Addendum Funding Solutions, the fintech division of supply chain financier Addendum Financial Technologies, has launched a locally developed fixed-income bulletin board — a platform on which more than R100m in bonds were traded in its opening week this month.
The platform, Addendum Marketplace, is a front-end, deal-making tool that enables debt capital market participants to meet, negotiate pricing and trade various listed and unlisted debt instruments. Though not an exchange, the platform has been developed in collaboration with the SA fixed-income market to solve the key challenges faced around transparency, liquidity, price discovery and ease of execution when trading nongovernment bonds.
Addendum Marketplace provides participants with the relevant documentation to prove that a legally binding transaction has occurred once they have reached agreement, which can then be reported to the JSE. The rules of the JSE require any trade executed off the main exchange system — typically called “off-book” trades — must be reported to the exchange so that the transaction can be documented.
Absa is the first of the large SA banks to join Addendum Marketplace by committing to using the platform to distribute instruments they hold with the broader debt capital markets. Though the market has so far traded debt issued by state-owned entities, banks and other large corporates, no government bonds have gone through the platform yet.
Any JSE-listed debt instrument could be traded on Addendum Marketplace. The platform is eyeing attracting government bonds in future.
Platform agnostic
“The goal is to create a tool that our entire institutional market can use for all their bond trading needs,” said Ian Norden, executive director and head of funding solutions at Addendum. “So the numbers could eventually be the same number as the total number of bonds changing hands in our market between the bond trading houses — banks, asset managers, debt brokers and life insurers.
“If the other newer exchanges start listing bonds we plan to incorporate those too as we are platform agnostic.”
Norden said that if the platform is successful and more bonds are traded as a result, the JSE should also benefit as more business will go through the exchange’s off-book reporting system, generating further revenue for SA’s main bourse.
Companies that have used the platform — which include Prescient Investment Management, Vunani Fund Managers and Futuregrowth Asset Management — say that one of the important elements it has introduced is enhanced price transparency and discovery for nongovernment debt.
“What has been sorely lacking [in SA’s nongovernment fixed income market] is one venue at which buyers and sellers can meet,” said Rowan Williams-Short, head of fixed income at Vunani Fund Managers. “We believe that Marketplace has tremendous potential.”
Due to illiquidity in the non-government bond market, fund managers are often faced with the challenge whereby the most recently traded bond price is used as a proxy for the instrument’s current market price, even though market conditions may have changed significantly since it was last traded. This illiquidity in the nongovernment debt market means the price of such instruments quoted in trades can sometimes be months or even years old.
“By giving the bond trader using the platform a better feel for what the price of the bond should be, the platform gives the trader more confidence to then actually buy or sell the bond and not just sit and wait for a price that may never come, as is currently often the case,” said Norden. “This should also hopefully lead to more liquidity in our bond market.”
Addendum has partnered with valuation experts RiskCafé to offer users pricing assistance in the form of a proprietary pricing curve plug-in, dubbed Analytics, which helps platform users understand where an instrument should be priced. The curve will be updated in real-time as trading volumes in a particular instrument increase.
“Given the lack of transparency in pricing and illiquidity in the trading of corporate credit, we are thrilled to have been one of the first to trade via this platform,” said Nadia Ismail, a portfolio manager and fixed-interest dealer at Futuregrowth Asset Management, one of SA’s biggest fixed-income asset managers.
“We believe this is a step in the right direction towards developing a fluid and more modern way of trading, while potentially creating liquidity and price discovery.”
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