Three years after DirectBooks, US bond market still phoning it in
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[October 30, 2023] By
Shankar Ramakrishnan
(Reuters) - Wall Street's three-year effort to modernize the way
billions of dollars of new corporate bonds are sold via phone, chat
message or email, is making slow progress.
Broad adoption of the fintech communications platform backed by big
banks called DirectBooks has so far been stymied by worries about the
cost of maintaining the technology and other tech hurdles. There is also
some concern about job losses and loss of market access by smaller
banks.
Changing an organization's behavior is difficult and takes sustained
effort, said DirectBooks CEO Rich Kerschner. "It has taken time and it
probably will take more time before the full benefits of this system are
realized."
"But, we have great momentum and have made material improvements to the
primary markets workflow," he added.
DirectBooks, formed by nine of the largest global banks went online in
November 2020 to overhaul the opaque practice of selling new
investment-grade rated bonds - a process that can be fraught with
errors. Interest in automation grew as desks struggled with corporate
bond volumes that touched a record $1.78 trillion in 2020.
Fintech solutions like DirectBooks may not be a silver bullet to ease
the complexity involved in how new U.S. investment-grade bonds with
varied maturities are structured, priced and allocated. But it is
expected to inject transparency in the administrative process of
syndicating new bonds and reduce the time it takes, lowering costs for
fixed income players.
PHONE, CHAT, EMAIL PREFERRED
There is increased interest for more sophisticated technology in the
sales and trading of bonds, but relying on chats versus automated,
documented processes "still prevails as the preferred way to get trades
done," said Spencer Lee, head of fixed income markets at global
financial technology company TS Imagine.
Sales teams at banks still reach out multiple times in a day through
phones, Bloomberg chat messages or email to investors for their orders
and amendments on every new bond offering throughout the course of a
deal, said four syndicate banking sources.
Orders are then logged by salespeople into their internal order portals
or a system called IssueBook.
An average four to five underwriters on any bond offering then
communicate through IssueNet which aggregates and collates the orders
secured from investors, said these sources.
In contrast, DirectBooks, when fully operational, aims to enable
investors to communicate directly to underwriters through its system,
making the process more efficient for investors and banks.
The technology meets "the growing demands of a sophisticated investor
base that is looking to cut down the amount of time it spends on the
process of buying a single bond, and rather focus on other complexities
that comes with bond investing," said Daniel Botoff, global head of DCM
syndicate at RBC Capital Markets.
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The Wall Street sign is pictured at the New York Stock exchange
(NYSE) in the Manhattan borough of New York City, New York, U.S.,
March 9, 2020. REUTERS/Carlo Allegri
UPHILL TASK?
Since going online, 25 banks have joined the original 9 founders -
Bank of America, Barclays, BNP Paribas, Citi, Deutsche Bank, Goldman
Sachs, JPMorgan, Morgan Stanley, and Wells Fargo - on DirectBooks.
Over 400 institutional buy-side firms have also signed up.
Three years into it, only a small proportion of orders and
allocation messages for a new bond were going through DirectBooks. A
vast majority of such communication is still through legacy systems
that require manual involvement, said four syndicate banking
sources.
Though DirectBooks has full functionality, widespread adoption is
taking time because of structural hurdles - banks had different
levels of tech spend, appetite for risk and speed of change,
sophistication, prioritization, and tech dependencies, said
Kerschner.
The buy-side is even more diverse in terms of tech sophistication
and appetite for process change, he added.
Automation may also provide an excuse to some banks to cut their
sales staff and for smaller banks it could diminish their role in
the primary bond sale process. This made some resistant to change,
said two of the four syndicate sources.
WAY FORWARD
For Chris Sztam, head of business development at S&P Global Market
Intelligence, which operates one of the current systems,
collaboration between fintech vendors was the way forward.
"Given the incentives of one network versus another, we view
collaboration between vendors aiming to create a more connected
ecosystem as something that market participants are asking for," he
said.
DirectBooks is now working with BlackRock's Aladdin and
StateStreet’s Charles River Development - two of the largest
providers of order management systems (OMS) to other investors - to
adopt new enhanced versions of application programming interfaces
(API).
The API would enable communication, exchange of data and
functionality between these systems easily and securely.
Once in place, hundreds of investors using OMS platforms could send
their order messages and receive allocation messages through
DirectBooks, said Kerschner.
"Full integration will take time, not for lack of effort from the
underwriters, as it needs to match processes from disparate systems
within and among numerous market participants and ensure compliance
and stability on the one single platform from very different markets
and jurisdictions," said RBC's Botoff.
(Reporting by Shankar Ramakrishnan; Editing by Anna Driver)
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