Fintech company shakes up the local bond market

An innovative new offering in the local bond market has traded over R100m worth of bonds in its opening week.

Reliable price discovery in the local bond market has been one of the critical challenges faced by asset managers and active traders for a long time and this has had a negative impact on the liquidity of the market.

South African fintech company Addendum Funding Solutions – a division of Addendum Financial Technologies – has launched the first locally developed fixed income bulletin board. The platform, called Addendum Marketplace, is a place where debt capital market participants can meet, negotiate and transact over various listed and unlisted debt instruments.

The platform has been developed with the guidance and support of the local fixed income market and solves the key challenges that the market faces around transparency, liquidity, price discovery and ease of execution.

Absa is the first of the large local banks to join Marketplace by committing to using the platform to distribute instruments they hold with the broader debt capital markets.

Zine Misani, Senior Credit Trader at Absa, explains: “For Absa, a key part of our strategy on the credit desk is to also look for ways to improve market infrastructure, for the benefit of all. This new platform is intuitive and connects us directly with a host of different market participants.”

One of the exciting elements introduced by this product is enhanced price transparency and discovery.

The most recently traded bond price is often used as a proxy for the current market price, but in this relatively illiquid market, this price might be months or, in some cases, years old! It is thus tough to buy or sell a bond without some feeling of confidence around the price you are about to pay – especially when you’re representing a range of clients who are relying on you to make optimal decisions. To this end, Addendum has partnered with valuation experts RiskCafé to offer users pricing assistance in the form of a proprietary pricing curve. This plug-in to Marketplace, dubbed Analytics, helps platform users understand where an instrument should be priced off this pricing curve. The curve will also be updating in real-time as soon as trading volumes increase. This means that if a trade occurs between other users through the platform – to which users might not be a party – the data is anonymised, and the price is fed back into the model to give users this update as soon as that trade concludes.

The initial trade activity was supported by asset managers, including Prescient Investment Management, Vunani Fund Managers and Futuregrowth Asset Management, who are active participants in the local market.

“Vunani Fund Managers is delighted to have been one of the first parties to have traded via the exciting new Marketplace platform,” says Rowan Williams-Short, Head of Fixed Income at Vunani Fund Managers. Williams-Short explains that the South African bond market outside government bonds suffers from limited liquidity, adding: “It has come along in leaps and bounds in terms of the number and variety of listed issues, but that growth has itself contributed to illiquidity. What has been sorely lacking is one ‘venue’ at which buyers and sellers can meet. In this regard, we believe that Marketplace has tremendous potential.”

These sentiments were echoed by Conway Williams, Head of Credit for Prescient Investment Management “We are also quite excited about the potential of the platform, notably the ability to seamlessly place bids in a secure and controlled manner, with the quality feedback and analytics provided post the fact. This has the potential to contribute to market liquidity, and, importantly, price discovery.”

Confidence in the market’s need for this type of solution and a responsiveness to initial client feedback, has led to Addendum expanding their initial unlisted debt platform offering – most notably by introducing this functionality which allows users the ability to participate in secondary market trades.

Nadia Ismail, Portfolio Manager and Fixed Interest Dealer at Futuregrowth Asset Management, one of South Africa’s largest fixed income asset managers, says: “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. 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.”