What the market thinks about the future of DCM
This week, I was interested to read the Future of Bond Market Infrastructure Survey from OMFIF's Sovereign Debt Institute. It asked a range of market participants, including issuers, asset managers, banks and service providers, for their thoughts on the future of DCM.
The survey aimed to discover the areas most in need of improvement, specifically exploring which parts of the DCM workflow cause the most frustration. The survey was fascinating reading, especially for me given how Origin is firmly focused on improving the workflow for a range of DCM participants. Encouragingly, the thrust of the survey’s responses married with what Origin has been pitching and focusing on for years.
Here are a few important findings from the survey that I’d like to highlight:
Fragmented workflow frustrations
By a stretch, the number one challenge for bond issuance continues to be fragmented workflow processes. This part of the process was of greater importance than other stumbling blocks, such as pricing, allocation, book-building, and other aspects that have traditionally received a lot more focus (and funding) from a technology perspective.
The holy grail of standardised legal docs
The improvement that would offer the most significant pre-trade benefit would be (drum roll please…) standardised legal documents. This was music to Origin’s ears, as this is the problem we’ve been working on solving for the best part of 7 years. We’ve always said that the single biggest bottleneck between the trade date and settlement date is documentation. Whilst other solutions try to solve problems in other parts of the workflow (settlement, cash, etc) or by using “advanced” technologies (e.g. DLT), we believe that the biggest win for market participants pre-trade will come from standardising and automating documentation. Until that’s complete, all the other problems are, largely, irrelevant.
Atomic settlement isn’t everything
Speaking of settlement, while almost all respondents would like to see shorter settlement cycles, very few (c5%) wanted to see T+0. This was an outcome that I was very interested to read given how many projects and companies are pushing for T+0, or “atomic settlement” (to use the trendy lingo). Full disclosure: we once did this ourselves, expressing in our launch mission statement, after our initial funding round with Clearstream, how we intended to try and achieve “T+0 issuance and settlement.” However, while we continue to use T+0 as our “North Star,” having gained feedback from so much of the market, we now know there’s no need to push for T+0 just for the sake of it. Plenty of other processes take place internally with investors and issuers prior to settlement, and having a little time to spare can be helpful from a cash management perspective. Investors rely on the settlement of other asset classes (equities, FX, derivatives etc) to free up cash, and they usually need time. Yes, the push to improve T+5 is necessary, but the majority of survey respondents (+50%) say that T+2 or T+3 is ideal. Hence, tech providers shouldn’t assume that T+0 is unequivocally the best as, this survey, along with Origin’s customers, continue to tell us otherwise.
The promise of DLT… but it’s a long way off
It was fascinating to read how the majority (71%) of market participants are not looking to adopt DLT, and how even more (86%) believe AI is too nascent to have any impact today. This told me a few things, but most pertinently how it’s vital not to conflate the agenda of conference organisers and journalists (who assume everyone is issuing digital bonds and price talk is all from ChatGPT) with what is being discussed around trading desks. We’ve seen a shift among our customers who recognise that continually talking about DLT is neither yielding results nor worth their time. They’d rather focus on the upsides of improving workflow and documentation, as per the responses highlighted above. Customers realise that while doing pilot DLT transactions for the sake of learning is important, at some point, the focus needs to be on solutions that will result in scalable improvement. But DLT isn’t quite there yet – document automation is.
Needless to say, the points above tie neatly with what Rob, the rest of the team, and I have been pushing for years. It was great to see this survey validate the thinking behind the way we’re shaping our products and tools.
We’ve felt the pivot in the market towards workflow and documentation amongst our customers and it has likely been one of the key drivers behind the increased adoption of our tool this year. Given the result of the OMFIF survey, I’d only expect more of it as we move into 2024.