08 September 2017 | FINTECH
The documentation trail of bond trading between a private bank’s execution desk and the relationship manager is still manual and “very inefficient” for both the banker and the end-client, external tech vendors that specialise in the fixed income space tell Asian Private Banker.
“Relationship managers rely on phone and email to share information in documents that take time for the banks to prepare manually,” said Vincent Caldeira, a former Bank of Singapore tech head and co-founder of Singapore-based fintech startup Bondlinc. “The process is also very inefficient.”
Similarly, the way execution desks take orders on their trading platforms is also human-driven, says Philipp Sterner, head of Asia sales at MarketAxess. “A majority of trading execution at private banks has been carried out manually, with those on the execution desk keying in information, sending off RFQs [request for quotations] rather than letting the orders be fed to the trading system in a straight-through-processing (STP) manner,” Sterner said.
MarketAxess specialises in delivering electronic trading platforms for fixed income securities.
But while the market is crowded with electronic solutions – like MarketAxess – that target buy-side dealers with solutions to access pools of liquidity online, the bond documentation trail that originates from the execution desk still lacks automation, Caldeira says. The recommendation list that then trickles down to the product specialist, the RM and ultimately to the end-client undergoes an interlude of phone calls and emails.
Factoring in the time spent to pull information from terminals such as Bloomberg or Reuters, and packaging it into a PDF proposal, the entire process from bond investment idea generation to pitching ideas to clients is “slow”, says Adrian Gostick, managing director at BondIT, another fintech firm that focuses on automating the delivery of bond information.
Tucks and tweaks
Gostick believes that the manual process limits the amount of fine-tuning and tweaks made before a proposal is presented to a private banking client.
“Given the difficulty of tailoring ideas for individual customers at scale, RMs often have to present generic, rather than tailored, ideas to their customers, resulting in a lower probability of the customer transacting.”
Gostick explains that when the CIO house view finally makes its way to their desks, RMs need to be armed with better analytical tools in order to make changes to proposals in a meaningful and compliant way.
“We are aware that RMs will be presented with the CIO house view, showing buy or sell recommendations for individual bonds,” he said. “To comply with internal bank policies, RMs usually have to notify customers that hold bonds on a sell list, and propose switch ideas. This process is also very manual. RMs will often call their clients and propose recommendations that may not necessarily be tailored to their risk profiles, or optimal for their portfolios.”
Platforms like BondIT’s, which have the ability to trigger alerts when changes are made to in-house buy or sell recommendations, and which work within the given universe of bonds using machine learning algorithms, can help RMs to come up with “smart investment ideas” that are based on “the specific risk profile, investment goals, and constraints of the individual customer”.
Caldeira agrees that bond automation tools can help a private bank to tick all the regulatory boxes while creating efficient channels of delivery. He says that today, one of the biggest issues that private banks face is their inability to carry out pre-trade checks in the “truest sense”.
This refers to carrying out checks “before the product is recommended to the client, before the transaction takes place, and capture evidence of those checks”.
Typically, pre-trade checks are carried out after clients view recommendations and before the transaction is effected.
Caldeira says that through automation, solutions like Bondlinc’s are able to “filter relevant products suitable for the private investor and effectively bring forward in the process flow some of the pre-trade checks required, if and when clients are able to provide us with their internal policies and rules”.
Delivering to the end-client
And while the proposal that lands on the laps of private banking clients needs to follow a lengthy trail, private investors that seek direct access to information on fixed income products are still reliant on their RMs “to get any product information or market colour”, Caldeira points out.
At the moment, those direct-dealing clients of brokerage firms or private banks who seek round-the-clock access to bond execution via trading desks are serviced through phone channels, he explains.
With digital access, such clients – albeit a small portion of private banking clients – can be “supported effectively even at night with a limited amount of internal resources via an asynchronous electronic channel, while providing proper tracking and auditing of orders”.
He adds that Bondlinc has created a solution that can be white-labeled for private banks.
“We saw a gap in the market for providing information and education on fixed income products directly to clients and therefore we created a simplified, mobile-enabled solution for private investors to manage their fixed income investments, from product discovery to execution,” he said.
“This is typically targeting sophisticated investors today but we see the market progressively opening with the increase in issuance of retail bonds and regulator-led initiatives that foster direct access to retail investors through a cost-effective and transparent electronic market.”
However, as more fintech firms focus on the largely manual fixed income workflow process, private banks continue to pour resources into their digitisation blueprints in order to enhance the overall client experience.
It all boils down to workflow habits, Sterner points out.
“The challenge for private banks is changing workflow habits. The dialogue has been increasing but at the end of the day, it is a question of adoption. It takes time to change habits.”