Two rival bond issuance platforms are vying for the hearts of the buy side.

Ipreo already has a strong following in Europe and was acquired by financial technology heavyweight IHS Markit in August 2018. But it is facing competition from a consortium of banks launching an alternative service called DirectBooks, aimed initially at the US market.

The goal of both platforms is to automate bond issuance, by allowing investors to view deals, submit orders and receive allocations electronically. But the contest has divided the market.

Some regard DirectBooks as a thinly veiled attempt by banks to tighten their grip on the primary market. “For the last 10 years, you’ve had no choice if you were a fixed income investor but to buy these things. It was the only place to get liquidity, so everyone was basically put against the wall by the issuance process, which is why the dealers are loath to surrender any aspect of control of it,” says an analyst at a capital markets consulting firm.

Those backing DirectBooks firmly reject any suggestion their motives are suspect. “I don’t think I’d view it as the banks trying to protect something they already have,” says a syndicate head at one of the consortium banks. “I view it as the banks coming together in a collaborative manner to enable substantial efficiencies, in particular for our investing clients, but also for our own businesses as well as our issuing clients.”

Richard Kerschner, chief executive of DirectBooks, says the platform was created to fill a gap in the market. “Our approach is that there are pain points that have not been met by the current providers—otherwise there would have been no demand for us,” he says. “Because the demand came from the industry, that’s a pretty big validation that something else needs to happen here.”

But banks admit there are other considerations, too. They are wary of entrusting sensitive, proprietary data to third parties, and are worried about fees being hiked if a single platform becomes dominant. “We want to have complete control of the data that we and our clients own,” says the syndicate head. “And we do not want to expose ourselves from a risk management perspective to a product that could end up having meaningful price risk for us or our clients in the future.”

Buy-side firms are caught in the middle and watching all this play out with mixed feelings. Far from promoting automation, some say the emergence of competing platforms may be stalling it. “Some clients don’t want to move to either the European or the US solutions, as they don’t want to impair their relationships with the region that they don’t go with,” says a sales head at one European dealer. “They’d rather keep it as a manual process to keep everybody happy than automate and impair one side of the relationship.”

Out of the Stone Age

For investment banks that handle debt sales, business is booming. In the US, annual corporate bond issuance has averaged $2.4 trillion between 2015 and 2019, according to data from Dealogic. Already this year, issuance has broken records as companies turned to cheap debt to shore up their balance sheets in the face of ongoing Covid-19 disruptions. More debt was raised in each of the first two quarters than in any other quarter since at least 2010.

In Europe, $866 billion of new debt was issued in the second quarter—the most in any quarter since 2012.

That translates to big profits for banks. Annual global debt capital markets (DCM) revenues hit at least a two-decade high in 2017, with 2019 close behind, according to Dealogic.

But the DCM business has been slow to adopt new technology, and the processes underpinning it remain highly manual and inefficient. “If you look at it now, it’s many, many silos. At investment banks, you have probably six, seven, eight departments who are dealing with a bond issuance,” says Robert Koller, executive chairman at the European Primary Placement Facility, which runs an electronic platform of European issuance.

The process of issuing debt involves a large number of participants, including corporate borrowers, investment banks, investors and law firms. Broadly, issuers negotiate the bond terms and covenants with banks. Banks broadcast the details to investors. Investors assess the deals and submit orders. Finally, the banks determine pricing, divvy up the issuance among investors, and then execute and settle the trades. Most of this is currently done by telephone, email and electronic chats.

“We have a system that functions with an enormous amount of manual input and constant reconciliation. Interconnectivity between stakeholders is driven by phone calls, emails, emails with attachments, PDFs, Word documents, Excel spreadsheets—very old tech,” says Charlie Berman, who spent more than two decades on sell-side DCM desks. He is now chief executive and co-founder of financial technology firm Agora, which is trying to automate DCM workflows with distributed ledger technology.

The sell side has made some progress towards automation. Pre-issuance documentation is being digitised and the syndicate book-building process—which involves compiling and reconciling the orders submitted by investors to determine the final price—is now largely electronic.

Interconnectivity between stakeholders is driven by phone calls, emails, emails with attachments, PDFs, Word documents, Excel spreadsheets – very old tech

Charlie Berman, Agora

“We have evolved from that two-to-three-day process on some of these book buildings 10 to 15 years ago to a process that only takes three hours. The volume we have seen over the last couple of years is definitely thanks to the fact that things have evolved,” says Kris Devos, global head of bond syndicate debt capital markets at ING.

Armin Peter, global head of debt capital markets syndicate at UBS, agrees banks are moving in the right direction. “Much has already changed and more will change going forward,” he says. “We are not necessarily in the Stone Age anymore, but there is much more to come.”

Things look very different from the buy side. Information is still being exchanged via email and Bloomberg chats, often in a haphazard and disorganised manner that investors find difficult to handle.

“There is definite frustration on the buy side with the lack of progress and more importantly, the non-standard way that’s happening. If I want to make the processing of a new issue order better, I basically have to dance to the tune of whoever’s offering it,” says Carl James, global head of fixed income trading at Pictet Asset Management.

Technology development will also allow small and medium players to play a much more meaningful role in the primary market deals

Gianluca Minieri, Amundi Intermediation

Keenan Choy, a member of the fixed income syndicate team at Wellington Management, says communicating and managing the firm’s orders over dozens of open chats is a pain.

“Delivery of documentation, co-ordinating marketing exercises, communication of orders and getting deal updates are still very cumbersome,” he says. “I can be talking to as many as 10 people in sales and syndicate at different banks, and that’s just for one deal.”

Many on the buy side are impatient to see the manual, relationship-driven process overhauled.

“Technology development will benefit us as a big player because it will streamline the entire process,” says Gianluca Minieri, head of Amundi Intermediation for the UK and Ireland. “It will make it easier for us to manage multiple primary deals, especially those deals that involve multiple syndicate desks, but it will also allow small and medium players to play a much more meaningful role in the primary market deals.”

Cut out of the deal?

One of the firms at the forefront of recent technological changes in the primary debt markets is IHS’s Ipreo. Its suite of tools for banks includes book-building software and a system called IssueNet that can merge various order books at 190 participating banks, allowing them to reconcile investor requests and monitor demand on syndicated deals.

IHS also has tools for the buy side, including a dashboard with new issuance details and a system to aggregate interest across a firm’s portfolio managers.

Connecting everything is a tool IHS calls Investor Access, which facilitates communication between banks and investors. Investors can use it to place orders with book-runners in a structured format. The platform can be accessed directly from buy-side order management systems, such as Charles River Development.

Currently, 55 banks use Investor Access to share deal terms, conditions and other relevant information with the buy side. Ted Douglas of IHS Markit’s global markets group, says 44 of them do more with the platform, using it “to actually interact by producing or establishing electronic [workflows]”.

IHS’s platform has plenty of fans on the sell side, especially among European banks. “Investor Access has allowed investors to put the order into one place and then carry on their dialogue with their sales representatives at individual firms in a much deeper fashion,” says Hugh Carter, head of credit and fixed income syndicate and deputy head of DCM bonds syndicate at Commerzbank, one of the platform’s early adopters.

IHS says more than 2,100 deals passed through Investor Access in 2019, including 97% of euro-denominated issuance. According to Dealogic, European issuers raised $2.1 trillion across 5,652 deals in 2019.

But sources say Investor Access has seen slower take-up in the US market. IHS Markit declined to provide details of its user base there. And it will soon face competition from DirectBooks, which will launch in the fourth quarter for US investment-grade deals.

The platform will allow banks and investors to exchange deal information, order requests and final allocations electronically. It is backed by nine major banks, including Citi, Deutsche Bank, Goldman Sachs and JP Morgan.

Some bank sources make no bones about their desire to cut IHS out of the deal. “Why would we outsource something like this, which is fundamental to our business, when we can do it ourselves?” asks a syndicate head at a second bank that is backing DirectBooks.

A hill to climb

The question is whether the primary debt markets are large and diverse enough to accommodate a number of platforms. Alongside IHS’s Ipreo and DirectBooks, Bloomberg has also developed tools for banks and investors to share, monitor and analyse new issue deals. Liquidnet also entered the fray in August, announcing a product intended to streamline electronic information exchanges between the buy and sell sides.

DirectBooks’ Kerschner says there is room in the market for multiple platforms. “We weren’t created to be a Bloomberg killer or an Ipreo killer,” he says.

For now, DirectBooks is targeting only a piece of the issuance process and is not competing with other parts of IHS’s business, such as providing book-building software to banks.

IHS’s Douglas sees the firm’s products as interoperable to a certain extent with other products—for instance, IssueNet can facilitate the issuance process even if buy-to-sell-side communications happen outside IHS Markit platforms. “We’re open, we’re interoperable,” he says. “We allow people to come in and connect to us, and the community really has enjoyed the benefits that they get from that.”

We could see a European solution and potentially a different US solution. That could be one way forward

Carl James, Pictet Asset Management

Still, the backing from banks puts DirectBooks in a strong position. “There’s clearly an advantage of having a large number of banks on the platform who account for a significant amount of the new issue product,” says a capital markets head at a third bank in the consortium. “One of the real benefits of the platform is that you’ll be able to have a significant chunk of the new issue volume coming through that platform.”

That leaves Investor Access and others with a big hill to climb, at least in the US. “Whomever brings a solution ultimately has to get enough banks on board, and unless they get that small group of dominant issuing banks on board, it just won't go anywhere. We could see a European solution and potentially a different US solution. That could be one way forward,” says Pictet’s James.

Others worry that if the platforms split the market, it could inhibit it from converging on a standard. “For us, the risk is as usual ending up with too much fragmentation. I'm not sure whether it will be better to have an industry utility or a product that is the outcome of a number of competing platforms,” says Minieri.

“We hope that eventually we will not be forced to connect to another 20 platforms,” he adds. “We like to think that in the future there will be one single industry utility where you can develop a single connectivity.”

UBS’s Peter anticipates some kind of middle ground between a fragmented market where participants have to pay fees to multiple vendors and a consolidated one where risk is overly concentrated.

“I do think going forward, we will see much more plug and play and the ability of multiple vendor providers and service providers to work more or less together, and the banks can pick and choose the technical environment they work with,” he says.