Regulatory changes have been topping everybody’s agenda for the past few years. What are your observations with regards to how the various industry segments have reacted?
Stating the obvious, regulators around the world have changed the landscape permanently. Initially, most market participants have taken a fairly rigid approach, in that regulatory compliance was the only concern. More recently, we’ve seen many taking a more holistic approach, along the lines of ‘if we have to overhaul our systems anyway, we might as well improve them from a business perspective at the same time’.
Often this entails a complete business review as a starting point. This allows organisations to proactively position the business for future growth. The confirmation of how critically important securities finance is often is a by-product of such business reviews. As we all know, it is not unusual for the business to be questioned in its core.
Finally, smaller market participants, often institutional lenders, have been forced to look for scale, as well as ways to generate indirect alpha for their portfolios without having to revamp, let alone newly build, their infrastructure.
Within this context, which process stages does Comyno typically get involved in?
When Comyno was founded in 2006, we always had a full-scale approach in mind, albeit with a clear specialisation in securities finance and the various areas it is closely connected with, such as trading and treasury. We consider ourselves an integrated consultancy firm, with a results-driven approach, based on the concept of combining technical solutions and strategic expertise.
Our projects usually have a clear goal that goes well above meeting market standards or complying with regulatory requirements. We always target a clear improvement of our clients’ competitiveness.
Beyond the above work, can you name a key area of focus?
We identified the emerging significance of central counterparty (CCP)-based models relatively early and positioned ourselves accordingly. It obviously took a while for it to take off but we now spend a significant amount of our time on working with our clients on the Securities Lending CCP topic.
As this is a rather new product for most participants, our holistic approach, which covers all services, from building, presenting or validating a business case, all the way to its implementation, has been recognised by our clients. We now work with four out of five of the connected members—as well as the CCP itself.
You describe Comyno as a software and consulting firm—where does software come into play?
First of all, we have often built specifically customised software for our clients to proactively crystallise the competitive advantage that we had identified within our consulting mandates. More recently, we’ve complemented our Securities Lending CCP expertise with a software package, the Securities Lending CCP Hub, to speed up the integration to the involved service providers, such as trading platforms, triparty agents, custodians and the CCP itself.
Furthermore, the market has prompted us to help out in connecting to the new Eurex Repo F7 platform—now ‘there’s an app for that’, with the first customer already on board.
Where do you see the biggest challenges for the securities finance marketplace?
In our view, regulatory changes have not only prompted market participants to focus on compliance, it has also created a distorted market. On one hand, pricing for the underlying assets is distorted by regulations such as Basel III and the US Dodd-Frank Act, which require market participants to hold more liquid assets.
On the other hand, European Securities and Markets Authority (ESMA) rules effectively prevent UCITS funds from doing term lending, whereas the sell side focuses heavily on aspects such as the liquidity coverage ratio, which effectively requires a term transaction. You might argue that this opens up opportunities for intermediaries willing to take certain risks, but overall it is likely to test the mechanisms of an efficient marketplace.
If you had to single out one multi-dimensional challenge, which one would it be?
Whoever we speak to, inventory optimisation seems to be high on everybody’s agenda, be it banks, broker-dealers or hedge funds. Conceptually, it seems relatively straightforward, but practically it usually turns out to be incredibly complex. What most legacy models have in common is that they provide partial information on both long and short inventory, which has typically led to a decentralised approach. Not only is this inefficient, but it also makes it all but impossible to come up with firm-wide aggregate numbers that are now required to meet the demands of business lines, treasury and regulators.
A number of infrastructure providers, such as custodians, have made tangible efforts in order to support a view of holdings across different custodians and intra-company entities. We at Comyno have worked hard on helping our client base in this area.
Do you share the view that collateral is the ultimate market driver?
First of all, the market has come a long way. I still remember the time when unsecured transactions weren’t uncommon. At the height of the financial crisis, collateral all of a sudden became so critical that the collateral provider rightfully worried about his own exposure to the collateral taker.
More generally, we’ve seen a clear trend towards more complex collateral schedules and, let’s face it, some market participants have only designed their first schedules more recently. We firmly believe that some collateral schedules have and will become too complex to be properly implemented, monitored and enforced. Setting certain standards, such as a collateral schedule’s general format, might be the way forward.
Finally, ‘big data’ has been a technological buzzword for a while. What significance does it have within securities finance?
Admittedly, the amount of data that is relevant for the securities finance business pales in comparison to some of the areas one usually thinks of when it comes to ‘big data’. Yet the challenges of big data can also be found in our marketplace. We’ve noticed a significant effort by many to become more efficient in searching, collecting, sharing, analysing and actively using trading related data. Unsurprisingly, everybody seems to be tired of having to spend entire days coming up with ad-hoc reports often required at short notice by various internal and external parties.
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Down to the balance sheet
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