It’s been a seven-year build but finally Singapore-based fintech BondEvalue has brought together the partnerships and the capital to open its landmark electronic exchange for bonds to retail investors.
First, Citi, an existing shareholder, has become the first digital custodian on the novel venue, BondbloX Bond Exchange (BBX). This now makes it possible for any Citi buy-side custody client to access the platform.
Second, BondEvalue raised a $6 million Series B round of funding, adding the venture arm of Thailand’s Kasikorn Bank, Beacon Venture Capital, to its cap table. Citi and MassMutual Venture Investors, also an existing investor, also took part in the funding round.
“Within a few years, anyone who buys single-ticket stocks will be buying single-ticket bonds,” said Rahul Banerjee, co-founder and CEO at BondEvalue.
He says the time to introduce this platform to a global investor base is ripe because, first, many people are now comfortable with digital onboarding, and second, the rise in interest rates over the past three years makes the asset class more attractive.
“Bill Gross says in trading fixed income, timing is key,” Banerjee said, citing the renowned bond investor. “And the timing for bonds is now correct.”
Banerjee and his co-founder Rajaram Kannan founded BondEvalue in 2015. Both were veterans of bond markets. Banerjee was the banker, previously ran the corporate bond desk at Standard Chartered. Kannan, the technologist, oversaw treasury and markets technology at DBS.
The goal from the outset was to make bonds more accessible to investors, both institutions and retail. That has meant bringing technology to the bond market.
Equities trade on centralized exchanges that post real-time prices and other information. The digitalization of stock markets since Nasdaq launched the first electronic quotation in the 1970s has opened equities to accredited individuals and then to retail investors. Electronic trading made it fast, convenient and reliable to buy and sell stocks, with pits of traders gradually giving way to today’s electronic world. There are still sales traders and other specialists for trading stocks, but only to serve the esoteric end of the institutional market.
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Bond markets have been much slower to go electronic, although today the most liquid markets, such as US Treasuries, no longer operate manually. But bond markets remain over-the-counter, rather than traded on exchanges. Investment banks underwrite new issuance and sell it on to professional investors such as private credit funds, or trade it on the interbank market and the money markets.
Such debt is the crucial lubricant for the banking system, but its OTC nature has made it harder to standardize and centralize. Fixed income has also remained the purview of institutions: the typical US corporate bond is issued in lot sizes of $200,000, which retail investors cannot digest.
Technology companies have been chipping away at the interbank bond market to enable electronification. Firms such as Bloomberg and IHS Markit provide data. MarketAxess and Tradeweb offer electronic trading, and Liquidnet operates an all-buy-side venue.
These solutions are aimed at institutions, although Tradeweb has extended its trading platform to financial advisors. Yet individual investors have just as much need for the benefits of fixed income in their portfolios.
Retail investors in the US have had recourse to brokers, such as ETrade, Charles Schwab, Fidelity, and Interactive Brokers. These come with drawbacks.
First, the brokerage commissions can be steep and the brokers show incomplete price information.
Second, they still trade in lots of around $5,000, which is a big advance from the interbank market but still out of reach for most.
Third, investors need a US brokerage account to use these platforms, or be willing to pay additional fees to an interdealer broker.
The exchange model
The most salient fact about these online offerings, however, is that they are merely improving the brokerage account: they are more efficient ways to access the OTC market.
What BondEvalue has built in BBX is an exchange.
The fintech started off with an app that enabled individuals to see bond prices in the US-dollar interbank market. This reflects the first step of making equities go electronic: listing quotes.
But investors worked out pretty quickly that the prices they got in the market were not what was quoted on BondEvalue’s app, so the fintech began to work on a trading and execution function.
It received a Recognized Market Operator license from the Monetary Authority of Singapore, to let it run an exchange. It built a distributed ledger (using the Hyperledger Sawtooth protocol) to enable atomic settlement and fractionalization.
The exchange sources bonds from financial institutions in the interbank market. These are custodied, either by Citi or by Northern Trust.
The custodian then issues a depository receipt in $1,000 denominations. This is again taking a leaf from the world of equities. DRs are typically used to list on an exchange a synthetic version of a stock originally listed elsewhere.
For example, banks such as BNY Mellon and JP Morgan dominate the market for ADRs, American Depository Receipts, in which they lock up a stock listed in, say, Tokyo, and issue DRs that trade on the New York Stock Exchange, giving US investors direct access to the Japanese stock, in New York’s time zone.
In the Bondblox example, Citi or Northern Trust will hold a $200,000 bond in custody and issue a DR that represents its economic terms – its coupon, maturity, and duration – and that is listed on BBX. BBX sources the bonds it wants to list from the interbank market but relies on its distributed ledger to fractionalize the bonds so they can be divvied up into DRs. BBX also uses its own matching engine to price and settle the DRs.
Initially these DRs were available to institutional investors, including accredited professionals, as well as banks.
From last month they have been opened to retail, with UOB Kay Hian serving as a consumer conduit. (Banerjee says he doesn’t like to use the term ‘retail’, and refers to ‘individuals’, which can include accredited professionals.)
Banerjee declined to provide BBX’s trading volumes, or the total notional of bonds outstanding on the exchange. He would not provide specifics about the size of the retail business versus the institutional one. He did, however, say BondEvalue has about 50,000 users of its pricing app, representing a latent demand for trading. These individuals can now access BBX directly or via a participating broker such as UOB Kay Hian.
Now, in the latest iteration, Citi has agreed to provide custody of these bonds in digital asset form. These are not structured as tokens – this is not a crypto project, and BBX is not akin to, say, Goldman Sachs’ Digital Asset Platform for bond tokenization. Rather these are digital versions of traditionally issued bonds (or, rather, DRs in purely digital form).
This enables Citi to plug its customers, such as global asset managers, directly into BBX, so they can trade the DRs in real time and enjoy near-instant settlement – a big advance over the usual two days it takes to settle a traditional equities DR. But Citi’s clients do not need a crypto wallet; to them, the DRs are ordinary bonds in their portfolios.
Banerjee says there is a business pipeline of consumer banks, private banks, and brokers that will be interested in obtaining similar access.
Whether for individuals getting access to bonds for the first time, or institutional investors benefiting from atomic settlement, BBX is the first step towards disrupting the traditional fixed-income market.
For now the bonds listed on BBX are non-US corporate bonds denominated in US dollars or Singapore dollars. The Series B raise will go to adding US Treasuries and corporate bonds. BondEvalue is also opening a trading venue in India for its domestic bond market.
“Bonds will become more like equities,” Banerjee said. “Electronification means opening to retail participation.”