Analysis-Three years after DirectBooks, US bond market still phoning it in

By Shankar Ramakrishnan

(Reuters) - Wall Street's three-year effort to modernize the way billions of dollars of new corporate bonds are sold via phone, chat message or email, is making slow progress.

Broad adoption of the fintech communications platform backed by big banks called DirectBooks has so far been stymied by worries about the cost of maintaining the technology and other tech hurdles. There is also some concern about job losses and loss of market access by smaller banks.

Changing an organization's behavior is difficult and takes sustained effort, said DirectBooks CEO Rich Kerschner. "It has taken time and it probably will take more time before the full benefits of this system are realized."

"But, we have great momentum and have made material improvements to the primary markets workflow," he added.

DirectBooks, formed by nine of the largest global banks went online in November 2020 to overhaul the opaque practice of selling new investment-grade rated bonds - a process that can be fraught with errors. Interest in automation grew as desks struggled with corporate bond volumes that touched a record $1.78 trillion in 2020.

Fintech solutions like DirectBooks may not be a silver bullet to ease the complexity involved in how new U.S. investment-grade bonds with varied maturities are structured, priced and allocated. But it is expected to inject transparency in the administrative process of syndicating new bonds and reduce the time it takes, lowering costs for fixed income players.

PHONE, CHAT, EMAIL PREFERRED

There is increased interest for more sophisticated technology in the sales and trading of bonds, but relying on chats versus automated, documented processes "still prevails as the preferred way to get trades done," said Spencer Lee, head of fixed income markets at global financial technology company TS Imagine.

Sales teams at banks still reach out multiple times in a day through phones, Bloomberg chat messages or email to investors for their orders and amendments on every new bond offering throughout the course of a deal, said four syndicate banking sources.

Orders are then logged by salespeople into their internal order portals or a system called IssueBook.

An average four to five underwriters on any bond offering then communicate through IssueNet which aggregates and collates the orders secured from investors, said these sources.

In contrast, DirectBooks, when fully operational, aims to enable investors to communicate directly to underwriters through its system, making the process more efficient for investors and banks.

The technology meets "the growing demands of a sophisticated investor base that is looking to cut down the amount of time it spends on the process of buying a single bond, and rather focus on other complexities that comes with bond investing," said Daniel Botoff, global head of DCM syndicate at RBC Capital Markets.

UPHILL TASK?

Since going online, 25 banks have joined the original 9 founders - Bank of America, Barclays, BNP Paribas, Citi, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley, and Wells Fargo - on DirectBooks. Over 400 institutional buy-side firms have also signed up.

Three years into it, only a small proportion of orders and allocation messages for a new bond were going through DirectBooks. A vast majority of such communication is still through legacy systems that require manual involvement, said four syndicate banking sources.

Though DirectBooks has full functionality, widespread adoption is taking time because of structural hurdles - banks had different levels of tech spend, appetite for risk and speed of change, sophistication, prioritization, and tech dependencies, said Kerschner.

The buy-side is even more diverse in terms of tech sophistication and appetite for process change, he added.

Automation may also provide an excuse to some banks to cut their sales staff and for smaller banks it could diminish their role in the primary bond sale process. This made some resistant to change, said two of the four syndicate sources.

WAY FORWARD

For Chris Sztam, head of business development at S&P Global Market Intelligence, which operates one of the current systems, collaboration between fintech vendors was the way forward.

"Given the incentives of one network versus another, we view collaboration between vendors aiming to create a more connected ecosystem as something that market participants are asking for," he said.

DirectBooks is now working with BlackRock's Aladdin and StateStreet’s Charles River Development - two of the largest providers of order management systems (OMS) to other investors - to adopt new enhanced versions of application programming interfaces (API).

The API would enable communication, exchange of data and functionality between these systems easily and securely.

Once in place, hundreds of investors using OMS platforms could send their order messages and receive allocation messages through DirectBooks, said Kerschner.

"Full integration will take time, not for lack of effort from the underwriters, as it needs to match processes from disparate systems within and among numerous market participants and ensure compliance and stability on the one single platform from very different markets and jurisdictions," said RBC's Botoff.

(Reporting by Shankar Ramakrishnan; Editing by Anna Driver)