Pushing the development of digital issuance in Germany, KfW has printed the first bond that uses the country’s new law allowing for totally digital paper, the issuer said.
Like most digital bonds up to this point, the print was a small experimental issue. Deutsche Bank was the sole arranger of the €20m 2.381% two-year transaction. The trade was not marketed publicly.
"As one of the world's largest capital market issuers, innovation in the area of our refinancing is important to us in order to improve efficiency and reduce operating risks and transaction costs," said Melanie Kehr, a member of KfW’s executive board group, explaining why the German agency had decided to explore the technology.
The bond makes use of a new piece of legislation enabling digital bonds, as more jurisdictions gear up to allow the issuance of fixed income products without a physical manifestation. Germany passed a law last year, titled the Electronic Securities Act, that allows for paperless digital issuance. The German development bank's deal uses that law for the first time, the issuer said.
The next step
Looking to further its efforts in the new product, KfW said it is “examining how further elements of the issuance process can be digitised” following the transaction. It emphasised that liquidity, a high priority for investors this year in response to the rapidly changing markets, “should always be taken into account”.
Normen Gunther, KfW's senior manager of new issues, told IFR via a spokesperson that, “The liquidity of our bonds is independent from this post trade process. The [new digital] bonds can be traded in the market as usual.”
Gunther could not give a timeline for when the market could expect the widespread adoption of digital products, instead saying that, “Digitalisation is a process."
“Once the setup is clear and everybody understands what is needed for electronic issuance," Gunther said, "there shouldn’t be barriers to adoption.”
Digital prints via Clearstream’s platform for digital products, dubbed D7, are meant to shorten the issuance process to minutes, a release for the new issue said, saving time, effort and processing costs. The inclusion of “decentral capabilities” is the next step for the platform, the release read, as well as offering the service in other jurisdictions such as Luxembourg.
The platform is designed to negate the up front investment in technology, which a Clearstream spokesperson called "One of the main barriers to adoption of digital securities".
"D7’s strong focus is the interoperability between existing and new systems," they said. "It supports market participants in leveraging benefits of digital issuance without having to develop an entirely new IT system."
KfW’s deal is the latest in a series of experiments in digital bonds, which promise to make execution faster, cheaper and more liquid. The features the product's proponents point to include automation and improved transparency. Previously, the German agency simulated a commercial paper offering using distributed ledger technology. In 2017, it priced a €100,000 five-day CP issue via Commerzbank, which sold it to MEAG. It settled without a paying agent or a clearing system.
The European Investment Bank has also been developing its own digital bonds, printing its second digital euro bond at the start of December. Goldman Sachs, Santander and Societe Generale priced the €100m two-year. That transaction used a private blockchain ledger on a platform developed by Goldman Sachs. Like KfW’s deal, EIB’s latest digital bond used a new law, but in Luxembourg.
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