Ready for EDDI? SSAs plan to disrupt bond issuance
The European Stability Mechanism is spearheading a plan to create a new digital platform for launching public sector bonds in euros. The system, which ESM wants to launch in 2020, is named the European Distribution of Debt Instruments (EDDI). It could end up replacing some of the functions of investment banks and clearing houses.
EDDI is an initiative by the European Stability Mechanism, but is intended to be run by the European Central Bank. GlobalCapital understands that the project is at an advanced stage. The ESM has built a prototype for the platform and has been holding frequent consultations with four other public sector borrowers, seeking their feedback.
They are Bank Nederlandse Gemeenten, the European Investment Bank, KfW and the Council of Europe Development Bank — with the ESM, five of the largest euro borrowers in the sovereign, supranational and agency bond market.
“As public institutions and frequent issuers, we are interested in improving efficiency in the market,” said a funding officer at one of the four borrowers advising on the project. “If there are ideas on how the process of issuing debt can be streamlined and made easier, then we are more than happy to help.”
The platform is intended to be used for the whole bond issuance process, from announcing a deal, through bookbuilding and up to settlement.
The ECB has yet to confirm if it will participate in the project.
But it has “shown interest in principle”, according to Kalin Anev Janse, secretary-general of the ESM, in a recent interview with Börsen-Zeitung, the German newspaper. “The ECB would focus particularly on the post-trade element of this fintech solution, while we would focus on the pre-trade element,” said Janse. “It would be easy to combine the two, we would talk about a combination of a front end and a back end system.”
Contacted by GlobalCapital to explain its plans further, the ESM declined to give an interview, merely confirming what it had said in the BZ interview.
The ECB also declined to comment, but pointed to a speech given in January by Yves Mersch, a member of its executive board, at the International Capital Market Association’s European Repo and Collateral Council in Luxembourg.
“Reflection on pan-European issuance and distribution channel in the most efficient manner would be in line with the endeavour to deepen the single capital market in the EU,” said Mersch. “This could have a positive impact on the establishment of a domestic yield curve for the euro money market. Should market participants propose solutions in this area, the ECB will certainly take them into consideration in our own investigation.”
Securing the involvement of the ECB, an independent party that is not a public sector issuer, is crucial, sources say.
Publicly owned solution
One of the main aims of the EDDI initiative is to create the first public sector-backed bond platform, said the funding officer. This would free issuers from having to rely on the various private sector platforms that already exist.
“We are very large issuers and represent a significant share of the euro SSA market,” the official added. “We don’t want to just sit on the sidelines. We want to help shape the future process of issuing bonds.”
Those involved in the consultations say the platform will be differentiated by its back end functionality.
“On the front end, it won’t change much,” said a funding executive at another of the four borrowers. “The bookbuilding system will be very much the same as what we are using now with the likes of Ipreo. What will be different is on the back end. The aim is for processes such as the documentation and settlement to be automated.”
Ipreo is the software platform whose IssueNet component is used by all banks in the European syndicated market for building bond books. Some banks also use the Investor Access component to let investors enter their orders directly. IHS Markit, the information group, bought Ipreo last August for $1.86bn from Blackstone and Goldman Sachs.
If SSAs move to their own EDDI system, that could mean less business for Ipreo.
Clearing houses protest
An automated back end function could lead to the clearing of euro SSA bonds being transferred to the ECB, said the second funding official.
The national clearing houses have written to the ECB to express concern about this, according to sources with knowledge of the matter. A consultation between the clearing houses and the ECB is expected shortly.
Euroclear, one of the principal clearing houses for euro securities, did not respond to a request for comment.
Besides Ipreo and clearing houses, another group that could be disrupted by EDDI is investment banks, if it allows investors and issuers to interact directly.
Banks' centrality at risk
With the current platforms, such as Ipreo, the banks act as gatekeepers to the orderbook for a bond issue. Through Ipreo’s Investor Access tool, launched in 2015, investors can electronically submit orders for bonds to Ipreo’s platform, once they have been approved by the banks' compliance teams. The book is still managed by the banks.
Asked about the EDDI plan, an SSA syndicate banker said: “Of course it’s worrying. They’re targeting our jobs.”
But a rival said: “It’s not that easy to cut us out entirely from the equation. We are the guys that speak to investors and provide the underwriting."
Bankers also argue that working out fair value for a new issue and picking the optimal time to launch it are subjective tasks that only humans can do.
A funding official at one of the borrowers advising on the project agreed that having banks involved — at least for syndicated transactions — was essential.
“My feeling is that having a personal touch is necessary,” he said. “This system may work for sovereigns doing auctions, but not for syndicated transactions. One very large European asset manager said he would never use such a platform. Investors want people to call them and give them updates on how deals are going.”
Nevertheless, electronic platforms have become increasingly present in bond markets.
By coincidence, this week GlobalCapital reported plans for another system designed to handle issuance of large, liquid benchmark bonds, using electronic auctions.
This venture, Newtrex, is a private sector one, led by Martin Nijboer, former head of global capital markets and securitizations at ING, and Torsten Elling, former co-head of European rates syndicate at Barclays.
"For frequent borrowers, Newtrex will make it easier, faster and cheaper to issue international benchmark transactions," the platform said.