From a position of strength
14 July 2017
The financial technology providers dedicated to securities finance must come together to better service clients, according to Pirum’s Ben Challice
Image: Shutterstock
Financial technology, known as fintech, has been the buzzword of the past few years as an entire industry has been created from companies using new technology and innovation with the goal to compete with, replace or enhance the usage of financial services of incumbent companies.
According to KPMG in The Pulse of FinTech Q4 2016, the value of investment and mergers related to fintech hit $70 billion in the past two years alone, and new abbreviations such as ‘regtech’ and ‘insuretech’ have been created as fintech looks to enter specialist areas from its roots in payments and peer-to-peer retail finance.
Closer to home, in wholesale financial services, much has been made of the conundrum that banks are facing with flatlining revenue, margins being squeezed, shrinking financial resources and the increased costs of supporting legacy infrastructure, all while complying with regulation as it moves from legislation to implementation.
Increasingly, business owners are realising that, given challenged revenues, cost is a variable that is more directly controllable and under their direct influence.
It’s the old adage of ‘doing more with less’, ie, optimising scarce financial resources to maximise returns while reducing cost. This is where there is a clear need to turn to technology as a part of the solution, especially in what is being referred to as the non-differentiated technology layer. Financial firms have realised developing proprietary solutions to industry-wide problems is expensive and often unproductive, consequently outsourcing to a service provider makes sense from both an efficiency and cost point of view.
However, given the sheer size and breadth of products in financial services, there will never be a magic bullet, or single technology solution. Instead, hundreds of technology providers have developed thousands of products to provide increased automation and efficiency while reducing operational risk and overall cost in specific areas of the value chain.
While buying a collection of best-of-breed solutions will provide benefits to an individual business line or product, it can actually create significant costs and risks for banks as individual systems and services require internal integration.
Furthermore, this integration often needs to be revisited each time one of the relevant systems is upgraded, creating a major burden on internal IT departments and limits the time and budget for revenue generating projects.
One practical way to minimise risk for both service providers and their clients is to create partnerships that allows the providers to combine the individual strengths of their existing products to solve new processing or regulatory challenges. Integration of functionality from existing systems, as well as combining expertise in complementary areas, is a way for partners to reduce cost, implementation risk and time to market. If a vendor partnership can provide a seamlessly integrated solution to problems that clients face, it means there is one less interface that an IT department needs to worry about. In these cost-conscious times, a holistic solution to a complex but standard set of problems, which can simplify overall infrastructure, is an attractive proposition.
Most vendors simply want to provide a better service to their clients and some, including Pirum, are starting to see partnerships as the best ways of doing this. The firms likely to form partnerships will have client bases that have some degree of overlap but are sufficiently diverse to create opportunities for both partners to get direct exposure to potential new clients, markets and products.
The critical mass of established vendors in securities finance and collateral management makes it possible to find partners that have complementary skills, system functionality and connectivity to clients. The right partner can provide a wide range of benefits, from a detailed understanding of nuances of different markets to the most effective way to design a data model.
At a more strategic level, the increasing convergence between product lines in securities finance and collateral management mean, that in the long term, there will be less scope for pure niche players. Partnerships are a great way to learn about the bigger picture and become ready for a more convergent world, and for niche vendors to quickly expand their functionality to become more relevant to a broader audience.
Pirum stands by this ethos and leads by example. We already provide a secure, centralised automation and connectivity hub that seamlessly connects market participants, allowing them to electronically verify key transaction details and fully automate the post-trade lifecycle.
The platform provides onward connections to partner infrastructure service providers. Its position, at the heart of securities finance, allows clients to leverage the Pirum connectivity to access central counterparties (CCPs), triparty agents, data vendors and regulatory reporting platforms, with more connections being added all the time
Case Study: Triparty RQV service
Triparty collateral services have become the standard for managing non-cash collateral in the securities finance market. IHS Markit reports that 63 percent of collateral for securities lending is now non-cash and combining with data from the International Capital Markets Associations and the Federal Reserve Bank of New York, we estimate collateral associated to global securities finance transactions to be less than $4 trillion.
Through our partnerships with BNY Mellon, J.P. Morgan and Euroclear, Pirum allows their mutual clients to seamlessly interact with each of the providers. The service allows users to provide fully automated intra-day position updates, close of business market prices and foreign exchange rates electronically to Pirum via near real-time feeds. Using this information, Pirum calculates triparty required value (RQV) figures at the triparty account level for each side displaying the results on its secure, intuitive web portal. Pirum’s proven reconciliation platform analyses any differences to determine the root cause of the dispute leading to rapid resolution. Pirum also provides near real-time exposure management tools and reporting, on a scheduled basis throughout the day, giving clients visibility over collateral that has been allocated at a triparty account level intra-day, and also automatically releasing pre-paid loans when collateralised.
Case-study: Trading Venues
The recent regulatory changes regarding initial margin and variation margin requirements for non-cleared derivatives together with the push for centrally cleared or exchange-traded derivatives, means that the buy-side must post margin in greater numbers than ever before. This is happening at the same time as banks are deleveraging, so it has created well-documented collateral mobilisation issues. We are seeing the rise of peer-to-peer trading venues to fill the gaps.
Pirum has established connections with trading venues to provide both connectivity to the settlement or collateral value together with full post-trade lifecycle management such as automated collateral management in conjunction with triparty providers (as discussed previously) and regulatory reporting. This seamless straight-through processing connectivity will help to bring liquidity to the platforms and allow participants who have less developed back office infrastructure to lower the implementation burden and realise the benefits of the trading platform.
Case Study: SFTR reporting partnership
A principal focus for the industry in 2017 and beyond is the EU’s Securities Financing Transactions Regulation (SFTR). SFTR brings the securities finance and collateral trades under the same general regime as over-the-counter (OTC) derivatives for reporting and will be implemented beginning in 2018.
Due to the product set in scope (stock loans, repo, buy/sell backs and margin loans) and the wide number of matching fields, the data required to simply report is likely to come from multiple different sources. Overlay this with the fact this is a dual-sided, principal level reporting regime, the need to pre-match transactions (and create a unique trade identifier) before reporting is a key requirement for clients to achieve acceptable matching rates at the trade repository. All of this leads to a costly implementation burden for firms and the threat of a disparate, unconnected world of service providers. Therefore, it was clear to us that established service providers should work together.
Given the short time scale and their relevant expertise in the component parts of the workflow necessary for successful reporting, Pirum and IHS Markit have partnered to create a robust SFTR solution. Pirum has 17 years of experience in matching and reconciling securities finance data through our popular contract and billing compare services. This has given us considerable experience in processing securities finance trade data.
It also means we already have connectivity to many of the key players in securities finance. IHS Markit is a data company at its core and has a long-established securities finance pricing data service as well as direct experience connecting to trade repositories for over-the-counter derivatives trades from its MarkitServ product. Together, we have all the pieces that a reporting firm needs to fulfil its reporting obligation and can deliver a pre-integrated service where we use the existing connectivity to reduce to implementation burden for clients and ultimately lower cost.
We believe these case studies demonstrate an increased need for collaboration by service providers in the securities finance and collateral management space. The requirement for new technology solutions is only going to increase. While regulations are still a focus, other opportunities will emerge in the future where both sell-side and buy-side firms will look to service providers to provide a complete front-to-back, cross-product solution, especially in that non-differentiated technology layer. As service providers build on their strengths, collaboration with complementary systems can offer all parties strategic upside with reduced risk in the development and integration cycle.
According to KPMG in The Pulse of FinTech Q4 2016, the value of investment and mergers related to fintech hit $70 billion in the past two years alone, and new abbreviations such as ‘regtech’ and ‘insuretech’ have been created as fintech looks to enter specialist areas from its roots in payments and peer-to-peer retail finance.
Closer to home, in wholesale financial services, much has been made of the conundrum that banks are facing with flatlining revenue, margins being squeezed, shrinking financial resources and the increased costs of supporting legacy infrastructure, all while complying with regulation as it moves from legislation to implementation.
Increasingly, business owners are realising that, given challenged revenues, cost is a variable that is more directly controllable and under their direct influence.
It’s the old adage of ‘doing more with less’, ie, optimising scarce financial resources to maximise returns while reducing cost. This is where there is a clear need to turn to technology as a part of the solution, especially in what is being referred to as the non-differentiated technology layer. Financial firms have realised developing proprietary solutions to industry-wide problems is expensive and often unproductive, consequently outsourcing to a service provider makes sense from both an efficiency and cost point of view.
However, given the sheer size and breadth of products in financial services, there will never be a magic bullet, or single technology solution. Instead, hundreds of technology providers have developed thousands of products to provide increased automation and efficiency while reducing operational risk and overall cost in specific areas of the value chain.
While buying a collection of best-of-breed solutions will provide benefits to an individual business line or product, it can actually create significant costs and risks for banks as individual systems and services require internal integration.
Furthermore, this integration often needs to be revisited each time one of the relevant systems is upgraded, creating a major burden on internal IT departments and limits the time and budget for revenue generating projects.
One practical way to minimise risk for both service providers and their clients is to create partnerships that allows the providers to combine the individual strengths of their existing products to solve new processing or regulatory challenges. Integration of functionality from existing systems, as well as combining expertise in complementary areas, is a way for partners to reduce cost, implementation risk and time to market. If a vendor partnership can provide a seamlessly integrated solution to problems that clients face, it means there is one less interface that an IT department needs to worry about. In these cost-conscious times, a holistic solution to a complex but standard set of problems, which can simplify overall infrastructure, is an attractive proposition.
Most vendors simply want to provide a better service to their clients and some, including Pirum, are starting to see partnerships as the best ways of doing this. The firms likely to form partnerships will have client bases that have some degree of overlap but are sufficiently diverse to create opportunities for both partners to get direct exposure to potential new clients, markets and products.
The critical mass of established vendors in securities finance and collateral management makes it possible to find partners that have complementary skills, system functionality and connectivity to clients. The right partner can provide a wide range of benefits, from a detailed understanding of nuances of different markets to the most effective way to design a data model.
At a more strategic level, the increasing convergence between product lines in securities finance and collateral management mean, that in the long term, there will be less scope for pure niche players. Partnerships are a great way to learn about the bigger picture and become ready for a more convergent world, and for niche vendors to quickly expand their functionality to become more relevant to a broader audience.
Pirum stands by this ethos and leads by example. We already provide a secure, centralised automation and connectivity hub that seamlessly connects market participants, allowing them to electronically verify key transaction details and fully automate the post-trade lifecycle.
The platform provides onward connections to partner infrastructure service providers. Its position, at the heart of securities finance, allows clients to leverage the Pirum connectivity to access central counterparties (CCPs), triparty agents, data vendors and regulatory reporting platforms, with more connections being added all the time
Case Study: Triparty RQV service
Triparty collateral services have become the standard for managing non-cash collateral in the securities finance market. IHS Markit reports that 63 percent of collateral for securities lending is now non-cash and combining with data from the International Capital Markets Associations and the Federal Reserve Bank of New York, we estimate collateral associated to global securities finance transactions to be less than $4 trillion.
Through our partnerships with BNY Mellon, J.P. Morgan and Euroclear, Pirum allows their mutual clients to seamlessly interact with each of the providers. The service allows users to provide fully automated intra-day position updates, close of business market prices and foreign exchange rates electronically to Pirum via near real-time feeds. Using this information, Pirum calculates triparty required value (RQV) figures at the triparty account level for each side displaying the results on its secure, intuitive web portal. Pirum’s proven reconciliation platform analyses any differences to determine the root cause of the dispute leading to rapid resolution. Pirum also provides near real-time exposure management tools and reporting, on a scheduled basis throughout the day, giving clients visibility over collateral that has been allocated at a triparty account level intra-day, and also automatically releasing pre-paid loans when collateralised.
Case-study: Trading Venues
The recent regulatory changes regarding initial margin and variation margin requirements for non-cleared derivatives together with the push for centrally cleared or exchange-traded derivatives, means that the buy-side must post margin in greater numbers than ever before. This is happening at the same time as banks are deleveraging, so it has created well-documented collateral mobilisation issues. We are seeing the rise of peer-to-peer trading venues to fill the gaps.
Pirum has established connections with trading venues to provide both connectivity to the settlement or collateral value together with full post-trade lifecycle management such as automated collateral management in conjunction with triparty providers (as discussed previously) and regulatory reporting. This seamless straight-through processing connectivity will help to bring liquidity to the platforms and allow participants who have less developed back office infrastructure to lower the implementation burden and realise the benefits of the trading platform.
Case Study: SFTR reporting partnership
A principal focus for the industry in 2017 and beyond is the EU’s Securities Financing Transactions Regulation (SFTR). SFTR brings the securities finance and collateral trades under the same general regime as over-the-counter (OTC) derivatives for reporting and will be implemented beginning in 2018.
Due to the product set in scope (stock loans, repo, buy/sell backs and margin loans) and the wide number of matching fields, the data required to simply report is likely to come from multiple different sources. Overlay this with the fact this is a dual-sided, principal level reporting regime, the need to pre-match transactions (and create a unique trade identifier) before reporting is a key requirement for clients to achieve acceptable matching rates at the trade repository. All of this leads to a costly implementation burden for firms and the threat of a disparate, unconnected world of service providers. Therefore, it was clear to us that established service providers should work together.
Given the short time scale and their relevant expertise in the component parts of the workflow necessary for successful reporting, Pirum and IHS Markit have partnered to create a robust SFTR solution. Pirum has 17 years of experience in matching and reconciling securities finance data through our popular contract and billing compare services. This has given us considerable experience in processing securities finance trade data.
It also means we already have connectivity to many of the key players in securities finance. IHS Markit is a data company at its core and has a long-established securities finance pricing data service as well as direct experience connecting to trade repositories for over-the-counter derivatives trades from its MarkitServ product. Together, we have all the pieces that a reporting firm needs to fulfil its reporting obligation and can deliver a pre-integrated service where we use the existing connectivity to reduce to implementation burden for clients and ultimately lower cost.
We believe these case studies demonstrate an increased need for collaboration by service providers in the securities finance and collateral management space. The requirement for new technology solutions is only going to increase. While regulations are still a focus, other opportunities will emerge in the future where both sell-side and buy-side firms will look to service providers to provide a complete front-to-back, cross-product solution, especially in that non-differentiated technology layer. As service providers build on their strengths, collaboration with complementary systems can offer all parties strategic upside with reduced risk in the development and integration cycle.
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100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
