How have the data demands of your clients developed in the past 12 months?
Pierre Khemdoudi: Clients in securities lending are looking to automate routine tasks so they can focus on managing risk and driving revenue rather than blocking and tackling. To do that they need clean, accurate data provided promptly with flexible delivery mechanisms. We’ve also seen an increasing demand for independent consulting services from beneficial owners and lending agents.
Regarding regulation, we are working with clients on regulatory solutions where centralising best practices reduce the hurdle for individual market participants. Regarding regulatory tools, IHS Markit initiatives include new benchmarking features and intra-day tools. We’re trying to get our data as close as possible to instant trading.
Being a trusted partner for our clients on regulatory solutions is key for IHS Markit, at a firm level, and the second Markets in Financial Instruments Directive (MiFID II) rollout has been a successful collaboration across product groups.
In securities finance, we see more and more clients asking questions about best execution as they are trying to navigate the regulation and its requirements for the securities finance products. Additionally, we have been very focused on developing our Securities Financing Transactions Regulation (SFTR) offering.
You mentioned regulatory hurdles, with less than 12 months to go for implementation of SFTR solutions, are clients engaged and prepared?
Edward Marhefka: Yes, we’ve seen broad engagement from our client base and have a full roster of design partners with many others highly interested in our platform and solution. We have 14 Tier 1 sell-side and buy-side organisations that have joined our design partner group, representing the whole spectrum of securities financing transactions needed to be reported under SFTR.
Putting in the early legwork has paid off, and our clients will be well positioned when the regulation goes live in Q2 2019.
Regis-TR collaborated with IHS Markit to create a reporting solution for the SFTR requirements. How has the solution fulfilled the SFTR obligation to report transaction details to a registered trade repository so far?
Khemdoudi: We’ve seen broad engagement across the securities finance community with our client base, and we have many others interested in our insight and platform solution. When looking at the workflow for the securities finance reporting, you have three elements in the ecosystem—the client itself, the vendor facilitating the reporting, and the trade repository. Working with trade repositories is a key factor for implementing a solution that produces accurate, matched and timely regulatory service. To that end, we are working with all trade repositories to ensure seamless connectivity for our clients.
Our task in the workflow is to make sure we make the transition through SFTR as easy and as painless as possible for our clients. To make it easier, we will increase the accuracy of the information that we send to trade repositories, and we will provide detailed monitoring of the process for managing the regulatory reporting.
We are pleased to see that clients, partner vendors and trade repositories are engaged with our SFTR teams.
What were the main themes you saw in 2017? And what do you expect for this year, how do you think some themes will differ?
Marhefka: Borrow demand, and total revenue has been robust. Last year delivered just over $9 billion in total revenue which represented a small decline versus 2016, but still the second best post-crisis year. Despite the steady demand for borrows, inventory growth has outpaced demand creating challenges for lender returns. Collateral flexibility has continued to take on greater importance for driving revenue for lenders, with utilisation declining for those who can only take cash.
There has also been a growing shift in borrowers needing to face off against lenders (and vice versa) in specific domiciles and legal entities for firms to properly allocate balance sheet and capital costs, which favours the firms with a strong global footprint.
Asia has been driving increased demand for equities/specials and was the only region to post a year on year increase in equity lending revenues. High-yield issues and private placements have lead increasing borrow balances for corporate bonds, which are at a post-crisis high. Demand for high-quality liquid assets remains a revenue tailwind for government bond holders.
From a sector perspective, retail was a key driver of specials in 2017, and this appears to be persistent in 2018, as shoppers continue to move online. Biotech and pharma also continue to be global demand drivers for equities. Other potential equity revenue drivers for 2018 include marijuana and shale in the Americas and semiconductors in Asia.
With equity revenue starting to come out of the shadow of 2016, along with drivers of government and corporate debt borrow demand remaining intact, there is cause for optimism for the industry in 2018.
How can market participants best leverage market data? And have you seen an increase in new clients over the past year?
Khemdoudi: Engagement is critical and regularly reviewing workflows with clients allows us to deliver data and analytics where they can be most impactful.
We’ve seen increasing demand for risk and exposure analysis and our consulting team is well positioned to customise solutions for all market participants. In a similar vein, beneficial owners have taken an increasingly proactive approach to benchmarking and view it more as an ongoing process versus a backwards-looking report.
With securities lending and repo data having increasingly broad applications across firms, we have found that dialogue between vendor and clients is critical to get the most out of the product. We talk about automation and artificial intelligence enhancements with cutting-edge technology: to achieve these efficiencies clients must have clean, accurate data, which is well supported.
With an increasing number of product users at client sites, it is imperative the product be intuitive and user-friendly while also delivering the flexibility for a range of client needs.
At a firm level, we’re also looking to the technologies which will power the future of financial information including blockchain, cloud computing and artificial intelligence.
As the information and technology needs in securities finance continue to evolve, we will remain on the cutting edge while always sticking to our core competency of delivering the highest quality global securities finance dataset.
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