, is what is holding back the full and lasting potential of technology on impact reporting.
“We are aligned with all the standardisation initiatives,” said Repinski. “But, even when issuers follow the guidelines and assign their impact to specified categories, they use different methodologies and boundaries. Despite their good intentions, data is a long way from being harmonised, unfortunately.”
The process still requires human input to collect, sort and lastly analyse the complex data.
“If it were possible to collect data using machine learning, we would be the first ones to do it. But that is not where we are, at least not for the data sets issuers report, which are often complex and not comparable,” said Repinski.
Perhaps surprisingly for a tech company, “our team of impact data analysts is the part of the business that is growing the fastest. There is just no shortcut here”, she said.
Analysts need to understand and decipher exactly what issuers mean when they are reporting. Some might report on total product impact even though they may not have financed all the projects, some on total debt portfolio, and some on what is prorated to a specific bond. And then there are different interpretations on definitions and time periods.
“It is impossible to use machine learning or artificial intelligence for this; there is no algorithm in the world that can get this right,” said Repinski. “You really need to have experts that can understand it.”
A better and clearer data structure is required before technology can unleash the promise of improved impact reporting and play its part in mobilising private capital towards financing the transition.
To this end, Green Assets Wallet is developing a Wikipedia of definitions on its platform to help issuers and investors to better understand how to report and analyse impact data.
“We feel that it is our responsibility – and in everyone's interest – to have a common understanding of what we mean with these terms,” said Repinski. “The terminology is there but the interpretations of it are so different.”
If it ain’t broke...
A major obstacle facing greater use of technology in the primary bond market is its inherent effectiveness. Time and again, even through crises, the debt capital markets have proved their robustness – a feature recently apparent following the outbreak of Covid-19 in early 2020, when bond markets, after a very brief hiatus, quickly reopened for business, albeit at higher costs for issuers.
SSAs were first in line to raise the huge volumes of debt needed to address the health and economic challenges presented by the spreading virus and subsequent lockdowns.
“The bond market is very well structured and continues to prove its resilience in the face of crises,” said Vion. “In fact, it’s probably one segment of the market that never actually stops. Quite the opposite, it is probably the one part of the market able to fill funding gaps when there is a problem.”
Nevertheless, during Covid, operational changes were forced on the market as remote working became the norm. Interaction between investors, bankers and issuers – and between co-workers within institutions –became virtual.
“This is where we've seen some of the biggest changes,” said Vion. “Instead of meeting directly with people and with investors, we've been very nimble in organising as many meetings – if not more – via video.”
Video conferencing has become a widely accepted communication tool, particularly at a time when travel restrictions are subject to change, but there is obviously appetite for people to socialise and meet in person.
“You can't really replace meeting in person, but there will be a mix of physical and virtual in the future,” said Vion. “You know, people have taken a real liking to these video calls.”
So, the conference schedule is filling up again, investor roadshows are back on the agenda and banks are doing their rounds, pitching for business, just as before. It appears that, until the next crisis, the number of virtual meetings will be scaled back.
Parts of the market will undoubtedly benefit from the adoption of cost and time-saving technology, while experiments in digital bonds could prove a major disrupter, but there is no rush. The debt capital markets already function well enough as they are.
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