Securities financing technology trends to watch
19 January 2016
Blockchain, big data, industry utilities and modular solutions are all expected to play a part in securities financing, says Jerry Friedhoff of Broadridge
Image: Shutterstock
About 40 years ago, a small group of pioneers launched the modern securities lending industry in the UK and US. These pioneers developed the basic processes and services necessary to make these functions a fundamental part of today’s global capital market operations. Incremental changes to the practices and technologies deployed by these financing desks and their supporting operations have been made over the years, but more recently there have been tectonic shifts in how these business lines operate.
The regulatory and market changes that have already been rolled out, or will be deployed in the near future, will touch every firm involved in securities financing. It’s hard to predict at what point regulations and market structures will begin to wane but instead of bemoaning the changes, perceptive and agile firms are devising plans how to take advantage of them. New business models, evolving trade structures and advanced collateral optimisation strategies will help progressive market participants find ways to make money in tomorrow’s securities financing landscape. Technology will be one enabler to allow such firms to adapt and thrive.
Within the securities finance space, there are four developing technology trends that bear watching over the next several years. These trends may trigger some near-term changes in traditional practices, but they will also create long-term competitive advantage for firms agile enough to take advantage of them.
Blockchain
In recent months, financial institutions have become increasingly interested in the blockchain distributed ledger technology. Numerous firms are jumping into this area and beginning to trial blockchain applications across various back- and middle-office ‘use cases’. The potential of this new technology is huge, but so are the challenges. The idea of providing more efficient, secure and transparent transactions using digital currency seems like a possible panacea for many of the operational challenges capital market firms have faced for years.
The securities lending sector has been identified as one of the areas where this distributed ledger could link beneficial owners directly with end users, reducing costs and timing delays. Initially this sounds great, but the implications to firms’ operational workflows, proprietary trading strategies and desire for anonymity will need to be carefully thought out. In the securities financing space, participants have traditionally wanted intermediaries involved for indemnification and anonymity reasons. In addition, the lack of a regulatory framework or industry-wide acceptance for blockchain systems could cause compliance and legal headaches for capital market firms. Regardless, the financial services industry is taking note of blockchain technology as evidenced by the number of startups looking to make a splash in this area.
Big data
Big data is another key technology area being discussed in boardrooms across the financial services sector. This next generation evolution of data warehousing, business intelligence and data management is intended to give firms unprecedented insight into their own operations, client data (for example, counterparty risk) and markets. However, harnessing the power of big data does not lie in the installation of the technology itself—but applying smart approaches to coax out actionable insights from the massive amount of data collected. In the securities financing sector, some firms are trying to leverage big data solutions to track trading activity, news reports and internal asset availability. The jury is still out on how effective these powerful tools are in actually driving improved margins, but the potential for competitive differentiation exists.
Industry utilities
Securities financing desks have been facing a prolonged period of regulatory and market challenges that are profoundly affecting their profitability and place within financial institutions. Demands for reduced counterparty risk amid a sustained period of low interest rates have forced firms to look for third-party intermediaries to help mitigate transaction risk and provide cross-border infrastructure services whose cost can be mutualised across industry participants. A number of industry utilities have expanded or started over the past five years to provide independent shared solutions to assist in the movement of collateral in a way that meets evolving regulatory requirements.
These firms have the resources and expertise to help securities financing businesses with fixed cost solutions that meet internal and external control and data security requirements. It’s expected that these industry utilities will continue to expand their offerings in the coming years to meet the needs of the global repo, securities lending and adjacent collateral management markets.
Modular solutions
The last trend is one that has been growing for several years, but with less fanfare than the other three. More and more or our clients are looking for point solutions rather than monolithic applications that handle a wide array of activities. Even though end-to-end, all-inclusive solutions allow procurement managers to tick off many boxes on their competitive analysis, the securities financing desks usually end up using only a fraction of the application’s capabilities. By modularising securities financing solutions into distinct components that can be installed, upgraded and also de-commissioned without requiring major IT engagements, repo and securities lending desks can gain business value faster and more economically.
At Broadridge, we are actively involved in all four of these emerging trends to ensure we meet the needs of our diverse global client base. It is an exciting time to support the trading, IT and operations teams tasked with evolving their firm’s securities financing capabilities quickly and economically. Now more than ever, it is essential that move to where securities finance is going to be, and not where it has been.
The regulatory and market changes that have already been rolled out, or will be deployed in the near future, will touch every firm involved in securities financing. It’s hard to predict at what point regulations and market structures will begin to wane but instead of bemoaning the changes, perceptive and agile firms are devising plans how to take advantage of them. New business models, evolving trade structures and advanced collateral optimisation strategies will help progressive market participants find ways to make money in tomorrow’s securities financing landscape. Technology will be one enabler to allow such firms to adapt and thrive.
Within the securities finance space, there are four developing technology trends that bear watching over the next several years. These trends may trigger some near-term changes in traditional practices, but they will also create long-term competitive advantage for firms agile enough to take advantage of them.
Blockchain
In recent months, financial institutions have become increasingly interested in the blockchain distributed ledger technology. Numerous firms are jumping into this area and beginning to trial blockchain applications across various back- and middle-office ‘use cases’. The potential of this new technology is huge, but so are the challenges. The idea of providing more efficient, secure and transparent transactions using digital currency seems like a possible panacea for many of the operational challenges capital market firms have faced for years.
The securities lending sector has been identified as one of the areas where this distributed ledger could link beneficial owners directly with end users, reducing costs and timing delays. Initially this sounds great, but the implications to firms’ operational workflows, proprietary trading strategies and desire for anonymity will need to be carefully thought out. In the securities financing space, participants have traditionally wanted intermediaries involved for indemnification and anonymity reasons. In addition, the lack of a regulatory framework or industry-wide acceptance for blockchain systems could cause compliance and legal headaches for capital market firms. Regardless, the financial services industry is taking note of blockchain technology as evidenced by the number of startups looking to make a splash in this area.
Big data
Big data is another key technology area being discussed in boardrooms across the financial services sector. This next generation evolution of data warehousing, business intelligence and data management is intended to give firms unprecedented insight into their own operations, client data (for example, counterparty risk) and markets. However, harnessing the power of big data does not lie in the installation of the technology itself—but applying smart approaches to coax out actionable insights from the massive amount of data collected. In the securities financing sector, some firms are trying to leverage big data solutions to track trading activity, news reports and internal asset availability. The jury is still out on how effective these powerful tools are in actually driving improved margins, but the potential for competitive differentiation exists.
Industry utilities
Securities financing desks have been facing a prolonged period of regulatory and market challenges that are profoundly affecting their profitability and place within financial institutions. Demands for reduced counterparty risk amid a sustained period of low interest rates have forced firms to look for third-party intermediaries to help mitigate transaction risk and provide cross-border infrastructure services whose cost can be mutualised across industry participants. A number of industry utilities have expanded or started over the past five years to provide independent shared solutions to assist in the movement of collateral in a way that meets evolving regulatory requirements.
These firms have the resources and expertise to help securities financing businesses with fixed cost solutions that meet internal and external control and data security requirements. It’s expected that these industry utilities will continue to expand their offerings in the coming years to meet the needs of the global repo, securities lending and adjacent collateral management markets.
Modular solutions
The last trend is one that has been growing for several years, but with less fanfare than the other three. More and more or our clients are looking for point solutions rather than monolithic applications that handle a wide array of activities. Even though end-to-end, all-inclusive solutions allow procurement managers to tick off many boxes on their competitive analysis, the securities financing desks usually end up using only a fraction of the application’s capabilities. By modularising securities financing solutions into distinct components that can be installed, upgraded and also de-commissioned without requiring major IT engagements, repo and securities lending desks can gain business value faster and more economically.
At Broadridge, we are actively involved in all four of these emerging trends to ensure we meet the needs of our diverse global client base. It is an exciting time to support the trading, IT and operations teams tasked with evolving their firm’s securities financing capabilities quickly and economically. Now more than ever, it is essential that move to where securities finance is going to be, and not where it has been.
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