There is a problem in the world of bond trading, and that problem is having consistent and accurate data that firms can rely on in their decision-making process. In this article, Neill Vanlint, Head of Global Sales and Client Operations at GoldenSource, offers his analysis about what firms face with disparate systems having conflicting information on a single issue. This has caught the regulators' eyes, as well, Mr. Vanlint, points out.
Nothing causes more heated debate than a new bond. As the spectre of the world’s central banks global response to COVID-19 continues, the EU’s latest attempt to weather the economic storm is to issue $80 billion worth of debt in the form of a NextGeneration EU funding programme.
These new bonds are set to become a regular fixture in Europe’s monetary policy. But for many investors, underpinning the interest of this recent issuance is a very specific problem that has been brewing for some time across the global debt markets.
Trading debt, like all asset classes, is only as good as the information that underpins the instruments. And for every asset type, there is a very different set of attributes required. Therefore, it would stand to reason that whenever a bond is issued, the financial institution trading it would always need an accurate issue and a maturity date. Or, if it was an interest paying bond, the same institutions would require schedules to be present.
The trouble is that too many financial institutions have all this information scattered across different parts of the bank with no mandatory checks being carried out. As such, the information being used to make trading decisions is very often incorrect. As a case in point, one system could be defining a perpetual bond as having a maturity date. This, despite the fact that a perpetual bond, by definition, should never have a maturity date as there is no end date for when it is going to mature.
While this may seem like an extreme error, it is typical of the type of inconsistencies that currently reside in the data systems of firms trading bonds. The complexities of the information sourced from the various market data vendors often means the data housed across various systems is very different.
After all, it is very rare that multiple systems within a bank all validate information in the same way. Not only does this lead to operational inconsistences, but it could also lead to inaccurate risk calculations. Particularly if a bank is making trading decisions based on a maturity date on a bond that does not actually exist.
Due to these risks, regulators are understandably pushing the industry to implement their own due diligence. This includes collating, ranking and defining those bond instrument types in a central place where records can be audited easily – not across numerous parts of the bank. Only by applying rules to detect issues within debt markets before they occur can financial institutions harbour any hopes of demonstrating responsibility in their trading decisions to regulators and investors.
The launch of any new bond always creates excitement about new enhanced liquidity entering the market. The recent NextGeneration EU bond issuance is no exception, but, unless market participants overcome information errors, their wider bond trading strategies will be a bit like the financial equivalent of former Bond actor George Lazenby, unable to live up to expectations.
• • • •
Neill Vanlint, Managing Director, is Head of Global Sales and Client Operations at GoldenSource, where he is responsible for spearheading the company’s strategic international growth. Based at GoldenSource’s European headquarters in London, Neill heads up the sales, professional services and account management teams that are responsible for new business development, implementation services and delivering customer care and support. With over 20 years of experience with GoldenSource, Neill has held a variety of senior management positions including several years as Head of the company’s international Professional Services Group prior to leading the sales team. Neill has spent the last 10 years working closely with customers across the US, Asia and Europe.