Securities Issuance Consortium
Pursuing innovation in the International Bond Markets
The Securities Issuance Consortium is a market-wide initiative that promotes efficiency within the issuance process - seeking to increase market liquidity, reduce transaction costs and increase broader industry standings. Launched in 2021, the consortium now includes a global audience of more than 200 individuals from over 50 industry firms, ranging from asset managers, bond issuers, (I)CSDs, law firms, investment banks and data vendors.
The Securities Issuance Consortium was initially conceived to reduce risks and delays when issuing bonds under Regulation S and Rule 144A. As of 2022 the enterprise has begun to consult the fast-growing Asian bond markets and will champion various new technologies that support the securities issuance process.
Getting to know the Securities Industry Consortium
The consortium was founded and is hosted by Adrian Dacruz, VP Strategic Market Development at Clearstream, who like many within our organisation sees the need for the bond markets to work much closer together. Importantly, the founding principles of this working group are to provide a collaborative and innovative space for the securities issuance markets to grow into their future state.
Identified market advantages to date (2022)
The consortium notes that only 15% of European issuer and 3% of Asian issuer 144As are currently set up within the "XS" Eurobond ISIN (ICSD) structure, despite the benefits of:
- An "XS" 144A converts into an "XS" REG-S security up to 57% faster than if the 144A used a more traditional "U.S." ISIN. This boosts liquidity and reduces settlement risks.
- Only XS ISIN securities offer collateral eligibility with the ECB.
- Using only one security depository for both REG-S and 144A issues means halving the time of review for security admission and eligibility and equally reduces the work done by agent banks and counsels. It also eliminates delays that occur from having a security operating within U.S. time zones.
Innovating with Regulation S & Rule 144A securities
Regulation S and Rule 144A securities are both exempt from Securities and Exchange Commission (SEC) registration under the U.S. Securities Act of 1933. Bonds can be issued under one or another exemption, and often a bond issue will be issued under both Reg S and Rule 144A.
Group findings in relation to innovating the REG-S/144A conversion process are:
- All issuer legal documentation can be easily changed to support 144A tranches settling within the ICSDs as XS ISINs.
- All major investors have ICSD accounts (either directly or indirectly).
- U.S. agent banks are very open to the idea of removing their Medallion Stamp requests which speeds up U.S. security conversions (an area for continued group action).
- Only 27% of Clearstream’s REG-S/144A yearly conversions involve both XS ISIN’s, despite this clearly being most beneficial to market efficiency.
- Third party legal firms and data vendors also have an interest in more efficient conversions and security representation in general.
Innovating using the Unitary ISIN Structure
Rather than having to allocate two distinct ISIN codes, the Unitary ISIN represents one single global security in registered form which is deposited at an ICSD Common Depository. The advantages include less administration, higher liquidity and no conversion processing.
Group findings in relation to using a Unitary ISIN are:
- The Unitary ISIN (representing a single global security in registered form which is deposited at an ICSD) is increasingly popular and most importantly removes the need for REG-S/144A conversions all together.
- Liquidity is maximised within a Unitary ISIN. There is no arbitrage or mispricing, as when using two ISINs.
- Security administration is absolutely minimal and distribution to investors is easy.
- Clearstream can operationally accept a single ISIN approach and frequently does.
- There is no change to the ICSD’s monitoring of the holders of the specified restrictions.
- Hundreds of active Unitary ISIN securities have been issued over the past 2 years, with 45% coming from Corporate/Financial issuers and 55% coming from Sovereign issuers. Typical issue sizes range from USD 1 Million to USD 1 Billion.
- Many agent banks advocate for increasing adoption of the Unitary ISIN as their processing time is halved for data entry, issuance, billings and payments.
- Agent banks have no requirement to provide the investor holdings split to the ICSDs, or state what investors sit within settlement systems.
- Investors should always be made aware that they are buying Unitary notes and that they must adhere to the regulations in place.
- Lead managers may decide to update their agreements with institutional buyers to ensure that transfer restrictions are observed by them.
Additional consortium objectives: Redesigning paying agent processes
The consortium also promotes change within the paying agent community and the operational processes that are undertaken in conversions. This aims to boost the speed of all conversions:
Goal: The consortium seeks to either remove exhibits completely or standardise them. Unnecessary exhibits are delaying conversions and are provided in a non-standard format. Our members suggest developing a standardised exhibit template.
Goal: The consortium wants to work with the industry to promote the proper application of chill periods. Paying agents can incorrectly quote a "coupon chill" during which conversions are halted. The group encourages agents to act with discretion and review wording and processes in detail.
Goal: The consortium seeks the removal of the stamp for European transactions. A few agent banks have led the way and removed it already. The consortium seeks industry wide removal as the extra work involved in obtaining the signed stamp adds to the timeframe on transfers.
Joining the consortium
Any participant within any area of the international bond markets is welcome to join the consortium.
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