Markit managing directors of securities finance Edward Marhefka and Pierre Khemdoudi discuss the journey to becoming a cross-asset player in financing
Markit is hosting its 16th Securities Finance Forum on 19 April. What should the attendees look forward to?
Pierre Khemdoudi: We have been hosting our Securities Finance Forum for 16 years now. The forum is very important for both us and our customers as it is a great place to hear from industry leaders about what is currently making the market and where it is heading. This year we have the privilege to open the forum with a keynote speech from James Clunie, manager of the Jupiter Absolute Return Fund, who will share his views on whether funds should short in all market cycles or just in bear markets.
This will be followed by a panel composed of sell-side and buy-side firms who will share their views on the keynote topics. The second panel will discuss the liquidity challenges in the securities finance markets, and we will close the forum with an industry leader panel on how the market should re-think strategies for the future.
Markit Securities Finance has recently released a research paper highlighting the importance of securities lending data for fund managers—can you tell us more?
Khemdoudi: The research paper is called Factor Crowdedness and was released at the beginning of March. In coordination with the Markit Research Signals team, we looked at how the Markit Securities Finance dataset can provide an effective measurement of factor crowdedness.
The paper shows how growth stocks were heavily shorted as compared to value stocks prior September 2014, after which the opposite occurred. From July 2014, shorting highly utilised value stock generated a 38 percent annual return. Combining it with buying lowly utilised value stock increased the return to a hefty 50 percent return on an annual basis. The performance remained strong after accounting for borrowing costs.
Is this the first research paper of a series?
Khemdoudi: In the past we have released research papers in collaboration with market participants. However, we have since started to put together a quantitative research team within Markit Securities Finance. They first released a fixed income paper on signals in the US dollar investment-grade corporate bond market, combining our securities finance dataset with Markit’s extensive fixed income data.
As we are now growing the team, we are increasing the frequency of our research papers. For example, to mark the fact we will shortly have a complete 10 years of daily history, we are working on a paper that will review the performance of our key data points and discuss reasons why the signals performed well or poorly in different macro environments.
The second session of the forum will focus on liquidity challenges in the securities finance market—can you elaborate?
Edward Marhefka: In this session we intend to discuss how liquidity issues are affecting the securities finance market. The repo market is the primary source of short-term funding for banks and an important short-term investment vehicle for money market funds and cash reinvestment for securities lenders. However, myriad regulations are forcing a retooling of the repo market’s gears, and will disrupt market participants and liquidity flows until completed and fully digested by industry participants.
Furthermore, Basel III’s risk capital and the more stringent US enhanced supplemental leverage ratio requirements have cumulatively encouraged banks to drastically modify their business models with regards to capital, assets and balance sheet. Banks have shed assets, particularly of the risk-free, lower yielding types such as repo, leading to reduced capacity to fulfil client requests to cover shorts (when not in inventory) and the availability of high-quality liquid assets.
Additionally, we will discuss the reduced liquidity in the corporate bond market and the consequences for the securities lending market.
Is Markit Securities Finance leveraging other Markit products to help its customers navigate the corporate bond liquidity maze?
Marhefka: That is correct. Markit Securities Finance has integrated some of the components of the Markit bond pricing suite. For example, by combining the securities finance dataset with the Markit Liquidity Scores, our customers can evaluate quickly the liquidity of a corporate bond and therefore manage better the risks in lending and/or borrowing them.
Blockchain is hot topic in the financial markets at the moment. Is Markit Securities Finance looking into this technology?
Marhefka: Indeed. Many banks have publically announced their initiatives in this space and much has been published around this topic. However, many of our customers are asking us questions about what this means for the securities finance markets. We therefore decided we should do a session on blockchain as part of our forum to explain, simply, what blockchain could bring to the financial markets and, especially to the securities finance markets. We believe that if adopted, this would have a profound impact.
It seems that you have avoided the traditional regulatory session when planning the forum. Is there any specific reason for that?
Marhefka: It is clear that regulation is an important topic. However, as the recent regulatory onslaught is being digested, the market is being reshaped and regulation is simply becoming part of how the market behaves. Although we do not have a specific focus on this topic, regulation and its intended or unintended consequences will be discussed throughout the afternoon.
As implementation of SFTR is coming closer, how do you think the market is preparing itself?
Khemdoudi: The Securities Financing Transactions Regulation (SFTR) is an interesting part of the recent regulatory changes. The overall framework is pretty daunting and we are seeing a very disparate level of preparedness among our clients. I take this occasion to praise the work of International Securities Lending Association and European Repo Council, which are pulling all of the industry around this as it is very clear that the industry is in need of a solution.
At Markit, we have provided over-the-counter (OTC) services including regulatory reporting to our clients for several years now. By combining the experience developed in OTC reporting with the Markit Securities Finance dataset, we will be able to provide the required fields that are needed for SFTR.
We therefore believe we can help our clients to comply with this regulation quite quickly, should they want to utilise our services.
You are about to release new features for the Markit Securities Finance product. Can you tell us more?
Khemdoudi: We are releasing a new metric that will help our customers gauge the overall stability of the inventory, at the security level. We are very proud of this feature as it has been devised by our newly created quantitative research group. Thanks to the breadth of our data, we are able to assign a degree of stability to each of the underlying funds populating the inventory.
Using this new metric, our customers will have additional and never before seen information to assess the risk of their positions. We are also continuing to add new features to our benchmarking tools, addressed to the lenders’ and beneficial owners’ areas of the market.
Are you about to release global intra-day securities lending data?
Marhefka: That is correct. We have been beta testing the intra-day dataset with some of our clients. We are coming to the end of the testing phase and will be ready to release a global intra-day dataset very shortly. This will allow our clients to get more timely data across the globe. As usual, this is a give-to-get dataset, so to be able to see the data, our clients will need to provide us with their intra-day data.
We understand that you are also expanding your consultancy team?
Marhefka: Historically, our consultancy business has been managed solely out of London. We believe that with the upcoming regulatory challenges, a US presence is necessary so we can offer a truly global service to our clients and efficiently expand our customer base. We have therefore asked Steve Baker, based in New York, to co-manage our consultancy branch, along with Sandra Fernandes who is based in London.
What does the future hold for the securities finance market?
Marhefka: This is what we are going to try to answer in the third panel of our forum. With low interest rates, balance sheet constraints and additional regulation, it is clear that certain historical avenues of revenues have been drastically reduced. However, collateral optimisation, increased short balances and cross-asset strategies should help create new avenues of revenues.
How will CoreOne fit into your strategic efforts in the financing space?
Khemdoudi: The acquisition of CoreOne technologies at the end of last year is reinforcing Markit’s presence in the secured financing space and affiliated markets. Through this acquisition, Markit acquired the DeltaOne solution, which completes existing Markit products providing index management services along with exchange-traded product data and dividend forecasting analysis. Combining these with securities finance data will allow us to offer a truly unique service addressed not only to the sell side but the buy side, too. Edward Marhefka and I are global co-heads of the division.
Since the beginning of the year, the teams have been busy migrating all legacy Markit customers into the newly built DeltaOne platform so we can offer our premium products to our customers. Additionally, thanks to this acquisition, Markit is now able to offer a complete cash and synthetic prime brokerage platform with PrimeOne. All of these products service the financing space, so making sure that they all talk together will help us to position Markit as a major cross-asset player in the financing space.
