SunGard’s Astec Analytics
David Lewis
22 September 2015
David Lewis, senior vice president at SunGard’s Astec Analytics, reveals why beneficial owners will always need to be educated, and what technologists need to do to help
Image: Shutterstock
What trends have you seen from the securities lending industry over the past few years?
In the long term, we have moved from an industry that was relatively disengaged to one that has a much more hands-on approach following the Lehmann Brothers crisis. Beneficial owners are now much more aware and engaged in their lending processes and don’t just leave it up to their agent.
The industry will never stand still, however, and therefore the educational phase for beneficial owners never truly ends. Because it’s a dynamic market, we need to maintain the momentum that we have now with stakeholder engagement, or even increase it.
For example, central counterparties (CCPs) are something that have been discussed for several years now but as we have seen at the IMN European Beneficial Owners’ Securities Lending & Collateral Management Conference, roughly half the audience of beneficial owners admitted they don’t feel confident in their understanding of CCPs.
What’s changed since 2008 in terms of behaviour in the market?
We at SunGard’s Astec Analytics pay a lot of attention to observing and creating benchmarks of market performance. Pre-Lehmann, everyone wanted to beat the benchmark and be the top performer. Now, people are a lot more realistic about their performance and are perfectly happy with potentially underperforming in terms of the benchmark and concentrate more on having a programme that is appropriate to their needs and meets their appetite for risk.
Almost overnight in 2008, everyone decided they didn’t want to lend cheap securities (general collateral) and only wanted to lend selective, higher quality products—this is often referred to as ‘intrinsic lending’. There are now some beneficial owners that will drive a large portion of their income from a small selection of stocks, because they are actively involved and know what makes a stock ‘special’. This has the double benefit of minimum balances with maximum revenue. Such an approach would not suit every lender, of course. If you don’t own any specials you will have to look elsewhere for revenues.
Is part of the reason why the ‘educational phase’ of the industry’s development will never end due to the fact that the market is growing all the time with new ‘unenlightened’ participants joining?
There are more people in the market and they are more active in their lending programmes than ever before. Education will never stop, because the market will never stop. New features appear all the time on both the buy and sell side: new trade types, new trading structures and routes to market. These are all developments that market stakeholders need to be conscious of.
In the past few years specifically, especially with regulation, we’ve moved from an initially very fluid situation where no-one was sure what the new requirements would be, to a more solidified position where we knew roughly how the regulations would be formed, to finally our current situation where the details have largely been set, we know what we’re doing and what will be expected of us. However, we may reach a collective stage of enlightenment but that doesn’t mean the end of the road—the journey will keep going.
What market participants must try not to lose sight of is that for beneficial owners, securities lending takes up only a small amount of their attention, whereas we live it every day. We need to be realistic about just how important this business is to the beneficial owner, and act accordingly. It’s important and a valuable part of their strategy, but still just a small percentage of their total operation.
Therefore, to expect every beneficial owner to be highly knowledgeable about every aspect of the industry is unrealistic—that’s where agents come in.
How has the role of technology developed within the securities lending market, specifically from SunGard’s perspective?
We at SunGard are always developing new features and services because the market moves relatively quickly. If you look at a financing desk when I first joined the industry, the fixed income and equity teams didn’t even talk to each other.
Now, technology providers such as SunGard need to provide solutions to allow the delta one, equity finance, fixed income repo, derivatives and collateral optimisation people to be all on one desk, and they want one software product to service all of them. We’re feeling the pressure to deliver such products and manage those clients’ needs.
As technologists, we have to both mimic and lead the market down a particular route. The industry is all about efficiency at the moment, they want to do more business with less resources and more technology.
We are talking about industrial-strength software that processes hundreds of thousands of complex trades a day and has to get every one of them right, and that doesn’t come overnight.
Do you see any limit to automation?
The sky’s the limit; there is no end-point. By the time you answer today’s questions there are new ones out there.
The market moves fast and regulation will be asking the market to do something new almost continuously—transaction reporting and transparency being key examples that we are currently working on.
How big of an opportunity are the reporting requirements?
Reporting provides a massive opportunity for us. The data experts group for the Financial Stability Board, which I sit on, wants to peer into shadow banking and examine what the unregulated market is doing and how big it is. Their prime objective is to analyse ‘interconnectedness’, meaning if a broker goes down, who is it going to take with it. To do this the regulator needs trade repositories and we can help our clients meet those requirements.
In the US, for example, SunGard Loanet is the books and records of the vast majority of the biggest market in the world. We have similar infrastructures set up in Europe and China, for example, and we will be using this to help our clients meet their regulatory reporting needs.
What is the trend that has affected SunGard the most this year?
Consolidation. The drive toward consolidation and optimisation influences the market and peoples’ behaviour in many ways, and this is all highly connected back to technology, of which SunGard hopes to be the top provider.
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