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Momentum is building behind a new taxonomy standard to automate data flow in the debt capital markets, but will it be able to overcome the standard fragmentation that has plagued the industry? 

Effecting change in the primary capital markets has historically proven difficult, mainly because it is a complex industry with multiple market participants and systems engaged at different stages of a deal. Creating a new data standard that is widely adopted across the various entities is even more difficult, as demonstrated by the plethora of standards that have never quite reached full acceptance across the industry.

Glen Fernandes, group strategy at Euroclear, observes that there is too much fragmentation across market initiatives, which could make it too expensive to invest in change. “The largest impact of that is borne by the smaller issuers and investors or intermediaries that don’t have as many resources. Wide market participation is important to create momentum towards a standard,” he says. He also mentions continuous adaptation and a technology neutral, open basis as important criteria.

Recently, a new standard has emerged that is garnering interest from across the debt capital markets (DCM) and which addresses many of Mr Fernandes’s points. The general-purpose legal mark-up Language (GLML) is a type of human- and machine-readable code which permits the accurate extraction of key data from legal documentation, allowing it to be passed to relevant intermediaries in an automated way.

Avtar Singh Sehra, chief executive and chief product architect at fintech Nivaura, which developed the technology underpinning the new standard, says: “With GLML, data is coming from a structured source, with a standard taxonomy that is aligned with other industry standards. The data can also be automatically leveraged, transformed and plugged back into different systems across different organisations, such as dealers, issuing and paying agents and central securities depositories — all which have complex data processes and activities that are currently driven by manual effort.”

GLML is a critical part of streamlining issuance procedures in the capital markets, reducing costs and risk

Simon Hill, A&O

Importantly, GLML is open source and managed by a consortium launched by law firms Allen & Overy (A&O), Clifford Chance, Linklaters and Nivaura in October 2019. The GLML Consortium now includes Euroclear, Euronext and the London Stock Exchange Group (LSEG), and several banks have also shown interest, such as DBS, HSBC and BNY Mellon.

“Financial market infrastructures like Euroclear already play a key role in the registration and distribution of international and domestic debt securities, and are well placed to support the industry with such a neutral, standardised and yet end-to-end transformative solution,” says Mr Fernandes. “We are taking an open and collaborative approach, engaging with a wide range of market actors and clients as we chart future steps together with them.”

Significant benefits

According to Simon Hill, partner at A&O, GLML is the “first big development” in DCM since the introduction of medium-term note (MTN) programmes in the 1990s, which allowed for swifter issuance of bonds into the market. “Since then, there has been little development in market infrastructure and how deals are documented. They are still done in the same way, but it’s slow and fairly cumbersome,” he says.

“GLML is a critical part of streamlining issuance procedures in the capital markets, reducing costs and risk, and eventually democratising the capital markets by opening them up to more issuers who might otherwise automatically go for bank debt,” Mr Hill adds.

Philip Smith, chair of the GLML Consortium, and previously a partner in A&O’s DCM practice, recognised early on the potential of an end-to-end digitisation product for capital markets issuance. “The market needed a user-friendly way of structuring data at inception — effectively a product that can overlay a legal contract and pick up the data points that then need to be pushed all the way through the capital markets architecture to each party that needs those data points, including clearing systems, stock exchanges, legal firms, investment banks and so on.”

Phil Smith

Philip Smith, GLML Consortium

Hence, A&O began working with Nivaura to develop GLML. Mr Smith says: “This methodology creates structured data in an easy way, but from the source of truth — the underlying legal contract. Capturing is done in the context of drafting the documents. The information is then pushed through whichever platform or provider an issuer wants to work with, effectively all the counterparties it is interacting with, in the context of a particular capital market transaction.”

Andrew Enga, senior associate in A&O’s DCM team in London, can testify to the repetitive process involved in MTN issuances. “The lawyers and other parties manually extract data from a term sheet and input it into various documents and systems, many of which don’t talk to one another. The process also introduces the risk of errors creeping in, due to its manual nature. Therefore, we can see the value in structuring data via the GLML concept,” he says.

The efficiency gains should be “quite significant”, according to Mr Smith, especially in reducing the lead time to market. He argues that this will allow an entity more flexibility in deciding when to tap the market because there are fewer manual processes involved, from pricing a transaction to execution.

Real-life application

The LSEG has already launched a new product using GLML called Issuer Services Flow, which gives dealers and issuers full control and transparency of the MTN transaction execution process.

“Flow uses GLML and then enables market participants to create documents, including final terms for bonds, in a very efficient manner, cutting the time to market and making it easier for issuers to make use of market windows,” explains Darko Hajdukovic, head of product and investment funds at LSEG. “It standardises the communication between parties through machine-readable data — which is auditable and based on one single, golden source — as well as giving the ability to plug into different parts of the ecosystem.”

He continues: “Flow is extremely beneficial when issuers want to create securities in a multiparty environment. Even if it’s only two parties, an issuer and a bank, for example, it is useful because it cuts down on all the documents that are being transferred from one source to another — everything is centralised and in the standardised format.” LSEG recently completed a multi-tranche, multi-currency syndicated trade on Flow with several law firms and HSBC receiving the data as an issuing and paying agent.

Commenting on Flow, Mr Smith says: “This shows that GLML is moving beyond the in-principle discussions of benefits to the execution of developing the market standard for moving data around the capital markets.”

All GLML participants can expand and develop new use cases, according to Mr Sehra, because the syntax and taxonomy is open. “This means that a firm won’t be stuck encoding all their documents into a particular format, which they would then have to re-encode if that format changes in the future or they switch to a new platform. Instead, they can develop and leverage adapters for GLML to convert into the specific document format. In addition, if everyone’s using a similar taxonomy, all of these automated systems can communicate with each other.”

Mr Sehra also highlights the ability to interact with other solutions in the market, such as DirectBooks for distribution. “Imagine the whole process happening seamlessly end-to-end, using a communication channel that’s completely straight through processing from front to back. This could revolutionise how transactions are done and drive down the cost,” he says. “This means issuers can choose to do fewer of the large transactions in one go, and instead spread them out in smaller sizes to level out repayment spikes. Or they could access new markets, where firms previously opted for bank loans.”

Next steps

Will GLML be a game-changer in DCM? Many, including Mr Hill, believe so. He is confident that GLML uptake will move quickly in the next 12 months. “Commercial paper and MTN issuers will find this immediately attractive,” he says.

Mr Smith adds: “Moving forward into a properly digitised world and increasing automation will reduce cost and enhance the ease of access for issuers, which may make debt issuance more attractive for certain issuers as opposed to a bank debt transaction.”

Mr Fernandes believes that it is too early to say whether it will prove to be a game-changer. “Is it already a good start? I would say absolutely yes, but it has its journey to go through. Opening up GLML now is a good beginning and will contribute to how it evolves,” he says.

The GLML Consortium will soon be rebranded as the GLML Foundation, which will act as the standard-setter for the creation of structured data. This will initially be in the capital markets context, but GLML could equally apply across the financial spectrum more broadly, according to Mr Smith.

Vic Arulchandran, chief product officer at Nivaura, says: “Firms want to join the GLML Foundation because they want to be a part of defining how the data looks in the documentation, so that they can move to fully streamlined data flows.”

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