The securitization bankers who might have spent their days dreaming up new forms of leveraged credit derivatives trades are now mostly out of the market, and their former juniors can only spend time on new tweaks to risk retention.
The hybrid structurers that pioneered the market before the crisis and eased Basel II into existence had a last hurrah with the flourishing of the AT1 market. But these days, complexity is out, and with it, some of the elegance and beauty of juggling ratings, legal forms, regulatory treatment, accountancy and economic cost.
That said, some are still trying. Banks are struggling with stress tests, which have been the binding constraint for US firms, and are emerging as one of the biggest considerations for UK and European CFOs as well. So capital formats that are treated well by stress tests are the new frontier — as explored by GC’s Tyler Davies in one of our cover stories this week. Deferred tax assets, and other forms of alchemy seemed promising at one time, as did CoCoCas (convertible contingent capital) but alas, regulators also no longer have the sense of fun that they once did. Radical simplicity, rather than bells and structural whistles, is likely to be the watchword in future.
Innovations is also afoot in the previously staid worlds of clearing and settlement, thanks mainly to the hype around blockchain technology. BlockEx, a firm backed by Mizuho’s former credit trading head James Godrey, appears to be winning the race to be the first firm to do an actual bond financing on blockchain — though there have been plenty of proof-of-concepts or trial runs.
Smaller, self-contained bond markets like Australia, Switzerland or Brazil are most commonly cited as high potential markets for adopting blockchain clearing and settlement — it helps, for example, to have a single hegemonic firm that runs market infrastructure, like ASX and SIX, rather than the messy patchwork of national securities depositories (as well as pan-European Euroclear and Clearstream) in the Eurobond market.
The fewer participants need to be coordinated, in other words, the better and easier will be the adoption.
That’s partly the secret of BlockEx’s likely success — initial issues are likely to be semi-private deals, where the work of finding investors has mostly been done — and the platform is literally just for execution and documentation. Don’t expect a €500m index-eligible benchmark to drop — but it will be a market milestone nonetheless.
Also creditable is BlockEx’s eagerness to go legit and fully comply with standard KYC and anti-money laundering rules. That will be essential to attracting credibility, and making sure the business is clearly differentiated from activity at the more absurd end of the blockchain business