issuer David Newns

The Swiss financial services group has issued the first digital bond in a fully regulated environment. Shanny Basar reports.

Digital assets are increasingly seen as fundamental to the future of finance. SIX – most well-known as the operator of the Swiss stock exchange, but also a broader provider of exchange services, financial information and banking services in Switzerland and Spain – has positioned itself for this future by launching the blockchain-based SIX Digital Exchange (SDX) in November 2021 and issuing a digital bond.

David Newns, head of SDX, says: “Innovation is critical for SIX, which is also the reason why we seized the opportunity to issue the digital bond in a fully regulated environment.”

SDX’s first listing was a SFr150m ($162m) bond issued by holding company SIX Group, with both digital and traditional tranches. The concept of the dual structure was to give investors additional comfort and highlight that both tranches had the same legal status. SIX has the ability to convert the bond from digital to traditional and vice versa as they are legally identical.

The target size of the entire issuance was determined before launch, but not the split between digital and traditional. Mr Newns says: “Although we knew that SIX has an excellent credit rating, we could not estimate the demand for the digital tranche, but we were convinced by the product.”

Strong interest

The digital proportion was finalised at SFr100m, as demand outstripped the traditional bond in the book-building exercise led by Credit Suisse, UBS Investment Bank and Zürcher Kantonalbank as joint lead managers. The offering was oversubscribed several times and attracted strong interest from a broad range of institutions in Switzerland, with insurance companies showing considerable interest in the digital tranche. The coupon was 0.125% per year for the bond, which matures in 2026. SIX will use the net proceeds for general financing purposes.

“The digital bond was genuinely a milestone in the history of capital markets, so the fact there was so much appetite to participate from the investor community was incredibly satisfying,” Mr Newns explains. “Digital securities are the future, but I must admit we did not really foresee the openness to the new technology from the investor base.”

SDX is the first and, so far, the only fully regulated and integrated digital assets financial markets infrastructure with a licence to operate a central securities depository (CSD) on a distributed ledger, according to Mr Newns. He says: “SDX is therefore appealing to both issuers looking to raise capital in the most efficient manner possible and for investors looking to include digital securities in their portfolios.”

In Switzerland, it is not permissible to trade digital securities on an exchange without being regulated as a financial markets infrastructure. SDX was granted licences as a CSD and an exchange in September 2021. The group worked closely together with the Swiss Financial Market Supervisory Authority during this process, but its specific approval was not needed to issue a digital bond.

Working hand-in-hand with regulators is our modus operandi, which has benefitted both us and our members

Mr Newns says: “Working hand-in-hand with regulators is our modus operandi, which has benefitted both us and our members. As a regulated entity, we can allow our members to realise the benefits of blockchain technology rather than coming at it from a ‘crypto-native’ approach.”

Atomic swap

Investors did not have to adopt any new technology for the digital bond, but SDX members needed to integrate the new CSD’s distributed ledger technology (DLT) into their core banking systems through standard connectivity methods. The bulk of the work for banks was to enhance workflow to prepare for the instantaneous settlement that the technology enables, which is referred to as an ‘atomic swap’.

At SDX, the use of DLT means that settlement is an integral part of the trade. A trade will only be legally binding when both counterparties can deliver assets versus cash. If one counterpart cannot deliver, the trade is not valid and will go back to the order book.

Another reason for issuing the digital bond was that SDX wanted to demonstrate it had confidence in the transaction. Mr Newns says that further digital deals will be dependent on issuers’ appetite to raise capital, and the natural cycle of existing bonds maturing and being replaced with digital securities.

The DLT infrastructure can also be used for issuing equities and SDX is also exploring use cases beyond traditional securities. Mr Newns says: “The sky is the limit in terms of what can be tokenised, but for SDX as a regulated financial markets infrastructure there is the obvious limit circumscribed by our regulatory obligations. During 2022 we will work with our members and our partners to load the platform and drive adoption of the financial markets infrastructure of the future.”

By the end of this year, Mr Newns would like to see several new issuers on SDX, a diverse array of products, and more partnerships and offerings in the digital markets infrastructure space.

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