In recent weeks we have seen more tangible evidence that the long promised reform of capital markets is gaining traction, impacting multiple asset classes and seemingly having the potential to make a real difference to both securities issuers and investors alike. But will innovation come at a cost to established markets, or will the benefits be delivered in a more uniform way across the industry as a whole?
There can be little doubt that the move away from that lengthy spell of low interest rates is positive for the bond market. With yields having been stuck at or below zero for well over a decade, the asset class found itself increasingly marginalised, with even the firmly-established portfolio theory of a 60/40 split between debt and equity eventually being called into question. That chapter is now in the past and the more attractive yields are making bonds an attractive play once again – especially against what many increasingly consider to be overblown equity valuations. One recurring issue for the UK market has however been that it is easier for issuers to sell bonds with a £100,000 face value than using a smaller denomination of say £1,000. That may pose no issue to the institutional audience, but the vast majority of retail investors are immediately squeezed out of holding the underlying asset. Moves are now afoot to address this, something that has the potential to widen the ownership of UK debt securities significantly. However, there still seems to insufficient recognition of the need to re-develop a UK domestic bond market given the vast majority of rated bonds are still issued as Eurobonds via a process of issuance via Brussels before re-issuances as CDIs in the UK; a level playing field for the domestic issuance route would be welcome.
Moves are also afoot to reform the way in which stamp duty is collected on securities transactions, with consultation on the matter running until late June 2023. Currently stamp duty is something of an outlier when it comes to UK tax collection, where, in the majority of instances, the default position is that a self-declaration of the liability needs to be made. When it comes to dematerialised equity transactions it is the broker who will collect the necessary taxes and remit these to HM Treasury. That clearly works as a process in the well-established post-trade systems of today’s equity markets, but for off market, paper, transfers only once proof of payment has been evidenced can the securities registrar record the transfer of ownership. With much media coverage about new platforms and technologies emerging to facilitate new ways of exchanging securities between investors, whilst focusing on the use of electronic rather than paper records, evolution here is overdue. Not only will change remove a significant cost and time hurdle that currently needs to be addressed, but it will also fit with HMRC’s modernisation agenda – at present they aim to deal with 80% of stock transfer forms within 15 working days of receipt, advise customers to allow at least 20 working days, and acknowledge that large value transactions can take even longer. That is noted by HMRC themselves as being detrimental to the market participants and having a negative effect on the UK’s attractiveness as a place to invest. Critically, improvements here will benefit the fintech disruptors as well as the most established exchanges.
The fact we’re now seeing these reforms is genuinely something to be applauded as they reduce costs, improve access and in turn ought to bolster London’s position as a capital raising venue of choice. Whilst the resulting benefits should play out right across the City, new participants will bring meaningful challenge to the incumbents. They too will likely need to keep delivering fresh product innovations if they want to maintain market share.
At Avenir we have developed and have in place electronic-first solutions that provide plug-and-play answers for all market participants, regardless of size. We look forward to many of the changes proposed as tools that make UK post-trade settlement fit for the 21st Century.
An amended version of this article originally appeared in the June 2023 version of AIM Journal. You can download a printable version here.