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Digitising Debt Capital Markets with Origin

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Earlier in the year, we covered Origin Markets’ collaboration with Clearstream. Origin is a London-based FinTech that aims to digitise debt capital markets. It is a start-up which many influencers in the FinTech space have commended over the last few years and have noted as being one of the most promising and innovative companies in this space.

Now being backed by Clearstream and the Luxembourg Stock Exchange, Origin has recently launched an instant-ISIN feature. This will provide immediate ISIN code allocation for Eurobonds and thereby significantly accelerate the bond issuance process, which for now remains a cumbersome, manual and repetitive procedure. Whilst the foreign exchange and equity markets have been digitised to a large extent, the fixed income capital markets continue to lag behind. To discuss how Origin are seeking to remedy this, we caught up with co-founder and CEO Raja Palaniappan.

Raja began by discussing his professional background and how he and his co-founder Robert Taylor came to the realisation that the bond market required digitising.

“Prior to starting Origin I was a corporate bond and credit derivatives trader. I was doing that for about seven years in London. I actually started my career at Lehmann Brothers – fun place to start! – and then moved on to Nomura and Credit Suisse. Nomura was where I met Robert Taylor who is now the CTO of the business. We were both traders there, and we started discussing the ideas that would eventually lead to the foundation of Origin.

“The primary thesis that we had was that technology had completely transformed other markets. The share markets and currency markets had been completely moved over to electronic trading around twenty years ago. But the fixed income market was lagging behind. Furthermore, efforts to digitise the bond market were focused on the secondary market and how bonds are bought and sold. But there was nothing going on in the primary market, looking at the process by which bonds are initially brought to the market.

“It’s a fairly frequent exercise – a large company or bank might come to the bond market up to a hundred times a year. A few times a week they’re issuing a new bond. This means it is a fairly repetitive and standardised process. But it also very manual and cumbersome – so we thought that technology is perfect for this.”

As Raja went on to explain, the bond issuance process can indeed be a long, drawn-out process. Whereas trading on, for example, the foreign exchange market takes a fraction of a second, allocating codes to bonds can take hours. In addition the amount of paperwork that is involved in this market is immense – and differs depending on what exchange you are participating in. This is what Raja and Origin are seeking to change:

“We’ve essentially built a platform that digitises every step of the bond issuance process from the start all the way to the finish. We work with a number of different institutions relevant to each stage. So in the beginning we’re working with the dealers and issuers as they’re trying to identify opportunities for issuing a new bond and borrowing money.

“But then as we progress through the transaction, we have three products that follow the lifecycle of the trade. We’ve got a marketplace product that helps dealers and issuers identify opportunities for issuance. We have a documentation product that is targeted at lawyers in capital markets, helping them to very quickly and automatically draft all the necessary legal documentation for a new bond. And then our post-trade product streamlines all of the reconciliation, information gathering and data extraction that all of the market infrastructure institutions do.

“That would be the exchanges, the paying agents, all of whom are necessary components to the capital markets but right now, their main method of liaising with an investment bank is via email. So we replace all that email traffic and manual reconciliation within the system with an API feed that provides structured date about these new securities.”

Clearly the big advantage of this product is speed: Origin are making it quicker and easier to participate in the debt capital markets. We asked Raja, therefore, if the ultimate aim of this technology is to increase volume on the bond markets: would greater streamlining and more automated processes augment the amounts being traded in this space?

“There’s two ways to look at volume. There’s first the volume of the issuance itself – how much people are borrowing. We might be able to impact that but it’s largely driven by the borrower’s needs: each institution will have a Treasurer determining how much funding they require for that year and whatnot.

“But there is also another way to measure volume which is how many issuances a particular borrower does. If they need to borrow one billion dollars this year, do they do that in one big bond issuance or two bond issuances of 500 million each? Or 20 bond issuances with small tickets of 50 million each?

“There are some advantages to doing one large ticket, because if you do that then it tends to be fairly liquid – it can be bought and sold and traded more frequently. But on the flip side, if a bond is very liquid then it means in times of stress the bond will be sold and that pricing is very obvious to the market.

“Many borrowers out there would prefer to do 20 tickets of 50 million each if they had a billion dollars of funding. Because each of those tickets will probably be bought by an individual investor that will not sell those bonds until they mature. Therefore in times of market stress there isn’t a massive signal that a specific issuer’s bonds are selling off massively and spreads are widening.

Additionally, doing more smaller tickets allows the borrower to smooth out what we call their redemption profile. If I issue a ten year bond for a billion dollars, then in ten years’ time I have to go and find a billion dollars to repay that bond. Usually what I do is just refinance it and issue another one. That means I have what we would consider a very lumpy redemption profile: I don’t do anything for nine years and then I’m at the mercy of what interest rates are doing in year ten (we’re starting to see borrowers get nervous about rate increases already). But if I am able to issue very frequently, maybe once a month or once a week, and issue smaller tickets, I won’t have those problems. Rather than borrowing one billion in one-go, I just have to borrow 50 million ahead of each redemption. So my interest rate risk is smoothed out.  By streamlining the issuance process and removing the legal cost and friction, issuers will potentially issue more bonds, even if ultimately for the same volume.”

If Raja is correct, the real benefit of Origin will be to reduce the average ticket size of the bonds being issued. Previously high volume tickets have posed problems: if a company finds itself having to repay a billion-dollar bond in the middle of a recession it is probably going to find itself in serious trouble. By contrast, the frequent repayment of smaller tickets would minimise this kind of risk and allow companies to have a more structured and orderly approach to debt financing.

Raja also explained that Origin can benefit the increasing number of banks and financial institutions that are looking for borrowers that match the requirements of end investors when it comes to ESG and sustainability issues. Origin is “essentially a network that connects investment banks and borrowers” and one that can allow parties with matching standards on sustainability to be paired up:

“Nowadays a lot of investors request that their funds are used for projects with a green or sustainability flavour to them. Some even have specific initiatives in mind: they do not just want to invest in a green bond but a green bond that is focused on improving access to clean water, for example. An investor might outline within their investment mandates that they wish to focus on a specific one of the UN’s development goals and will tell their investment bank to find them investments or projects that tick those boxes.

“There’s no obvious database for investors to find those kind of opportunities. They can see green bonds that have been issued already, and if they are liquid they can buy into those, but if they wish to invest in a new bond there’s no real opportunity for that. So within our marketplace we’re going through an exercise this summer to overhaul our database so that when someone searches through, they can not only search by credit rating or country of the issue, but also by sustainability criteria and use of proceeds. I think this is going to be huge in the future.”

It certainly seems that Raja and Origin are offering a useful solution to a problem in the bond markets: streamlining and digitising the existing processes to speed up participation and cut out time-consuming, expensive processes. In turn this could offer the markets greater flexibility in terms of the ticket volumes that come to market. Origin also has clear value for those embracing the continuously evolving, and ever-more complex, green products that we are now seeing.

The Origin platform currently integrates with the Luxembourg Stock Exchange, with plans to expand into other major European and world exchanges where bonds are listed. Certainly this market could benefit from a “tech layer and data layer that streamlines the whole connectivity of the market.” Indeed, in a slightly different context, we saw recently how Alliance Block has worked with the London Stock Exchange Group to make this market more efficient by allowing institutional members direct market access. Should Origin become another start-up able to introduce its service successfully, the impact on the bond markets – in Europe and beyond – could be considerable.  

Author: Harry Clynch

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