IMN: Benchmarking is heading in the right direction as its importance grows
05 February 2024 US
Image: Lexy_Milliken_Marketing_Manager_at_IMN
The number of participants taking benchmarking more seriously “is only increasing”, according to panellists at the IMN Securities Finance & Collateral Management Conference.
The Best Practices for Performance Measurement & Utilising Data panel discussed how firms measure performance and how organisations intend on gaining an edge on benchmarking.
A benchmark is a standard against which something is compared. Investors use benchmarks to measure the performance of securities, mutual funds, exchange-traded funds, portfolios, or other investment instruments.
Patrick Morrissey, director of product and strategy for securities lending at Vanguard, noted that benchmark providers are receiving more questions from clients relative to five to 10 years ago. “I think this will really help. The more that we are able to participate in real time and accurate data, the better the entire industry will be in terms of transparency.”
Benchmarking has historically been a challenge due to the “subjectivity and all of the nuances that go into executing and maintaining a position”, according to Rachel Andreassian, managing director of product and market structure at Provable Markets.
She added that “a lot of this is due to a lack of transparency, the cleanliness of data, as well as limitations in the market structure and technology”. However, this is now changing. Andreassian continued by drawing on experience in equities market structure, where firms automate experimenting with the parameters of a trade by splitting flow (e.g. “Algo Wheels”) and compare relative performance among the sample sets.
“Benchmarking is definitely heading in the right direction,” added Marney McCabe, head of relationship management for agency lending at Fidelity.
She continued: “The industry has done a lot of great work to advance benchmarking, allowing firms to now drill in and filter out data, and provide an ‘apples to apples comparison’ for minimum spreads, for example.”
However, McCabe indicated at the Nashville-based event that non-cash collateral is the “one outlier” in terms of benchmarking.
She added: “There is no way to really drill down into US Treasuries, you may be comparing yourself to someone who is taking equities. Therefore, there will be a big difference in the performance that you see. The industry still needs to evolve in this area.”
With the upcoming 10c-1 top of mind for many market participants, McCabe highlighted that the US Securities and Exchange Commission (SEC) regulation will benefit the use of benchmarking as “everyone is going to be required to submit their data — this is not happening right now”.
McCabe added: “Some beneficial owners have chosen not to submit their data or have their providers submit the data to third-party providers. We do not have access to the entire universe; 10c-1 is going to change that.”
Andreassian concluded that “there is potential for knock-on benefits, with vendors and participants being pushed to speak the same language — the fields defined by the SEC and the protocol to be established by FINRA”, which she stated could “support true interoperability”.
The Best Practices for Performance Measurement & Utilising Data panel discussed how firms measure performance and how organisations intend on gaining an edge on benchmarking.
A benchmark is a standard against which something is compared. Investors use benchmarks to measure the performance of securities, mutual funds, exchange-traded funds, portfolios, or other investment instruments.
Patrick Morrissey, director of product and strategy for securities lending at Vanguard, noted that benchmark providers are receiving more questions from clients relative to five to 10 years ago. “I think this will really help. The more that we are able to participate in real time and accurate data, the better the entire industry will be in terms of transparency.”
Benchmarking has historically been a challenge due to the “subjectivity and all of the nuances that go into executing and maintaining a position”, according to Rachel Andreassian, managing director of product and market structure at Provable Markets.
She added that “a lot of this is due to a lack of transparency, the cleanliness of data, as well as limitations in the market structure and technology”. However, this is now changing. Andreassian continued by drawing on experience in equities market structure, where firms automate experimenting with the parameters of a trade by splitting flow (e.g. “Algo Wheels”) and compare relative performance among the sample sets.
“Benchmarking is definitely heading in the right direction,” added Marney McCabe, head of relationship management for agency lending at Fidelity.
She continued: “The industry has done a lot of great work to advance benchmarking, allowing firms to now drill in and filter out data, and provide an ‘apples to apples comparison’ for minimum spreads, for example.”
However, McCabe indicated at the Nashville-based event that non-cash collateral is the “one outlier” in terms of benchmarking.
She added: “There is no way to really drill down into US Treasuries, you may be comparing yourself to someone who is taking equities. Therefore, there will be a big difference in the performance that you see. The industry still needs to evolve in this area.”
With the upcoming 10c-1 top of mind for many market participants, McCabe highlighted that the US Securities and Exchange Commission (SEC) regulation will benefit the use of benchmarking as “everyone is going to be required to submit their data — this is not happening right now”.
McCabe added: “Some beneficial owners have chosen not to submit their data or have their providers submit the data to third-party providers. We do not have access to the entire universe; 10c-1 is going to change that.”
Andreassian concluded that “there is potential for knock-on benefits, with vendors and participants being pushed to speak the same language — the fields defined by the SEC and the protocol to be established by FINRA”, which she stated could “support true interoperability”.
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