An abundance of product offerings positioning themselves to capitalise on the digitisation of primary bond workflows has led market participants – including German public sector issuer KfW – to conclude that consolidation is essential for the nascent sector to thrive.
“At this stage of development it does make sense to have many different initiatives in place,” said Joerg Graupner, KfW's vice-president for funding. “However, I think that eventually one or two [platforms] will prevail.”
Digital bond platforms include Goldman Sachs’ Digital Assets Platform, known as GS DAP, HSBC’s Orion, Clearstream’s D7, Societe Generale’s Forge, and, among the most recent entrants, Credit Agricole and SEB’s "so|bond". Together, there are 33 digital platform providers offering to facilitate the sale of investment-grade bonds in the primary market, according to the International Capital Market Association's technology directory.
Mathew McDermott, global head of digital assets at Goldman, acknowledged the likelihood that only a handful of providers will survive. “My personal view is that, over time … people will coalesce around a small number [of platforms],” he said.
Proponents of digitisation via the blockchain using distributed ledger technology say such platforms can free up billions of dollars of capital by curtailing the substantial operational risk inherent in the new issue markets' reliance on complicated and manual processes involving spreadsheets, instant messenger chats, emails and phone calls. Sceptics say the supposed benefits are largely theoretical – a clever solution seeking a problem.
Either way, the process of winnowing out the also-rans will be complicated and unpredictable – and demanding for those in the middle of the action. “It is challenging for us to follow all these approaches. We have only limited capacity, which needs to be spent wisely,” said Sven Wabbels, KfW’s head of new issues. “No one knows who in the end will be the winners in this digital platform market."
Not surprisingly, the operators are keen to get KfW onboard. “They all want to pull us, as a big issuer, onto their platform,” said Wabbels. “It’s not exclusive. It’s more a polite [way of] asking if we would be open to do a first test deal.”
What do you want?
In the end, the winners will be those who best identify what users of such platforms want. "Which opportunity or which problem is the user most interested in addressing first? Or which combination of issues, problems and/or opportunities do they want to address and in what sequence or side by side?" asked Charlie Berman, CEO and co-founder of fintech company agora, which is developing data solutions for bond executions via DLT.
For Robert Koller, CEO of NowCM, a primary debt fintech firm, remembering who calls the shots is key. “We keep forgetting that everybody other than the issuer and investor are service providers in this value chain,” he said. “The ones that really call the shots are the principals: the issuer and investor. And [platforms need to provide] a solution that fits both of them and brings improvements.”
Some projects have already experienced the consequences of failing to capture client commitment. In January, NowCM took control of the assets and intellectual property of Nivaura, which was developing a platform called DCM Flow to automate new issuance processes. Several sources said it was Nivaura's biggest client and partial owner London Stock Exchange Group (which also owns IFR) that effectively pulled the plug when Nivaura's software initially did not live up to expectations.
Even as the market senses that consolidation is inevitable, talk at this point is mostly about collaboration rather than competition.
When capital raising starts in earnest, the platforms are going to have to work with and alongside each other because efficiency comes with scale. Platforms and services that do not work together – are not interoperable – will not be able to make digital bonds the practical alternative that proponents say they can be.
“You’re not going to have six or seven digital asset platforms that don’t talk to each other because it defeats the whole purpose of people using this technology,” McDermott said. He expects “full, seamless interoperability” between the platforms that survive.
Broad use of the same smart contract programming language, called Daml, between the platforms means there should be natural interoperability between different ventures, McDermott said. He added that Goldman both does not mind issuing on another platform and does not want GS DAP to be only used for Goldman-led deals.
Whether banks become comfortable using a competitor’s platform, however, will depend on how much the platform changes bank-client relationships, according to Allen & Overy partner Daniel Fletcher.
“If you are talking about an intermediated model where the bank will continue to do the same things and have the same relationships with the same clients as they currently do, I think it is easier for them to support issuance on other banks’ platforms,” he said. But if the platform entails passing a relationship to the platform operator or giving that operator insight into a competitor's relationships, those platforms are unlikely to get many takers.
Aware of those risks, banks are building platforms with appropriate restrictions in place. Asif Sherani, HSBC’s head of DCM syndicate for EMEA, said: “We don’t get any special treatment or information [from HSBC’s digital bond platform Orion] … We have strict information controls and strict Chinese walls and a legally and regulatory strict separation of duty in many instances. [That] does sometimes complicate the architecture of what we’re trying to do and did lead to a longer build time. But [it] is there for obvious reasons.”
Quite when the brave new world promised by digital bond evangelists arrives is another question. Early predictions were certainly too optimistic.
"I think you’ll see increased cadence in the next few years," McDermott said. But when it comes to digital bonds becoming more mainstream, "you’re a good two to three years away".