The U.S. corporate bond market is booming at the moment. Reports in Financial Times earlier this month highlighted its resilience through recent stock market volatility, with analysts noting that corporations are largely looking to avoid selling new debt. Late last year, the publication of said sales of U.S. corporate bonds surpassed $1 trillion in September, the fastest pace the market has ever seen.
This boom may change, but the influx of corporates looking to raise capital via bond issuance has shed a bit of light in yet another area of corporate and investment banking that is ripe for technological disruption.
Ipreo is one FinTech firm looking to improve banks' back-office functions in the bond issuance process, but as Bill Sherman, EVP and head of the global markets group, recently told PYMNTS, there was a gap to fill in this market.
“We sit mostly on the sell side – banks, when they transact, do some portion of it over our platform,” he explained. “What we bring is the ability to communicate bank-to-bank around a deal. They need to be able to collaborate, but the trick is to open up a window to the investor.”
Ipreo built that window with the launch of Investor Access, which recently expanded with the addition of three new banks to the initiative.
Primary market deals can be more complicated than secondary markets (like the stock market), explained Sherman, because negotiations are initiated before a security even exists. That means a lot of players, a lot of communication and a lot of data flowing across parties.
“The way this information gets shared needs to be streamlined and structured,” he said, adding that while banks needed a way to collaborate on these deals, opening up communication and data-sharing streams to the investors themselves can address a major point of friction. Bond and equity investors not only need to collaborate with multiple banks on a single deal, they have to share information internally on offers, too.
“You have maybe 20 counterparts on six deals, and they're all sending you information in an unstructured way,” said Sherman. “That is a complicated process for you to receive that information, to know the most recent bit of communication, to organize that information and get it over to any interested party in your firm. There is a lot of coordination, and a lot to keep track of. It's all error-prone; it makes it difficult to understand where you are at any given point.”
If that challenge sounds familiar, that's because it's a common one in the global financial services market overall.
Take trade finance and supply chain management, for instance. A single deal involves the buyer's bank, the seller's bank, logistics players, trade insurance companies and all of the other service providers down the supply chain. Similarly, cross-border payments involving the interbank market and relying on correspondent banking relationships can see similar struggles in the transmission of data in real time.
Information is being sent via various channels, from paper documents to text message. Multiple parties are sending information all at once, making it difficult to understand positions in real time. And much of this occurs manually.
This is much the same for the bonds and equities market, said Sherman.
"A lot of communication between banks and investors has been over the phone, through email, through text – it's very analogue," the executive said. "It's not organized or structured. Generally, these transactions have multiple banks involved, all sending unstructured information. Investors have to get these deals done one by one. There is definitely a lot of room for efficiency."
On top of the challenge of managing the movement of data across parties, these spaces also have to ensure regulatory compliance, with global authorities placing greater emphasis on ensuring that a record is kept of every transaction.
"In this industry, there are two things we have to make sure are paramount: information security and the regulatory environment," the executive stated. "The rules are shaped toward making sure you're able to keep track of what you're doing, have a record of things you're doing."
These areas of friction are some of the largest targets for blockchain innovators, and Sherman noted that Ipreo is certainly interested in exploring how blockchain could potentially affect this space. In 2016, the company launched a joint venture with Symbiont to focus on the use of distributed ledger technology in the syndicated loans market, which involves multiple lenders on a single financing deal.
"The way we look at [blockchain] isn't so much a disruption, as it is something that could be brought to bear in a very positive way," said Sherman. "Our solution is very blockchain-friendly," he added, noting that he sees potential in data being stored on a blockchain-based platform to offer a more streamlined data management process.
"It's got legs," he said of blockchain's potential in this space. "We don't see it as disruptive – we see it as enabling, beneficial and synergistic."
As a whole, using technology to enhance and simplify global investment markets involves many of the same areas of focus for other FinTech specialties. Often, it comes down to collaboration.
"We spend a lot of time working with constituents and counterparts to make sure there is value for everyone, and everyone has control of what they're doing," said Sherman. "It's not like technology takes over – it facilitates what you're doing.
"There is no finger-pointing," he continued. "We're having a collaborative moment going on, where everyone knows that there are things that can be done to improve this process. The way to do it is if everyone gets on the same page and works together."