Primary market practices are under pressure to change, however the urgency and direction given for adaptation are often skewed by specific market participant groups.
The DESK spoke with Katie Kelly and Miriam Patterson both senior directors, Market Practice & Regulatory Policy, and Ruari Ewing, senior director on EMEA / Asian syndicated new bond issuance market practice and regulatory policy at the International Capital Markets Association (ICMA), to understand where change may come from, what form it may take, and who it could truly benefit, based on ICMA’s engagement across market participants.
The DESK: How well do you see primary market bond issuance working today, based on industry feedback?
Ruari Ewing: From the issuer side, it works. The focus for them tends to be more on the macro side, rather than around process, partly because it is run by the banks for them.
Katie Kelly: I agree. We are looking on the ICMA side at
innovation in primary markets. In Q2 we hope to present some of the evidence-based work that we’ve been conducting here. Generally, the Euro Medium Term Note (EMTN) programme was there to serve a particular need, which was to speed up issuance, to make things more efficient, to make things cheaper, and to be able to take advantage of windows of issuance, etc. Generally, that works really well and it can be hard to predict where innovation may help. We hear issuers are generally happy with the process. There are some difficulties, for example in trying to identify classifications of investors in the order book, trying to get the ISIN number or trying to get the documentation on the investor side, were incremental improvements could be made.
RE: There is a difference between those who occasionally engage with new issues, and those who are systematic participants – whether on the issuer or the investor side. Most issuers hardly ever issue, and a tiny minority of issuers do so frequently, and are staffed accordingly. Across that new issue spectrum, and from a market-wide perspective the process will not be tailored just for those who use it every day.
TD: How is that reflected in potential changes to the process?
RE: There’s an efficiency and cost angle there. If there are many issuers who only use the process once every five years, and you’re making it more convenient for those use it every day, that could be making it much harder and heavier on those who use it every five years, which is the overwhelming number of issuers. That tiny minority of investors who have dedicated primary desks care much more about process technicalities whereas others tend to react more based on the outcome because they don’t engage as much on the process itself.
TD: We have seen electronification deliver real efficiency and cost benefits in secondary markets, do you have a sense of what potential benefits might be to the different constituencies in primary?
KK: The supranational, sovereign and agency (SSA) bond community and the financial institutions who all issue much more frequently, will be the pioneers in any kind of digitalisation or electronification. When you’re looking at corporate issuers and some banks such as Tier 2 and smaller, they will remain followers of innovation or change until it becomes mainstream and necessary. Anything that requires change is going to require money and resource to get it started. Up to that point, the corporates will not be the pioneers. SSA will set the curve and it will take a longer time to get those corporates interested.
RE: We do see the digitalisation of marketing, which historically had been via face-to-face roadshows, and which is very time intensive for less frequent issuers and in some cases may be unnecessary. Given environmental considerations as well as time and effort considerations, and their successful virtual delivery under COVID we do see that change now well under way.
Miriam Patterson: In addition to distributed ledger technology and digitalisation of bonds, there has been progress on the documentation side of issuing bonds. The international central securities depositaries (ICSDs) launched an electronic global note initiative in 2024, and that’s all about the documentation behind the global note, which has been paper based for decades. It has had limited take-up from launch, partly because the first phase has a narrow base of issuers that can use it, but also because the current system works, and issuers don’t see the need to move to something else. As Katie was saying, it takes resources and cost to change your primary market programme to issue notes in an electronic global note format instead of a paper format. One of the driving factors that might drive that change is the environmental factor. There are currently tons of paper being held in vaults across the world, with a cost for storage, transfer and management. So we see efforts to innovate and digitise, but limited incentive for some people to engage.
RE: The electronification of the processing of orders, which was very manual, via phone and ledger reconciliation, has moved on. There is a perception that more secondary trading orders are processed electronically versus primary. I’m hearing numbers higher than I expected – going up to 40% of primary orders being electronic – but the numbers are still not as high as secondary. I’m hearing that is developing but it’s heavy lift. There are different solutions out there via market competition, I think that the speed at which change is occurring is proving disappointing to people because it hasn’t proven as fast as expected. When it happens, it releases time for traders to focus more on added-value exchanges rather than having to do less valuable grunt work.
TD: How does that change tie into the wider ecosystem?
RE: That connectivity for orders links through to settlement as well. When the front office is placing orders, they can do it directly into the order book via sellside web apps – but they need to link their orders with their internal booking systems. Distinctly, there is the allocations process which is art not science. The syndicate banks generally seek to focus on investors likely to be long term stakeholders, rather than tourists passing through a sector. To stay on top of the investor landscape that is often changing is challenging and involves subjective judgments. We can see more science with digitalisation there, perhaps looking at recent deals investors have been involved in and using that to project allocation proposals, for human review rather than to replace human engagement.
TD: Could you see corporate issuers issuing more frequently to fund smoother financing programmes to take advantage of more efficient issuing processes?
KK: in the research that I’ve conducted with 15 issuers spoken to so far and more to go, nobody’s having many difficulties or finding it very strenuous. That said, there are of course things that are cumbersome and clunky. Authorisations, getting all the checks complete after settlement, due diligence and ratings checks. But you would have to do those no matter what your automation was delivering. There’s nothing so fundamental that I see a demand to move to a drip feed issuance culture, with more regular drawdowns on an on-demand basis. Beyond the private placement market, I just don’t feel it.
RE: An issuer is always balancing cost and risk. The issuance decision is essentially: “do I get my funding later and cheaper, but potentially not get it at all – or get it more expensively now but at least have certainty of funding?”
MP: Whether issuers will do more bond issuances if the process were easier has to be considered at the macro level. An issuer is only going to borrow money if it needs money, and accordingly if it needs that money, it’s either going to get it from the loan or bond market. So there’s an interplay between rates in the market, and how easy is it to borrow bilaterally from your bank or via syndicate loans versus the bond market.
KK: The more complex bits of the process; pricing, allocation, etc. will still have to be managed on a case-by-case basis, whether you’re issuing frequently or just twice a year. Those technical, tricky elements can’t really be automated for.
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