March 10th 2020  

Markets

What if all Paying Agents disappeared?

Imagine a world where principal payments between issuers and investors and the servicing of financial assets, such as dividend payments, coupon payments, buy backs ecc. where to come to a halt.

That's what the world without Paying Agents would look like. Their role is crucial, yet the broader financial community is generally not fully aware of the Paying Agent’s critical and intricate services. 

Swiss Securities Dealers and Banks create financial securities with Swiss ISINs, introduce them into the financial market (DVP, DFP), connect global custodians and their investors with the issuers, and service these financial assets over their entire life-time.

The demands on Paying Agents are set to increase 

As our banking system continues to evolve and grow, so does its complexity. This means the demands placed on Paying Agents will increase significantly in the future. Arguably this has already begun to happen.

Since the Financial Crisis in 2008 markets have rallied also thanks to huge amounts of stimulus provided by central banks. Even the Corona virus pandemic has not stopped the long-term upward trajectory. 

When the global lock-down kicked in, central banks around the world responded with even more aggressive monetary policy, flooding markets with liquidity. Subsequently, valuations continued to soar even when apparently contradicting the economic situation. 

Investors are flocking to Alternative Assets

In this environment investors’ nervousness about what the future might hold increased. Interest rates remain at extremely low levels and are likely to stay there for the foreseeable future. We have just seen the first private bank in Switzerland to completely abandon the classic fixed income asset class. The search for attractive Alternative Assets is spiking.

Such assets generally tend to behave differently from the classic stock and fixed income markets. Their attractiveness resides in their potential of delivering diversified and enhanced returns with generally lower correlations to traditional financial markets. 

In short, they offer investors another source of alpha, an alternative risk premium with lower correlation to the rest of the portfolio holdings.

A problem is that these Alternative Investments often are non-bankable

One of the challenges investors face, is being able to add these Alternative Investments to their financial portfolios which they hold with global financial institutions and custodians. To do this, the assets need to be bankable. However, increasingly attractive Alternative Investments tend to be private in nature and non-bankable by design.

Classic examples include private equity or private debt investments. Extensions to other sets of investment opportunities develop fast and include a variety of real tangible and intangible assets, which differ significantly from traditional financial assets due to their complex or illiquid nature. 

So, what’s the solution? 

Well, that's simple! First the assets need to become bankable! By securitizing them, they can enter the regulated financial markets, offer increased transparency, transferability and storage. This is exactly what securitization platforms and new boutique companies have quite successfully set out to do.  

These market participants specialize in securitising assets for institutional clients, such as asset managers, family offices and private banks by creating individual Special Purpose Vehicles (SPVs), who hold the alternative assets on their balance sheet and then issue bankable securities tracking the asset’s performances. Asset segregation, bankruptcy remoteness, transferability, liquidity and simplified active management of the underlying assets represent major additional advantages to getting exposure to such Alternative Assets.

This is leading to democratisation of Wealth Management

Assets and Asset Management are being democratised by this development. Non-bankable assets are now no longer exclusive to an elite few. They can now be efficiently introduced to the financial markets by their owners and held by the wider investment community through the creation of transparent and regulated bankable securities.

This is a good development for the public in general. It vastly increases the investable universe and gives also smaller private owners of illiquid alternative assets access to the global financial markets. Classic asset managers benefit from variated risk exposures and openings to new investment opportunities. In between stand the Paying Agents whose workloads are bound to soar.

Apart from a proper due diligence by any investor before purchasing complex, illiquid assets, could there be another elephant in the room? What about the rise in tokenisation and the use of distributed ledger technology (DLT)?

The rise of DLT and Security Token Offering (STO)  

STOs change the way assets are created, serviced and traded and therefore might replace classic asset securitizations. 

Creating the legal anchors that match the tokens to their underlying assets, will continue to require various service providers which will vary from one jurisdiction to the other. The storage of the tokens and the running of organized market places for trading and execution as well as providing gateways to FIAT money with its regulated AML systems, is likely to remain in the hands of banks and bank-like institutions. A pure peer-to-peer and completely disintermediated DLT based global financial system might be possible but not in the near future. Existing securitization platforms, banks, paying agents and wealth managers might have to adjust their operations, should the technology completely replace the existing ecosystem. Self-executing smart contracts in which the terms of the agreement between issuer and investor of the security token are directly written into the DLT, would make the traditional services of the Paying Agents redundant.

However, for now neither DLT nor security tokens have yet been widely adopted by the industry. They might be in future, for now traditional stock exchanges, clearing houses and interbank services remain in place and for most CFOs, taking the traditional route to raising debt and equity is still more common and less complicated than through the digital route.

Consequently, we are faced with a paradox. On the one hand, we can't currently live in a world without Paying Agents. Our financial system would grind to a halt. On the other hand, new technologies such as DLT could one day give us a world without Paying Agents.

It is an intriguing thought. All we can say, and this is unfortunately not a revolutionizing conclusion, is that the past and present do not provide a clear picture of our future.

Confidentiality Notice and Disclaimer

This document is published by ISP Group Ltd., Zurich, for qualified investors only. It is for information purposes only and does not explicitly target any person who by domicile or nationality is prohibited to receive such information according to applicable law.

While ISP Group Ltd. uses reasonable efforts to obtain information from sources which it believes to be reliable, ISP Securities Ltd. makes no representation or warranty as to the accuracy, reliability or completeness of the information. Unless otherwise stated, all figures are unaudited.

This document is neither an offer or solicitation nor a recommendation or advertisement for the purchase or sale of financial products or financials services and does not discharge the recipient from his own judgment.

 

The development of the values mentioned in this document originates in the past. Past performance is no guarantee for future performance. Each investment bears risks, such as value and profit fluctuations. Investments in foreign currencies may be subject to currency exchange rates.

Particularly, ISP Group Ltd. recommends that the recipient, if need be by consulting professional guidance, assess the information in consideration of his personal situation with regard to legal, regulatory and tax consequences that might be invoked.

None of the information contained on this document constitutes financial advice or analysis within the meaning of the Swiss Bankers Association's Directives on the Independence of Financial Research.


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