Digital Transactions Inc. Develops Software For The Commercial Paper Market

When corporations first began issuing commercial paper in the mid- 1800s, bankers stored the notes inside their stovepipe hats while calling on potential buyers. The invention of the telephone revolutionized the market by allowing dealers to sell commercial paper while sitting at their desks, but more than a century later notes are still delivered by hand.

Digital Transactions Inc. believes the commercial paper market's anachronistic issuance and placement practices are ripe for innovation. The New York-based software firm was founded last year by systems designer Alf Newlin and computer programmer Behrouz Vafa and Nicholas Mitsos, former vice president and general manager of Telerate Video Inc.

Since then, DTI has developed two automated systems for the commercial paper market -- one for issuing medium-term and variable- rate notes and another for underwriting or placing commercial paper, money market instruments and medium-term notes.

Mitsos says dealers' and agents' need for technology is fueled by exploding volume in the $500 billion global commercial paper market and regulatory decisions making it easier for U.S. banks to become dealers. Since the Glass-Steagall Act was passed in 1933, banks have been limited to acting as agents or issuers.

Large agent banks such as Citibank, Manufacturers Hanover, Chase Manhattan and Chemical Bank have built their own note-issuance systems, which also are used by out-of-town banks to distribute commercial paper in New York City. Control Data Corp. also acts as a service bureau for banks that do not have issuance facilities.

Mitsos says DTI's system is a cost-efficient alternative to paying a service bureau or another bank to issue notes. It is especially attractive for agent banks that want to distribute commercial paper outside their home town, Mitsos says. Because commercial paper is still physically delivered, the market is made up of regional trading centers around the world.

Both Credit Lyonnais and Security Pacific Corp. have installed DTI's note issuance system in their New York office.

DTI's note issuance software runs on a DEC VAX and can be licensed for $150,000. Mitsos says this one-time charge compares favorably to paying between $10 and $25 a note to an agent bank. "We keep communication charges for the system low by doing everything off-line until it's time to issue," he says.

In March, DTI introduced a Money Market Dealing System that runs on stand-alone IBM PC-compatibles. DTI is working on a Unix version for cluster configurations that will use a DEC VAX as a dedicated server. Sun, Apollo or IBM RT applications are also in development.

In addition to the dealing system, DTI offers several tools that allow users to change menus, screens and databases without a programmer.

The Money Market Dealing System includes access to databases of issuer information and rate data. The issuer database contains current credit ratings, outstanding issues, transaction history, commission rate, credit limits and other relevant information.

The rate database tracks:

lending and borrowing rates for Eurodeposits in U.S. dollars and other major currencies;

futures prices for Eurodollars, sterling deposits and French Treasury bills; and

spot and forward rates for major currencies.

Rates can be entered manually or the system can accept real-time market data from services such as Reuters RTDF.

The Money Market Dealing System is available for traders, salespeople and risk managers. The trader's module contains issuer information, analytical tools and position-keeping, including weighted average maturity, weighted average yield and sensitivity to changes in the yield curve. Traders also have access to realized and unrealized P&L on a real-time basis.

After a trader prices and releases an issue, it is disseminated to salespeople. The sales module has access to the same information as the trader module with the exception of the rate the underwriter quoted the issuer and the spread between this and the rate being offered to investors.

If a salesperson enters a potential buyer's requirements concerning maturity or credit rating, DTI's Money Market Dealing System will display offerings that meet these criteria.

The risk manager module monitors traders' positions by currency, as well as consolidated P&L for cash and futures positions. It also generates recommendations on the optimal way to strip-hedge the portfolio with financial futures.

From the trader's point of view, the most interesting features of DTI's dealing system are its analytical tools for pricing new issues and creating synthetic instruments. The system examines issuance rates and current futures prices and recommends the least-cost method to raise funds. For instance, a corporation that wants to borrow money for six months may cut its financing costs by breaking the issue into two pieces and shorting futures to lock in a lower rate.

For issuers that want to swap proceeds or payments into another currency, the system automatically calculates the effective rate using spot and forward rates.

The Money Market Dealing System is designed to make life easy for traders and salespeople through menu-driven screens and default information displays that can be manually overridden. The system eliminates paperwork by automatically printing tickets.

DTI offers banks an integrated solution by providing an interface between the dealing and note issuance systems so a bank's back-office can print notes immediately after each trade is executed.