The MTN market is in the middle of a sensitive transition. A new strain of online information and trading site has recently evolved and is about to battle for status and recognition. Non-proprietary or third-party sites - those not owned or run by established investment banks - have burst onto the scene this year. And transparency, accessibility and disintermediation are the central marketing tools making these systems attractive. e-mtn.com is one such site run by DCM-Online. Peter Doherty, head of capital markets at DCM-Online, says: "The concept of a central marketplace where everyone can view the same information is definitely the way forward. We can describe every possible structure that an issuer could want to do and make that available to everyone." But according to market dealers, the fight for survival that will ensue will highlight how gimmicky they all are. These independent sites are unnecessary and redundant and will only serve to underline the dominance of the investment banks in the MTN arena, they say. Mike Tims is founder of MTN-i.com, an online news service for the MTN market that will be launched next year. He says: "I doubt anyone takes seriously the idea that a dotcom start-up company can win new issue business away from the main players in the Euro-MTN market. On paper it always looks possible, but when you examine the way in which the market really works you realize it's a very unlikely prospect." A simplistic view of an intricate business is lulling these companies into thinking they can compete. And the cost of set-up may mean most are out of the picture before they start. Tims continues: "Dealers are already doing vanilla trades for zero profit, or subsidizing them for league table position. That doesn't leave much on the table for third-party systems. Having made the huge investment in acquiring the ability to broke transactions it's hard to see how they will make any money." Stuart Clenaghan is head of fixed income e-commerce at UBS Warburg. Over 100 sites have asked him for sponsorship or an investment of some kind this year, but only a handful has impressed him. He says: "There are lots of ideas in the market, but very few of these are unique. Very few of them get to the roots of the problems in the marketplace. It's taken us years to get the balance right between issuer, investor and dealer." The third-party sites are keen to involve the dealer community, but at the same time the very nature of their sites - a point of interaction for issuer and investor, which is the main role of the dealer - seeks to replace them. This is their main problem. Investment banks will always have the tools for the job and the expertise to go with them. The third-party sites rarely have the same level of expertise, and though they offer an open and informed service, they conjure up images of David facing Goliath, without his sling. Deal Composer is one site that has recently backed down from the challenge of competing with the banks. It is not targetted specifically at MTNs, and therefore has a wider choice of avenues to explore. Kevin Arnold, a founding partner at the company, says: "It is not a hugely powerful system, but it is an exhaustive tool kit that replicates the entire capital-raising process." But in the last month it has done an about-turn. Clients were going to be charged fees for each transaction they did via the site, leaving Deal Composer as the main intermediary. Now, they pay an annual fee for a licence. It will allow the clients themselves, which include many investment banks, to host and use the tool kit as they choose. Arnold says: "We envisage getting much more mileage out of the system if we sell it as a package to then be used as the client sees fit. We are not running as a competitor to the banks. Our competitors now are other trading system providers." But not everyone has been put off. e-mtn.com's main selling point is hard to argue against: why would an investor want to look at six or eight proprietary sites - those owned by investment banks - to find the trade he or she wants? Doherty, at the company, says: "The present duplication of effort in sourcing levels is madness. The market has to convince the issuers to do some of the work themselves, or at least to accept systems like ours as a necessary way of improving efficiency." Issuers use the site for free, and can select which accounts will get to see their levels. Investors can search for the deals they want or, by using the reverse enquiry form, they can anonymously post their own needs. And at the moment dealers can buy access to the site to view the data. Investors and dealers are charged a monthly fee of about euro200 ($170.33). But by June next year Doherty hopes the site will be used for trading too. What Doherty calls a universal transaction ticket will allow all the data necessary for a fixed income trade to be processed and sent to the appropriate authorities. This will include IPAs, clearing houses and dealers. A transaction fee of between 0.25 and 1 basis point will also be charged, depending on the size of the deal. And by the end of next year the site will have Recognised Investor Exchange (RIE) status, granted by the Financial Services Authority (FSA). So it comes as a surprise to hear only four issuers are posting levels. The problem facing e-mtn.com, and any new site to the market, is that no one wants to be first. Westpac Banking Corp is one of e-mtn.com's issuers that has braved the water, but only because its levels are already being displayed on the Bloomberg system. Jonathan Minor, head of global funding at the bank, admits that openness is a double-edged sword for most borrowers. He says: "It works both ways. Greater transparency means greater investor access to your paper, which means more possibility of finding a good deal. But it also means they can compare the value of issuers." But if third-party sites already have a confident base of issuers and investors this may not be a problem. LIMITrader does, and will soon be able to accommodate those who want to join the world of MTN new issues. Warren Spar, advisory board member at LIMITrader, says: "Using electronic systems to buy and sell in the fixed income markets is now almost universally accepted. The LIMITrader system will offer global access to the marketplace, and although LIMITrader will start out with plain vanilla and relatively simple new issuance structures, LIMITrader will have the ability to do large bonds and more complex structured deals." But although the issuers may have confidence in LIMITrader and the internet, this may not stretch to doing structures. Considering the negotiation required it is likely the majority of trades done via the web will be vanilla. Tims, at MTN-i.com, says: "If it is possible to model all the variables that conspire in the creation of a structured MTN, and make these available for live execution, it won't be a non-dealer system that achieves this." Third-party sites are too small and inexperienced at this time. It means that many of them will have to team up if they are to survive. Prescient Markets runs cpmarket.com in the US, the first direct issuance internet platform that allows issuers to place commercial paper. It will be translating its model into MTNs in the US by the end of next year. Laurent Paulhac, president and chief executive officer at Prescient Markets, thinks consolidation is inevitable. He says: "Consolidation is critical because ultimately we are limited in the number of products we can offer our clients. It will be driven by investors. They don't want to log on to three or four different sites to find what they want. They want one unique site with one unique protocol." And despite offering issuers and investors the definitive disintermediatory tool, Paulhac positively embraces the roles investment banks can play. He says: "Disintermediation is not a factor. Investment banks add too much value to the product to be disregarded. How quickly our US model can translate into Europe will depend on their endorsement." This is how most of the third-party sites would like to play it. Endorsement and investment from a bank would be the lifeline many of them are eager to latch on to. But the banks have other plans. Rumours are circulating that a bulge-bracket group will soon set up their own consortium site for trading MTNs. Tims, at MTN-i.com, says: "The next phase will be a move on the part of the top tier houses to lock in their domination of the market with a shared system that leverages their existing advantages. Non-dealer third-party systems won't even make it onto the radar in that scenario. The only non-proprietary system that will succeed will be one launched by dealers." And Clenaghan, at UBS Warburg, admits there have been discussions between some banks in the MTN market. He says: "This year a number of alliances have taken place where dealers have agreed standards and protocols. The key to any e-trading system is liquidity, and it seems likely that investment banks will be able to agree on how to work together towards this goal. Third party sites may not be necessary." But there is hope for the third-party systems. If they take a leaf from Deal Composer's book, and concentrate on information dissemination, or on supplying trading tools to the dealer community, they may survive. Pieter van Dyck, formerly head of MTNs at ABN Amro, also takes this view. He left DCM-Online this summer to become managing director of his own internet company, Capital Market Daily, that offers daily commentary on the MTN market. It will also provide dealers and issuers with various tools for making what he sees as a fragmented market more efficient. This was because he did not agree with the direction DCM-Online was taking. He says: "Non-proprietary trading sites are simply not appropriate for the private placement Euro-MTN market. The structure of the market is so dependent on the value the dealers provide, I think the business will always stay with the banks. This market is not just about technology, you need customers too." But even the notion of serving the market as an information provider is met with derision in some corners. Dean Fogg, assistant vice president at Merrill Lynch, says: "As a dealer if I needed to use these sites for information I should be fired. It's my job to ensure I readily have access to any information about the market, and this is why these systems have nothing new to offer the dealing fraternity." The future of these sites depends on being seen as relevant by the established market participants. The banks cannot see what benefits they offer that aren't already present in their own systems. Change direction, or the banks will defeat you, is the message. Van Dyck, at Capital Market Daily, says: "If the new sites are creative and they find a new group of investors they might have a chance. But if a consortium site develops, and I'd welcome one, then the third-party sites will have a very tough time."
December 15, 2000
