IHS Markit (Nasdaq: INFO) is pleased to provide its comments regarding the European Central Bank (ECB) consultation paper (CP) on a potential mechanism for issuance and initial distribution of debt securities in the EU; European Distribution of Debt Instruments (EDDI). We are responding as a solutions provider of comprehensive product suite that facilitates the execution of primary market transactions - from origination to settlement work flows - allowing efficient collaboration between issuers, banks and investors.[1]

Introduction

IHS Markit is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 key business and government customers, including 80 percent of the Fortune Global 500 and the world's leading financial institutions.

IHS Markit, which acquired IPREO in 2018, provides a number of services to global debt capital markets, particularly in pre-issuance markets that offer significant benefits to the market in terms of standardisation and efficiency. For example, IssueNet is a pre-issuance platform that services over 180 banks. It allows banks to price deals sooner, removes risk from the issuance process and has also implemented many innovations that have benefitted the industry such as unified bookbuilding and standard deal terms.[2]

Summary

IHS Markit supports moves to improve debt capital markets in the EU. There is scope for development in the EU market for debt securities as can be seen in the way that funding of European business is skewed heavily towards loans rather than debt, in contrast to some other economies like the United States of America. A more diversified funding market would undoubtedly benefit the European economy. IHS Markit has also been a supporter of the EU Capital Market Union initiative, engaging actively with the European Commission on a number of related issues.

While we support the initiative to improve debt markets in Europe, it is important that the ECB fully understands and builds on global harmonisation that has taken place over the last 15 years, particularly in pre-issuance. Therefore, our main messages to the ECB are that:

1. IHS Markit would generally support initiatives to promote harmonisation and efficiency in the debt capital market;
2. the ECB should be fully cognisant of how the global market has developed harmonisation over recent years (particularly in pre-issuance) and understands the role of existing global platforms; and
3. any action taken by the authorities in debt markets should ensure existing harmonisation is not unwound or fragmentation reintroduced by adopting European approaches out of line with existing global markets.

IHS Markit would be very happy to share with the ECB our experience and expertise of operating a pre-issuance platform in debt markets, something that, we believe, would be useful to the development of this policy area.

Answers to CP Questions

Q1.Please provide your views on the description of the European ecosystem for the issuance of debt instruments, in particular as regards whether you deem other actors, elements or processes relevant to complete the picture.

Although we agree broadly with the description provided in the CP, we believe it is worth providing a further explanation of the role played by IHS Markit.

IHS Markit provides pre-issuance platforms as represented in Chart 1 of the CP.[3] Its IssueBook and IssueNet products combine to provide a pre-issuance platform which is used to run the vast majority of all primary market issues globally, including in the European Union. There are over 180 banks involved in the primary market and they all use the platform to run their primary issues for a broad range of issuers (including SSA, Corporate, FIG). IssueBook and IssueNet have played a significant role in the primary market for over 15 years and, in that time, have promoted the adoption of standards that have created greater homogeneity across the global market.

Q2a.Do you think that there is a structural issue in the current debt issuance and distribution in the EU, seen from the perspective of a single capital market? If so, what is your view regarding the underlying causes of this structural issue?

One example of a structural issue would be the process of assigning security identifiers. Delays in obtaining a security identifier for new issues slows down the transition from primary to secondary markets and therefore the speed with which trading can begin in the secondary market.

Another example would be the distribution of deal terms to investors. The current process requires human intervention, which means the distribution process is not always optimal. More specifically:

• Syndicates determine which sales people to send deal terms to and those sales people determine which investors to send to. The result is that some investors may not see deals that they might be interested in. IHS Markit products allow for everything to be sent to everyone (subject to marketing and selling restrictions) and let the investor filter for what they want to see; and
• Sales people typically distribute deal terms to static distribution lists. This can be a laborious process for sales people who are increasingly focused on providing value or insights to the buyside in a resource-constrained environment. Electronification of this process through IHS Markit's IssueLaunch product allows the use of embedded logic to ensure that deal terms reach the correct investors and critical sales team resources are optimised.

Q2b.Do you face problems or see problems for issuers when reaching out to a pan-European or international investor base? If so, please specify.

As explained in the answer to question 2a above, the traditional process for distributing deal terms is reliant on human intervention, which can mean the distribution process is not always optimal:

• Issues are often reliant on syndicates to determine which sales people to send deal terms to and for those sales people to determine which investors to send to. The result is that some issues may be missing potentially interested investors. IHS Markit products allow for everything to be sent to everyone (subject to marketing and selling restrictions) and let the investor filter for what they want to see.
• These sales people ordinarily distribute deal terms to static distribution lists. This is a relatively basic mechanism for ensuring that deal terms are distributed in accordance with marketing and selling restrictions and the bank's own KYC status. Again, issues may therefore be unable to reach potential investors internationally. Electronification of this process through IHS Markit's IssueLaunch product allows the use of embedded logic to enable deal terms to reach a wider range of appropriate investors.

In addition, electronification ensures that the distribution process can scale as deal volumes in the market continue to increase.

Q2d.What is your view on the statement that there is a need to improve competition and level playing field conditions regarding the access of banks, investors and CSDs to debt securities?

With regard to the banks, public league tables for European debt capital markets activity indicate healthy competition among a broad range of banks, certainly vis-à-vis the US domestic market. This indicates a strong level of competition among the banks.[4]

Q3a.Do you think that there is a need for further harmonisation and standardisation in the area of debt securities issuance?

IHS Markit believes that pre-issuance processes would benefit from further harmonisation. For example, standardisation of book states and deal timing would benefit all market participants and can be provided through technology solutions like IssueNet.

Existing harmonisation efforts, such as the standardisation of deal terms, could also be expanded. IHS Markit's IssueLaunch solution already provides an effective way to facilitate this, having developed a set of mandatory deal terms, in consultation with banks and investors. This has now been adopted by the market and is used on 95% of Euro denominated investment grade deals.

In addition, it is worth noting that ICMA and FMSB have both published best practices which have yet to achieve widespread adoption.[5] Having already established a standard issuance workflow across all markets, IssueNet could be used to provide market participants with an efficient way of implementing these guidelines.

Q3b.Should the work on harmonisation/standardisation cover the full transaction chain, i.e. from pre-issuance to post-trade?

IHS Markit would agree that the full transaction chain should be considered. However, harmonisation of the pre-issuance process is further advanced than post-trade so we would recommend a focus on this area.

Q3c.What are your views regarding the pre-issuance harmonisation items/topics? Which processes should be looked at?

Over the course of the last 15 years IHS Markit's IssueNet product has already established a market-wide process for bookbuilding and allocation, including standards on terminology, rounding and order formatting. IHS Markit would welcome the opportunity to expand this to other areas, something which would benefit the market. IHS Markit also believe the ECB should learn from how the market has already worked together to address some of these topics, rather than restart or duplicate such approaches.

Q3f.Do you see any other efforts that could help resolve the current market fragmentation?

Market fragmentation is more prevalent in the post-trade process. In pre-issuance, one platform (IssueNet) is used by all banks, across all markets to issue bonds from all Issuer types. Therefore, the ECB should focus on how greater harmonisation can be brought about in post-trade processes and avoid introducing fragmentation (whether regional or between asset classes) in pre-trade processes.

Q4b.Do you think that this service, as described above, exists today in the EU? If not, should it be offered by a private entity or a public entity, and why?

Debt capital markets tend to be global and IssueNet provides a global, not just pan European, service. It already provides a harmonised issuance platform which all banks active in this market use (over 180 banks use the service). It allows banks to price deals sooner, removes risk from the issuance process and has also implemented many innovations that have benefitted the market (such as unified bookbuilding and standard deal terms). The increase in deal volumes in recent years and in particular the increase in deal sizes (both number of orders and number of banks in the syndicate) would have made it increasingly difficult for banks to execute primary deals if IssueNet had not delivered the efficiencies and standardisation that it has.

Whilst run by a commercial entity, IssueNet has retained the market utility principles established by ICMA when they created the platform in 2003 (for example, common pricing for all participants). As such, it combines positive elements of both private and public management and has developed a reputation for innovation and reliability.

Q4c.Is there a need to combine both approaches, i.e. a Europe-wide harmonisation initiative and the provision of a European market infrastructure service, and why?

The existence of market infrastructure services makes harmonisation easier to implement. The IssueNet service has standardised the bookbuild process and there are numerous examples of how this has helped harmonise the processes used across all deals (for example, the establishment of a standard order format). Equally, IssueLaunch has enabled harmonisation of terms distribution to investors, with the platform able to ensure conformity with sales restrictions and enforce the distribution of required terms at each stage of the deal. IHS Markit would welcome the opportunity to work with the ECB to establish further harmonisation through enhancement of the IssueNet and IssueLaunch platforms.

Q5a.What is your view regarding the inclusion of the pre-issuance and post-trade functions in a potential EDDI initiative?

The IssueNet service is a global pre-issuance platform that services the whole of Europe, with over 180 banks onboard. It allows banks to price deals sooner, removes risk from the issuance process and has also implemented many innovations that have benefitted the market, such as unified bookbuilding and standard deal terms. As explained in the answer to question 4b, the increase in deal volumes in recent years and in particular the increase in deal sizes (both number of orders and number of banks in the syndicate) would have made it increasingly difficult for banks to execute primary deals if IssueNet had not delivered the efficiencies and standardisation that it has.

Building another platform would increase fragmentation of the market and make it harder to drive harmonisation and align market practices. It would also cause divergence between European and global processes which have been established by banks, issuers and investors over the last 15 years. This is likely to lead to further inefficiencies in the European market.

Q6a.What are your views on the expected impact of EDDI on the market in general and on your institution in particular?

As we have set out above, the IssueNet service is a global pre-issuance platform that services the whole of Europe, with over 180 banks onboard. It allows banks to price deals sooner, removes risk from the issuance process and has also implemented many innovations that have benefitted the industry such as unified bookbuilding and standard deal terms. The increase in deal volumes in recent years and in particular the increase in deal sizes (both number of orders and number of banks in the syndicate) would have made it increasingly difficult for banks to execute primary deals if IssueNet had not delivered the efficiencies and standardisation that it has.

Building another platform would increase fragmentation of the market and make it harder to drive harmonisation and align market practices. It would also cause divergence between European and global processes which have been established by banks, issuers and investors over the last 15 years. This is likely to lead to further inefficiencies in the European market.

[1] We agree with the publication of any related personal data included in the comments on the internet. We declare that we have obtained consent for the publication of such personal data from the involved persons.

[2] Visit Fixed Income Syndication to see more

[3] CP Page 5

[4]Bloomberg-EMEA-Capital-Markets-League-Tables-FY-2018,Page 1. League table shows that the number 1 bank still only has 6% market share.

[5]FMSB NewIssues Process FI Markets - 2May, IPMA handbook

Posted 11 July 2019 by David Cook, Executive Director, Regulatory Affairs

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.