Dan Barnes Welcome to Primary Markets TV Asia Pacific – your updates on newly issued securities. I’m Dan Barnes. This week is seeing the launch of several initial public offerings on Australia Stock Exchange with IPOs from Aurumin today, 30th of November, Hexima and Prospech on the 1st, Cashrewards on the 2nd, Booktopia Group and East 33 on the 3rd, Doctor Care Anywhere Group, MAAS Group Holdings, and Nuix on the 4th. Hong Kong Stock Exchange has Evergreen Property Services Group listing on the 2nd, and word on the street is it’s been well-received at its roadshows. It’s also well-supported by Cornerstone Investors. Japan Exchange has one listing on the Tokyo Stock Exchange, network security specialist Vario Secure today on the 30th of November. On Korea Stock Exchange on the 2nd of December, we have ESR Kendall Sq REIT listing, and we noted last week, some concerns about defaults by state-owned enterprises in China, had led to a suspension of some new bond issuance. Morgan Stanley analysts have observed that net new issuance for AA and AAA-rated China bonds turn negative on the week of the 20th – a situation worth monitoring, as funding conditions can be a lead indicator for defaults, they noticed. The situation with SOEs have been addressed somewhat to date, with several meetings between issuers and bond holders, plus a meeting held by the Financial Stability and Development Committee under the State Council on November the 21st, which pledged zero tolerance and severe punishments on violations of rules and regulations, but also stressed further that there was a reform of the bond market, and reforms on state-owned enterprises. Data from the central bank in China, released last week, also showed the total bond issuance in the country stood at 4.8 trillion yuan. That’s about 729.6 billion dollars in October. Joining me now are Brian Richmond, head of business development for Chi-X Australia, and Rehan Ahmed, head of FI products & digital assets at Singapore Exchange, to discuss alternative ways for issuers to reach the market. Guys, welcome to the show.
Bryan Richmond Great to be here, thanks.
Rehan Ahmed Great to be here, Dan. Greetings from SGX in Singapore.
Dan Barnes Thank you, Rehan. Can I start with you? SGX has developed the digital issuance of bonds. How does this help the allocation process for issuers such as Olam, which has trialed the product? And how else does it affect the mechanism for trading and dealing with bonds?
Rehan Ahmed So let’s start off with maybe defining what a digital bond is vs what an analog or a paper bond actually is. A paper bond is what all of us are used to issuing out of, and it’s an object that doesn’t live. It’s not a programable asset, it has to be acted upon. So some action, such as fx, coupon payments, redemption payments, or corporate actions in the future, which actually have to be humanly intervened with. But a digital bond has the advantage of all the characteristics of a paper bond, but really what it adds on top is a programable layer that allows you to automate a lot of these lifecycle events. So, you know, to get back to your question when you look at allocation processes – certainly as a part of the issuance process – given that we are a listing platform in a depository, I would say that’s probably out of scope for what we are looking to do. That is usually done by the syndicate banks that the issuer appoints, but what we are looking to change is how that data comes into a post-rate infrastructure like a central securities depository.
Dan Barnes When there are any sort of corporate actions, payments of coupons, etc., is that really where we’re seeing the advantage for digital assets like this?
Rehan Ahmed We actually try to map out how many minutes it takes us to basically process a single coupon payment. And the number for the entire ecosystem is 202 minutes. Whereas with a digital platforms as such for the digital security, that actually has the ability to narrow it down into seconds of processing. If you think about a bond that pays a quarterly coupons over a 10-year life, obviously the savings are large for the entire ecosystem. And really, this isn’t so much about disintermediating the roles that sit within the market structure today. I would say it’s about making those roles more efficient so these roles can focus on higher value-add activities.
Dan Barnes What are your future plans for the model of digital issuing bonds?
Rehan Ahmed So we started off as a project group at SGX Temasek, which is the state-backed investment company and HSBC, to really focus on post-trade automation. So what happens post issuance, post deal launch? And over the course of this, we have met more than 70 issuers, investors and other sell-side banks as well. Interestingly, what we find is that there’s a lot of upstream efficiency to be had, so as we focus on what happens once the deal gets priced, we’re finding a lot of data gaps that happen between all of the participants at issuance, whereas the paying agent, the legal counsel, the syndicate banks, that happens much more upstream. So, if you think about building and end-to-end, fixed-income, digital Infrastructure, I would say the next part would be focusing on is upstream platforms. And this really is a lot of partnership-approach, because there’s many issuance platforms out there. There’s one stat I read last night about there being 18 primary platforms existing in the market. So I think our approach is really to have an open architecture, digital securities depository, and have platform partnerships that are able to focus on different parts of the issuance. Also, we’re looking at some of the other participants, such as legal counsel; they’re very important when it comes to passing us data on new issuances. ‘How can you really improve that data transmission process?’ Likewise are paying agents. So that’s a short summary. We started downstream, but we’re actually moving further upstream with a partnership-approach.
Dan Barnes Brian, turning to you, Chi-X Australia partners with Citi to support the issue of warrants on the platform. Can you tell us, first of all, how issuers use warrants to reach investors?
Bryan Richmond So the issuer, Citi, in our particular case, they came on board with us about five years ago now, and what they’re basically doing once they receive demand from a particular broker or an end retail client, looking to go long or short, a particular series, or index, or some sort of commodity. They’ll receive that demand, then they can turn those around relatively quickly by getting approval from the stock exchange. If that’s a code that’s acceptable, and then they’ll look to issue some series off the back of that. And what they also do is they also run software in the background to look at any existing gaps in the existing stocks they’ve got. So, some strike gaps where they might have an index trading one, or some of the larger trading banks and resource companies here. And they’ll use that to create more series along the line, I guess, to different levels of gearing, to attract different types of retail investors, whether they’re doing it under their own personal name. And they might be willing to leverage a little bit higher, through the self-managed, super funds here, where they might be more conservative and do something smaller with less leverage.
Dan Barnes For the investors, how do they actually access trading warrants?
Bryan Richmond They trade a warrant, just like they’d trade any other Australian cash equity with their broker, their existing brokering account. In Australia, there is a warrant agreement form, which is basically signing to say that they do understand that it is a leveraged product, and there are some risks involved. But once you have that set up with your broker, you trade a Chi-X warrant, just like you would any other domestic equity here.
Dan Barnes How would you describe the advantages that people get from trading warrants on Chi-X?
Bryan Richmond We break warrants down in two different, main categories of warrants. There’s the investment side, which is more the longer term holds, buy-and-hold on the long side, which you do see in the self-managed super funds. And then you’ve got the trading warrants, which is more your minis, and calls and puts warrants, which are a lot more highly leveraged and obviously gives you exposure on both the long and the short side. So you might be having someone trading in the reporting season. They say, ‘I think it’s going to be a good or a bad one’, and they can choose to go a long or short off the back of that. Obviously, there were some short selling rules here that came into place quite a few years ago, so that has seen a good boost in the warrant trading volumes, because this is a way of actually being able to trade short the market, or even hedge out of portfolio without having to sell the underlying. You can use a short mini or short index mini to alleviate some of that downward pressure. On the self-managed, super funds, there’s some dividend plays that they can do here. Given the franking credits available here in Australia, there are some tax advantages for certain investors and especially the self-managed, super fund scene.
Dan Barnes So they can be used both tactically and strategically just to help in sort of nuance a position, I suppose, in the market?
Bryan Richmond Exactly right. If you’ve got a particular directional view on stock X, Y, Z, then you can choose that one if you’ve got a series over it. And like I said, on the downside, it’s protection; if you think the market’s choppy and you don’t want to sell the underlying and create a capital gain or loss, then you can use a short mini or a short index mini, to get some gain on the downside as well.
Dan Barnes Fantastic. Bryan, Rehan, thanks very much.
Bryan Richmond Appreciate it.
Rehan Ahmed Thank you.