Capital Markets

Digital Dealing

Electronic marketplaces for finance departments are taking off. Be it dealing in forex, issuing commercial paper, repurchasing bonds, buying intere...
Justin WoodSeptember 1, 2000

When Olivier Govare needed to arrange lease financing for FFr10 million ($1.35 million) of computer equipment earlier this year, he was able to secure five offers in ten days without ever lifting his phone. Nor did he hold a single face-to-face meeting. Instead, the treasurer of JC Decaux, the FFr7.9 billion ($7.1 billion) outdoor advertising group, simply used his Web browser to reach

“If it wasn’t for Bfinance, the process would have taken at least two weeks longer,” states Govare. As it was, he merely had to fill in an online form with all the dE-tails of the financing he required and then sit back and watch the offers come in. Waiting at the Bfinance site were 60 financial institutions, half handling treasury placements such as money market funds and half looking to lend. It was five companies from the latter group that replied to Govare’s online request.

“The service was excellent,” he enthuses. “I only had to explain the dE-tails of the financing once instead of visiting lots of lenders individually.”

What Govare’s experience shows is how the Internet is starting to change the way that treasurers and CFOs do their day-to-day business. Be it dealing in foreign exchange, issuing commercial paper, repurchasing bonds, buying interest-rate swaps, or arranging loans and deposits, finance teams are executing more and more of their transactions online.

True, the trend to work on the Web has so far been more of a trickle than a torrent, but that’s all about to change. Consider two reports issued this year by Greenwich Associates (, a US-based financial-services research firm. The first, released in March, polled 500 companies and fund managers around the world about their use of the Internet — as opposed to other electronic systems such as Reuters Dealing and EBS — for trading foreign exchange. While only 11 percent said they used the Web, another 46 percent said they expected to within two years. Furthermore, those traders already using the net expected to increase the proportion they traded online from 13 percent today to 22 percent over the same period.

The second report, issued in August, shows that one in three US institutional investors now trades some fixed-income products — on average 25 percent of their volume — online. That’s up from one in five last year, and the trend is accelerating, with a further 40 percent of investors looking to go digital soon.

“When it comes to treasurers actually executing their trades online, it’s still very early days,” observes Steve Glick, a partner at Greenwich Treasury Associates. “Behind that, though, there are a lot of treasurers who want to transact over the Internet.”

The opportunities to do so are certainly growing to meet the demand. Most banks and other financial-services providers have already set up their own Web sites, offering clients the chance to trade various products online, but with just one counterparty. While this offers some progress over telephone trading, the advantages are limited. Where real growth is taking place today is with a new breed of trading platform that joins together lots of different providers.

It is here that the true benefits of moving online become apparent. By grouping multiple counterparties in one place for the first time, such sites aim to consolidate fragmented liquidity and increase competition. For treasurers it leads to more-transparent and lower prices. Take bonds, for example, where the lack of a central marketplace has kept prices notoriously opaque. “Up until recently, the fixed-income market was like a very deep, dark closet,” says Brad Levie, president and chief operating officer of BondLink (, a US-based platform for high-yield, emerging-market and convertible products. “What Internet trading sites do is switch on a 100-watt lightbulb right in the middle of it.”

They also cut down the time needed to carry out a transaction and make trading more efficient — with straight-through processing, deals flow smoothly from pricing through to settlement, so cutting out errors and improving the audit trail. What’s more, many sites offer news, research and online tools such as for risk and portfolio management. And for larger companies, there’s even the chance to issuing debt directly.

According to Larry Tabb, group director for securities and investments at Tower Group, an IT research firm, the number of such multi-counterparty sites now stands at well over 100. But, while all agree that multi-dealer trading sites are here to stay, “there is little consensus about what form the platforms will take”, notes Tabb.

A Muddle of Models

He has identified a number of different trading models, but two in particular are proving popular. The first are the auction models, the most common being the open (as opposed to anonymous) reverse auction. Here, a treasurer picks five or six counterparties, submits a request, and then chooses whom to transact with based on the responses. The second model is the anonymous cross-matching platform that acts like an exchange, linking bids to offers in real time and where the platform itself acts as a central counterparty, taking on the credit risk. So far, the Internet has spawned examples of all the different trading models for almost every sort of financial product.

David Woods, managing director of treasury and fixed income ecommerce at ABN AMRO (,expects the market to settle into three tiers. “At the bottom, you’ll see anonymous, executable quote systems for liquid, simple products, like government bonds,” he explains. “Above that will be sites for more-complex products, like interest-rate swaps, that are more suited to a reverse auction.” The third tier, he adds, won’t be online at all: “For very complex or large trades, treasurers will still prefer to use the phone.”

As if the picture wasn’t complex enough already, a further question also remains — who will end up owning and running the markets? So far, independent, nonbank operators have tended to be first to launch multi-counterparty sites, hoping to lure corporate finance executives with their neutrality.

As Martin Spurr, head of E-ventures at Royal Bank of Scotland (, concedes: “Technology companies have led the way up until now, but the banks have been quick to respond with their own multi-dealer platforms.” Indeed, Spurr’s bank revealed in July that it is joining forces with Banco Santander Central Hispano, Commerzbank, Sanpaolo IMI and Societe Generale to launch a treasury marketplace offering a range of foreign-exchange products, interest-rate derivatives, money-market instruments and fixed-income securities.

Banks Play Catch-Up

Nowhere is Spurr’s point more clearly demonstrated than in the field of foreign exchange. In April this year, Currenex ( launched as a third-party trading platform offering treasurers access to 25 banks on one site. Within months, two bank-owned sites were announced —, a consortium of 11 banks, and, a collaboration between the market’s three biggest players, Chase Manhattan, Citigroup and Deutsche Bank — both of which are due to open next year.

Lori Mirek, president and CEO of Currenex, firmly believes that third-party ownership is the most advantageous solution for customers looking to avoid conflicts of interest. “Clients tell us that they don’t want their counterparty also to run the platform,” she states.

Banks, however, disagree. Philip Weisberg, CEO of FXAll, retorts: “We’ll operate as a separate company in a competitive environment and stand or fall on our own merits. The fact that dealers own the platform doesn’t mean they won’t make rational economic decisions.”

Other players are also looking to muscle in on the market, not least suppliers of treasury management software. By using an ASP model — whereby treasurers access software on the Web with a browser instead of having it installed on their own computers — such companies reckon they have the perfect foundations on which to build trading platforms.

One company that has taken this route is Integral Development with its Web site Though originally a software developer for banks, Integral has adapted its risk and portfolio management products to suit treasurers and has made them available on the Internet. To this, the company has added news and research services and, as of June this year, the ability to price and trade foreign-exchange and interest-rate derivatives and to place deposits. Over the coming months, it will add fixed-income trading too. So far, it has signed up nine financial institutions and 4,400 users, though very few of them are transacting online yet.

The concept behind, to be a full capital-markets portal, raises a further issue. Will treasurers gravitate to multi-product sites, or will they prefer to use several, specialized sites? Again, there are no clear answers. Harpal Sandhu, CEO of Integral, likens his product to Microsoft’s Office software: “In the early days, some companies specialized in word-processing, others specialized in spreadsheets and so on. In the end, users preferred a uniform approach, with all their functions perfectly integrated.”

Gary Jones, an analyst at Butler Group (, the IT research firm, disagrees. “Focused markets probably have more chance of success,” he says. Further into the future, he predicts “the molecularization” of trading platforms “beneath über-hubs.” The idea being that lots of focused sites will join forces under a common portal.

However these issues are resolved, one fact alone is clear: many, even most, of the trading platforms being launched today won’t survive. As ABN AMRO’s Woods acknowledges: “It’s hard to predict who the winners and losers will be, and it’s changing all the time. This week’s list isn’t the same as last week’s.”

Justin Wood is the managing editor of CFO Europe.

Debt on the Net

For Robert Manilla, issuing debt electronically is nothing new. Indeed, as senior manager of corporate finance at DaimlerChrysler, the E150 billion ($135 billion) US-German automaker, Manilla has sold his company’s commercial paper through Bloomberg screens for several years now. However, this summer he started moving a big chunk of that business onto the Internet.

It’s all thanks to a new Web site for direct issuers called (, which opened for business in the US on June 1, 2000. (, a European site, is due to open this autumn.) Set up as a joint project between Prescient Markets, a software firm, and the Direct Issuers’ Working Group, a US trade association, CPMarket now has 18 companies and more than 200 institutional investors signed up to the service. Though currently just a primary trading platform, the plan is to add secondary trading, too.

For Manilla, who now issues 10 percent of his $18 billion (E20 billion) US commercial paper program over the net, CPMarket has many advantages. “The biggest benefit,” he says, “is a wider investor base. Since using CPMarket, 30 percent of our investors are new.” What’s more, he adds, the platform makes those investors far more visible and improves communication, for example, in terms of gathering their reactions to different rates.

Craig Dukes, North America short-term funding manager at Ford, the $163 billion US auto firm, is another issuer on CPMarket. With a huge $35 billion commercial paper program to handle, Dukes has also “substantially grown” his investor base by moving onto the net and as a result has seen a “slight betterment” in the rates he can offer. Furthermore, he finds the platform raises efficiencies: “The old way of trading, when telephone dealers wrote out tickets manually and then inputted the data, had a big margin for error.”

Of course, the likes of Ford and DaimlerChrysler are no small fry. And when it comes to issuing commercial paper directly rather than using a bank, companies need to have a big enough program to justify the expense of running a team to sell that paper. According to a report by the Federal Reserve Bank, direct issuers in the US on average save a dealer fee of one-eighth of a percentage point, or $125,000 on every $100 million placed. That leaves many sizable companies well shy of the break-even point for going direct.

Nonetheless, says Laurent Paulhac, CEO of Prescient Markets, “CPMarket will encourage many more firms to become direct issuers than otherwise would have been the case.”

Dukes agrees, but advocates caution. “Companies that use three or four dealers now might like to take a gradual approach, dropping just one of them and issuing a portion of their business directly,” he suggests. With direct issuance almost nonexistent in Europe, the launch of ECPmarket could well be a turning point. —J.W.

Digital Dirhams and Dongs

If anyone can claim to have fully embraced foreign exchange over the Internet, then it’s Stephen Piccininni, vice president and deputy treasurer of MasterCard International, the US-based payments company. As it stands, more than half of the firm’s forex deals are executed over the net. To achieve that, Mastercard’s settlement team uses Currenex, a foreign-exchange Web site launched in April this year.

Using a simple browser, they are able to access the site, choose as many banks as they like from the 25 that Currenex links to, and ask them to submit prices for a particular trade. Depending on the currency, the banks have between 15 and 45 seconds to reply. Once the time is up, the results are fed back to MasterCard where the forex dealer has five seconds to accept any of the prices submitted.

“We use Currenex because it’s efficient and we feel it gives us the best rate we can get. How else could you get seven banks to bid competitively at the same time?” says Piccininni. Lori Mirek, president and CEO of Currenex, believes she can quantify the savings that come from having lots of providers compete with each other in a transparent environment: “For major currencies treasurers are saving three to ten basis points, for secondary currencies, they’re looking at 30 basis points, and for exotic currencies, it’s over 100.”

For Piccininni, though, price reductions are really just the icing on the cake. “The efficiencies alone of using the net make it worth doing,” he says. While his internal systems aren’t yet fully plugged into those of Currenex, he isn’t far from achieving full straight-through processing. Tim Power, cash manager at Intel, the $29.4 billion (E32.7  billion) US chip maker, agrees with Piccininni: “We have a policy whereby we need a minimum of three quotes for every deal we do. Using Currenex makes that easy and keeps our auditors happy.” —J.W.

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