ASIC has just released a report that reviews allocation practices in equity raises. Among the report’s valuable insights and guidance, there is a picture painted of a sector in need of automation.
Published in the review’s findings are summarised here. The full text, here, provides an excellent review of how the market works today. The key topics include transparency in messaging to investors, how licensees engage with their issuers, management of the allocation process and – most importantly – how conflicts of interest in equity allocations are be managed.
ASIC Commissioner Cathie Armour said, 'The fair and efficient allocation of securities in equity raising transactions promotes market integrity, improves market efficiency and increases investor confidence.”
On each topic ASIC includes clear guidance on possible improvements, providing a path to closing gaps in process or compliance. But what also emerges from the review and the recommendations are that many processes are still managed manually, by spreadsheet or email, creating efficiency and auditability challenges – in effect, a gap in automation.
Messaging to Investors
The ASIC team found areas for improvement in messaging to investors from both licensees and from issuers, specifically around the levels of demand for the securities being issued.
Some institutional investors expressed concern with statements in market announcements about the level and nature of investor demand. They cited examples where offers that were communicated as being ‘heavily oversubscribed’ traded at a discount to the issue price in the after-market
Having an approval process involving Compliance for messaging to investors is a good first step. Of course, a workflow system could bring efficiency and auditability to this process.
But there’s a larger opportunity to use technology to improve transparency and increase investor confidence in 2019. For example, registered investors might utilise a secure web-application to see statistics on the book-build of a new issuance. As a more advanced alternative, Peloton Blockchain is developing technology to allow book-builds to be run on central order books in private markets – automating the issuance and securitisation process.
Engaging with Issuers
The report goes on to encourage licensees to ensure that issuers receive timely and accurate information and manage conflicts in allocations. Issuers are similarly encouraged to question licensees and review any market messaging. While there are rules and conventions, no standard exists with which issuers can become familiar.
New technologies can vastly improve the experience for issuers, focusing on clearly communicating the most vital information via digital touchpoints already central to other aspects of our increasingly digital lives.
While many licensees may have a CRM system to track their contacts, there are few cases where this CRM is tightly integrated into the raising and book-running process itself. This is a great opportunity for ECM and Sales teams to build closer links with clients via digital integration.
Monitoring Allocation Conflicts
Licensees are issuer’s gatekeepers into the world of equity raising and ASIC rightly calls out that recommendations on allocations must centre on what’s best for the issuer.
Licensees that propose an allocation to employees and principal accounts need robust policies and procedures to manage conflicts
ASIC highlights that “Allocation recommendations to employees and principal accounts should be avoided as they present a significant risk of conflicts of interest to both the issuer and investors”, with robust policies and procedures required to manage any conflicts that do arise.
The report found that while institutional investors prevent it, it is common in mid-sized licensees for employees to receive allocations. There are real risks to the issuer that stem from allocations to employees or the licensee’s principal accounts. Obviously, a policy that clearly prescribes how to manage conflicts of interest is vital. The report found areas for improvement in practices in monitoring allocations for adherence to policies.
There’s again a powerful role for technology to play here. Allocation algorithms can be derived directly from (and tied to) policies and regulatory guidance, ensuring a transparent and fair process while still allowing for the flexibility that licensees require when finalising allocations.
Further, moving a book-build from a licensee or JLM-held spreadsheet into a private market environment (itself with appropriate KYC entry requirements) can entirely de-couple licensees from allocation decisions while allowing competition between investors to drive price discovery.
Closing the Automation Gap
Technology has been applied very successfully in many other areas of the capital markets to reduce manual risks, improve both client outcomes and internal compliance with regulations and to create operational efficiencies that hit the bottom line.
Efficiency and bottom-line opportunities remain and are within reach of many licensees, particularly where processes are run via spreadsheet.
With ASIC’s review also setting the expectation of follow-ups in 2019, including an industry consultation on debt capital transactions, the report is a timely reminder to begin planning now to close the automation gap.
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