In what could prove to be a game-changer for bond issuance in Asia, Singapore Exchange (SGX) has completed the first digital bond issuance in the region cutting settlement from the traditional five days, to two days.
Last week, 1 September, it replicated a S$400 million ($292.4 million) 4% 5.5-year public bond issue and a follow-on S$100 million tap of the same issue by food and agri-business conglomerate Olam International.
The driver to go digital was efficiency.
“We chose fixed income, which is an asset that isn't very digitalised, to begin with,” said Peter Shen, head of digital services for fixed income, currencies and commodities at SGX in an interview with FinanceAsia.
Olam was a logical first mover. Aside from the fact that it is a known name and a regular issuer, together with HSBC and the company’s largest shareholder, Singaporean state investor Temasek, Olam felt that it had enough visibility over the process.
“Olam does a large number of deals a year and understands the process well enough that they could understand well what we were trying to achieve,” said Mark Leahy, head of fixed income at SGX, speaking to FinanceAsia.
QUICKER, BETTER, FASTER
The way that companies sell bonds is one that has not changed a great deal over the past decade thanks, in part, to the fees that surround it. The process makes up a significant chunk of the profit and loss of the investment banks.
They have had no particular interest in changing this status quo, which means that the primary issuance process is much more open to improvements in efficiency. “The market is pushing to to do things quicker, better, faster, stronger and cheaper,” said Leahy.
The management of Olam International, certainly agrees. “Going digital will make the entire process more efficient and transparent for all parties – issuers like us receive our funds more speedily, investors get their bonds more quickly while the arrangers, custodian and banks benefit from the reduced probability of error and speed,” said managing director and chief financial officer N Muthukumar.
While what is called atomic settlement, or instantaneous settlement, is often seen as the Holy Grail, Shen explains that “it's not technically possible when you layer in all the practical elements of what a bond actually is. We can do it, but the ecosystem isn't there yet”.
Getting issuers, having done the deal, to receive the funds on their side in their bank accounts takes time as does, after allocation, triggering the payments from those that have bought the paper. The two-day settlement is simply a function of that.
SGX used DAML, a smart contract language created by New York-based Digital Asset, to model the bond and its distributed workflows for issuance and asset servicing over the bond’s lifecycle. This uses smart contracts to capture the rights and obligations of parties involved in issuance and asset servicing, such as arrangers, depository agents, legal counsel and custodians.
“The bond market is one of the last bastions of risk, holding on to paper and manual processes,” said Yuval Rooz, co-founder and chief executive of Digital Asset. “Despite the growth in electronic bond trading, there are still many aspects that require manual intervention. SGX’s DAML smart contract solution solves a major pain point market participants have been working to fix for years.”
The adoption of smart contracts by the financial sector has been slow, though it has been gathering pace recently. The first issuer to use distributed ledger technology (DLT) was the World Bank which sold an A$110 million ($80.3 million) two-year Kangaroo at 2.251% in August 2018.
There has been sovereign interest in the region too, notably from China, which, at the end of last year sold $2.8 billion two-year debt at 3.25% via blockchain.
But with the SGX’s first digital bond issuance, the exchange has the opportunity to become Asia’s fixed income hub for bond issuers.
Certainly, there is a pipeline. Leahy points out the SGX has the largest cross border and international fixed income business in the region. This gives the exchange scope to expand.
“We can see how we take the transaction done locally and then map it out into the US dollar market in Asia. So we clearly have a line of sight on being able to achieve that next,” he said.