Beyond bonds: opening a new world of asset classes on the blockchain

Full transcript

[00:00:13] Seamus: Welcome to Episode 27 of METACO Talks, our series of live conversations with the people at the forefront of innovation and decentralized finance, today. Today, the title of episode is: Beyond bonds – opening up a new world of asset classes on the blockchain. To discuss this, we have a special guest, Rehan Ahmed, Chief Product Officer and founding team member at Marketnode, in SGX and Temasek joint venture on digital assets.

Within this role, he focuses on product development, digitalization of capital markets products includes bonds, fund infrastructure and sustainable finance. as Head of Fixed Income Products and Digital Assets at SGX, Rehan oversaw the launch of a digital bond issuance platform that culminated in the Marketnode partnership.

Rehan was involved in the launch of the new platforms, including SGX’s institutional bond trading platform in 2016, and led a general counterparty service 2018 rollout before focusing on digital assets. He’s been one of the key SGX representatives on industry bodies, such as ICMA, the Fixed Trading Community, and the Singapore National Market.

 

[00:01:33] Rehan: Good afternoon from Singapore.

 

[00:01:34] Seamus: Good morning from Switzerland. Great to have you here. I would love to chat a bit about how you got into the digital asset space, how that evolution evolved.

 

[00:01:40] Rehan: Much like many of us in this space, it all started off with a personal interest in crypto. That began sometime around 2016, early 2017. But I actually got a lot more interested in the efficiency as a result of smart contracts and ledgers. There’s actually a personal reason why.

One of the first jobs I had in banking, which is many years ago now, I was actually sent to Japan to service an individual security, that took about two weeks to service. This security had more than 9,000 mortgages underlying, and I was the guy sent to go out there and service it. Back then there was no concept of smart contracts and ledgers to be able to automate asset servicing. We always had that mindset of, such an immense amount of data, how do you automate and make it more efficient for these kinds of assets?

We were quite pragmatic about being able to support things like crypto in a major global exchange. I started focusing a lot more on, what is the underlying technology? How do you use smart contracts for servicing of pings like bond coupon payments, that I was stuck in Japan doing for about two weeks? How do you automate maturity payments? How do you think about automating things like voting in the future?

As started looking at that, the potential of the of the technology and the application was obvious. We only wanted to think about, where do you use it? Now, as Singapore exchange, we are quite a unique financial market infrastructure in the sense that we have a listing venue for bonds, we have a lot of Asian and US issuers and westerners. But we also operate a depository in the region that supports aside from equities, bonds. For us bonds, asset servicing, are as a bread and butter business.

It began from looking at, how can I use this particular technology, which is smart contracts and blockchains, to make life easier for our bond holding clients? That really was the genesis of it. We’ve all been down the rabbit hole. As you start looking at the usage of the technology, different applications become a lot more apparent. The usage across different asset classes that may not be accessible to you become a lot more apparent, and here we are.

 

[00:04:02] Seamus: I imagine that there was a dramatic truck when you had to do the asset service in Japan. The advanced features were probably programming the fax machine more than anything, given how that was a critical piece of equipment in Japan. That evolution is pretty clear; can you talk about what Marketnode is and what eventually was the combination of the experience, and what problem it solves?

 

[00:04:25] Rehan: When Marketnode started off in 2019, it was really an attempt to create a digital human-less depository, which is at the point in which a bond comes to be customized with us in our depository. How do you automate the settlement? How do you automate the coupons? How do you automate the maturity payments?

When we started working on this, it was pretty clear at the start that we needed partners. Usually within the bond market, you definitely need a large arranger. You need custodian banks, you need to be able to have trustees, the investors, and everyone just plugged into the ecosystem to make it work. Very early on, we searched for partners. Some examples I can give here are partners like HSBC. Subsequently, we also worked with UOB, which is a Singapore bank. We managed to understand how the post-trade could be fully automated.

But as we worked with all of these parties, what became quite clear is that a lot of the data gaps and a lot of workflow gaps might constrain in the bond issuance process. Some stats I can share with you, depending on which bank you speak to and the complexity of the deal. A typical bond deal can have anywhere from 250 to 600 individual steps that are happening between the banks, the law firms, trustees, the investor custodians, the bank custodians. It became very obvious that if we were looking at fixed income as our first asset class, we have to look at the entire value chain, versus just looking at post-trade, which is what we started off as.

It’s a long way of saying that Marketnode essentially focuses on end-to-end DLP enabled infrastructure. Our fixed income is definitely our anchor asset class. Over time, we will look to make this a multi-asset infrastructure. We have what we call an ABCD and E within our end-to-end. Typically, in FinTech, I’m sure a lot of your listeners will be aware of the ABCD of FinTech, which is: AI, blockchain, cloud, and data. Our ABCDE, is A for access mechanisms. We’re working on some really interesting products to be able to give issuers the ability to tap traditional capital markets through a digital access. Our B is our experience working with ledger technologies, blockchain technologies, which we’ve done over the last two and a half years. Our C is cloud. We realized that the way this market is evolving; you need a faster deployment procedure. Everything you do is on the cloud. Data analytics we’ll cover in detail throughout this webinar. Last but not least is ESG. The ESG element is really interesting. We realized that as you’re building out a future digital market infrastructure for traditional capital market products, it’s something we could not ignore. It’s almost turned this day and age in Europe and Asia and the US, into a borderline fiduciary responsibility. Being able to show, for example for green bonds, where’s this money going? What frameworks are you using? What are the kinds of projects you can invest in? What is the ongoing impact reporting?

Again, it’s a very ground up approach to ESG. Lately we come across many fintechs that are overnight ESG experts. You know, we actually put them into part of our design process very early on.

 

[00:07:48] Seamus: Fascinating. When I look at similar market infrastructure and utilities, they have a very different approach. Let’s think about the players like ASX, they’re really focused on the ledger side of the infrastructure equation. Do you think this has helped you not deciding what that core ledger is and really focused on the issuance process? Does that make the task easier?

 

[00:08:10] Rehan: Here, I’ll go directly back to Project Houben, which is how all the parties met. As a matter of fact, we’d gone to test out the interoperability between ledgers for trading and credit clearing and settlement, as part of Project Houben. For us, that was a relatively well-known process. As a matter of. SGX, our parent company, actually filed a patent on this and has received it. The mechanics are actually quite familiar to us. For us, for market mill we had to prove out that there is a commercializable business for this.

When you start thinking in those terms, you start moving away from the concept of minimum viable product to that of a minimal viable ecosystem – which is your banks, your issuers, your law firms. We very early on within our digital bond project did a lot of design study into what the individual pain points were. For someone to be completely upfront with the audience, for someone sitting on a BCM desk right in the coal face, they really care less about consensus mechanics. They care more about am I able to find the last 10 COVID risk factors for deals on Asia? They’re looking for ESG data, they’re trying to understand what the ESG profile of an issuer is, they’re trying to gauge customer demand, and frankly they’re quite far removed.

Also as someone that controls the wallet and the spend on this, I think you have to look at what the business centers cares about. It’s certainly a very different approach from what some of the other financial market infrastructure players have done. We also wanted to focus on fixed income because it’s an OTC asset class. Typical public bond deals have 120 to 150 institutional investors. Private placement deals have 1 to 3 investors. You’ve got a smaller universe. You’re not dealing with major equity IPO that can also have retail participation.

Some very natural reasons why we chose to focus on the workflow, just because we did a lot of design thinking workshops with our participants. The feedback was loud and clear. That’s some of the thinking around what we build Marketnode on.

 

[00:10:37] Seamus: It’s clear what problem you’re solving in the near term. What’s the longer term mission for Marketnode? What’s the end state?

 

[00:10:44] Rehan: Let’s start at what the current mission and vision is. In the short term, we want to get fixed income right. In the longer term, you want to take this concept of getting an end-to-end for one single asset, then be able to expand it. Let me break that down into what that means in this context.

When you look at an asset class like fixed income, let’s split it into two, which is pre-issuance. What is the point in time in which an issuer decides to come to the market to raise funding through a new bond? That involves a lot of documentation, a lot of issuer profiling, investors sounding, and basically a lot of work in the front office. Then essentially you have the post-trade, through which you’re able to settle it more efficiently, through which you’re able to be corporate actions more efficient.

Since we started working on it in the beginning of January, we had an 18-month horizon in which we had to get the fixed income right. We had get certain parts of pre-issuance right, and parts of post-issuance right. Hopefully that is something we’re able to deliver the market by middle of next year. As a matter of fact, our first product launch is not too far away. We will be launching our pre-issuance platform on the 15^th December, then subsequently we have phase releases on post-trade. That should put us in a very good position by middle of next year to have delivered on fixed income.

Now, whenever you’re building up financial market infrastructure, I’m sure your listeners can appreciate, you have to think about making it multi-asset because of the common component. That’s where we’re starting to look at new asset classes that fit this paradigm, that have issues that may or may not be similar to fixed income but are definitely faced by participants. It becomes quite important, which is why we’ve been looking at some of the newer asset classes that I’m sure we’ll cover soon.

 

[00:12:32] Seamus: What are those common characteristics when you look at other asset classes?

 

[00:12:35] Rehan: Let’s zoom out from asset classes and think about when you generally look at the ledger technology. What are some of the challenges it is supposed to solve? Generally immutable record keeping. Yes. Are you looking for a better way to connect data across participants? Absolutely. Are you looking at streamlining things like issuance, money transfers, get away from very traditional batch settlement processes that happened one or two times a day? Last but not least, are you able to create new investible asset classes from something that doesn’t exist today?

When I look at the broad universal of instruments available, the ones that seem to fit in quite well are things like loans, which would be an extension of fixed income. If you think about the global loan market, it’s split into syndicated loans, and then you have the private loan market. I’ll share an anecdote with you from someone I met earlier in the week. He was telling me about how a secondary loan transfer he once did, took him 45 days to settle. In the bond world, we talk about, T+5 is a long time. imagine the person who is out there trying to do a loan in secondary.

When you think about all of these challenges, what it really comes down to is you don’t have a centralized infrastructure. That’s where I think this kind of technology is very useful for. For loans, for example, there is no centralized infrastructure for things like bilateral private loans. As a result of that, you don’t have the ability to create a secondary market. That’s why, because all the processes are very paper oriented, it took that banker 45 days received the funding.

Then I think when you start looking at things like funds as well, I think for funds it really depends on the market you’re looking at. Many regional markets globally have very efficient fund infrastructure, but some don’t. Something we definitely see a lot happening in Singapore is so-called private funds, Large public mutual funds, for example, they have some kind of infrastructure with transfer agents, custodian banks. But when you start thinking of private funds, it’s a very lumpy landscape in that way

Again, if you have a core infrastructure that’s able to tokenize, it’s able to settle, it’s able to have data at the depository level, then these sorts of asset classes start looking very interesting because then you’re not going against an incumbent infrastructure such as the CSPs.

 

[00:15:21] Seamus: That’s fascinating. You’ve identified a lot of problem statements around the different asset classes. How do you look at trade finance finances? There’s a lot of consortium’s looking to resolve all the paper and manual processes and time delays involved in trade finance. Is there a role for Marketnode there as well?

 

[00:15:39] Rehan: It’s been something we’ve been studying intellectually versus from a product standpoint. The interesting thing about trade finances, you’re right, there’s a lot of platforms and consortiums that are focused on things like bills of lading. There’s many good examples in Singapore and globally on there. That part is better served by the fintechs. What interests us is, how do you look at the technology news from trade finance? Take container logistics as an example. Some of the use cases that we’re seeing now is really the adoption of sensory technology, and for example verifiable credentials to be tagged onto container logistics that you’re able to track their movement.

Because you’re able to track their movement, let’s say if you’re a bank is providing trade finance to cover you for the receipt of a container; now you have a real time view of essentially what your funding risks looks like, what your credit risk actually looks like. I think the interesting part for trade finance is how this technology is used at scale at a cost efficient manner, because we see a lot of overlap between that and how the technology could be used for ESG capture in the future. I think that’s a few years away, but we started looking at how that could be used, because from an ESG data standpoint, I’m sure we’ll cover this in a little bit, we have a lot of data because SGX is a premier listing venue for ESG bonds in Asia. You want to start thinking about how that gets recorded, how investors get a better view of all of the work that the issuers are putting into this. It has really been quite interesting technology.

The second area, that frankly Marketnode is not looking at, but we see a lot of this happening in the trade finance space, is how do you turn short-term funding and receivables into actual tradable products? In that case, for example, it could be an anchor corporate that is well-known, and a bank is providing funding to the anchor corporate that has tied to, for example, peanut to a supplier. In short, it could be seen by an investor as short-term risks to an anchor corporate. How do you turn that to new digital asset that can then be traded across the digital asset venue or network of digital asset venues? That’s some of the ideas that we’re seeing in the trade finance space right now.

 

[00:18:03] Seamus: It seems the issue is not so different than aligning settlement cycles with trade cycles, basically. You have a couple of days in equities, but trade finance could take six months to negotiate a contract with a bank. Aligning those would radically change how they get financed and probably increase the loans.

You touched on the ESG data element. Are those properties codified or made more programmable? How do you plan to approach that?

 

[00:18:30] Rehan: The first problem is to define the dataset, before thinking about how to quantify them, and that is a big task. If we look at the Asia offshore bond market, we have a number of issues across different industries, mostly in financials, but across automotive, technology and real estate. What we’ve been trying to do so far is to actually – I don’t want to use the word standardized – but set a common dataset across all of these kinds of issuers. Thanks to some industry bodies in the market like ICMA (the International Capital Markets Association), they’ve put a lot of work into educating, putting out templates for reporting, putting up templates for frameworks.

I got asked the same question earlier this week. My answer is that when it comes to ESG standards, it’s a bit like how they talk about the future. That it’s here, it’s just unevenly distributed. We find the same with ESG standards. There’s no lack of existing standards and industry bodies that are working on this. The challenge is really the issuer awareness and education on how to use it.

Now, once the issuer starts using it, we need to be able to start to define the common dataset before thinking about codifying. I’ll give you an example. You could have an issuer that decides to come to the market and they say, “My coupon is 4&.” Not that 4% coupons exist anymore, but the issuer could say 4%. “I promise you the investor that if my greenhouse gas emissions do not go down by 20% over the next three years, my coupon is going to go up to 5%.”

Let’s think about how that is actually done today. By the time you report that in five years, there’s a lag in the reporting. Someone has to manually go in and report it. Then someone has to go in and manually amend the coupon from 4% to 4.5 or 5%. One use case we can see in the future is, for programmable assets through sensory technology, this is the longer term play, are you able to record greenhouse gas emissions on a real-time basis? Once you’re able to do that, are you then able to go in and amend things like coupons? You could also think about other penalties for issuers like this. This is quite common in the marketplace. The remedial action could be: please ensure you go out to the marketplace and buy carbon credits.

It is this kind of policing that, unless you have the dataset there you can’t even think about codifying it. For us, making sure we have the right dataset is what we’ve taken a long time to come through. We think that’s going to be a continuing journey over the next year or so. Then we think about a year’s time, we’ll start thinking about how to codify this, which is a very different approach from what I seen some of the green fintechs take. They go in and they say, “You’re a real estate issuer, let me give you a full end-to-end tracking mechanism. It’s all there.”

I’ll give you one recent example that came across. There was a conglomerate that we were speaking to, and the conglomerate had textile manufacturing and agriculture. Someone came to them with a great pitch for textile manufacturing and how to attract supply chain finance there, but then turns out, they said, “We’ve been thinking of doing a green bond for agriculture business. Do you have anything for that?”

Again, I think some caution is required there. There’s a lot going on in the ESG space, but for us to put our heads down and get the dataset right first before thinking of codification, we feel is the right approach. Also, you want to start with the right sector, because not all sectors will be appropriate for this. That’s why we’re spending our time doing the ESG.

 

[00:22:26] Seamus: Great points on what you have to get right before you codify. We’re talking about to a large degree reinventing the technical stack. What’s the difference you see in terms of the old issuance technology stack versus how you see that new issuance stack in the future?

 

[00:22:44] Rehan: I’m sure your audience is very well aware of the new trading tokenization and ledger of stack. I’ll switch gears a bit on pre-insurance, which is how does an issuer decide to come to the market?

The incumbent technology in that market is Word Doc and Excel. You don’t want to discount the incumbency over there. They are very powerful incumbents and for many good reasons, because deals are very nuanced. You get very nuanced colors on complex credit deals that you can’t codify. We’re quite excited about a lot of the new technologies that are being used in the pre-issuance space. I’ll give you a couple of examples. One could be data extraction technologies. How do you use optical character recognition or OCR, to be able to extract certain closets? For example, if you’re a Korean issuer coming to the market and you want to see what the last five Korean issuers have done in terms of the risk factors. Today, it’s unfortunately some poor analyst sitting out a DCM desk, going around different sites, trying to get the documents in and wanting to control that search.

We actually find extraction technologies that I think have matured a fair bit, given the library transition, which is where banks have many different library loans that have migrated. We’re looking at some use cases for that to be used for bonds.

There is, for example, in the repo market, a but removed from this conversation, you tend to see bonds libraries being built out by industry bodies such as ICMA. For us, a natural progression is that we trap bonds libraries. We’re looking at some of that. Then when you look at going further downstream from there, there’ll be some element of document templatization, better sharing and collaboration tools on a single platform. One example I’ll give you is CircleUp. Today, auditors go and mark big red circles on financial statements. Could that be something that could be digitalized, and could you point that to a source?

Again, a little bit removed from traditionally what I’m sure your guests talk about on your webinars, but we are quite excited about the usage of that technology.

Going further downstream, back in 2019 we were looking at enterprise wars. There were a number of players that were in that space, each having a different niche. We think that’s consulted at a fair bit. It’s a lot easier to, if not pick a single winner, then at least pick two winners in that space. That gives us a lot of comfort.

In a way, it’s good to be a slight later mover advantage when you’re looking at downstream, because you can have your pick of the proven technologies.

 

[00:25:37] Seamus: Fantastic ambitions. It sounds like the key success is standardization. Obviously standards are about reaching consensus or building an ecosystem around those standards. How is that ecosystem progressing on your side?

 

[00:25:53] Rehan: We think about ecosystem in two ways. The old method of building a platform is: launch platform, do 30-page onboarding, get your salespeople out there dialing, and just going out there and reaching out to clients. We think that the new model is a little bit different. A very good illustration is the partnerships that we forged with 10 financial institutions as Marketnode, in late September.

We are very open to the fact that banks have a lot deeper relationships with the corporate issuers than for example, today Marketnode does. We want to be able to work with these banks to understand their pain points on upstream and downstream – all the points I was mentioning earlier about legal documentation. We think that working with these banks as partners and going to issuers, is a lot more powerful than us being standalone.  That’s one element of us looking at banks as key partners, sponsored access into key demographics like the issuers.

The second that we see coming up from a distribution standpoint, us digital exchanges. There’s a number of them in this region that generally look at either private assets or bonds. If you think about Singapore as a jurisdiction, a very technologically savvy jurisdiction, investment savvy as well. Many of them may not want to be served by your private banking advisor. They are much more comfortable with the digital technology, and they understand the credits a lot as well because many of them work in the financial landscape.

Those are two models that are coming up. We do expect to be partnering with a few of these digital exchange as we launch our post-trade products out before the middle of next year.

 

[00:27:44] Seamus: As part of the launch, what are the critical next steps for Marketnode?

 

[00:27:50] Rehan: It’s purely adoption. I think the one milestone that I’m very proud of is our ability to build a rock star team. Certainly, we launched Marketnode, we were quite well known in the region, it’s helped bring in some key players and key participants; a lot of interest in joining Marketnode. That’s worked out quite well. I think our critical milestone will be to deliver all of our partners what we promised them we would.

We’ve always told our banking partners that by Q2 of next year, we would have the end-to-end. Whether they are looking at pre-issuance or post-trade or looking at loans infrastructure, we would be able to serve them. That’s a critical milestone for me to achieve, which is making good on the promises that we’ve made to all of our partners.

 

[00:28:35] Seamus: Clearly, Marketnode is highly strategic for Singapore. Does that make it easier or harder to execute?

 

[00:28:41] Rehan: It would make it no harder to execute, but I think we need to zoom out a little bit. We have a lot of support here in Singapore, but looking at us coming out of 18 months of lockdown now, what will be critical for us is our ability to show that we can partner with international partners in this space. For example, we’re speaking to some potential parties in the EU and outside of the EU and the US. I think for us to deliver on that will be a lot more important going forward. Certainly, Synchro has been extremely supportive to us over the last year or so within our journey. The banks, the financial institutions, the buy side, the regulators as well. But I think we need to start thinking about how we partner internationally, to be part of this digital market infrastructure that is pretty much at our doorstep.

 

[00:29:33] Seamus: Very excited. We’re out of time. Any final comments, or how can people connect with you?

 

[00:29:39] Rehan: It is Rehan@marketnote.com. Please feel free to tag me on the METACO post. Feel free to reach out to me. Always happy to speak external partners, people who are interested in partnering with Marketnode, people interested in working with Markets Note and working for Marketnode. I’m on LinkedIn, please feel free to reach out as well. We’ll add something to your show notes as well.

 

[00:30:09] Seamus: It’s been a real pleasure. Thanks for the time, and good luck with those next steps.

 

[00:30:15] Rehan: And we’ll see you once again. Thank you.

 

[00:30:17] Seamus: Look forward to it. Our next METACO Talks will be in two weeks’ time. Until then, wish you all a great weekend. Stay informed at www.METACO.com/talks. Thanks again, everybody. See you next time.