The sky’s the limit
17 April 2018
Leading industry experts discuss how automation is primed to affect the securities finance market
Image: Shutterstock
For some, automation is a must-have in order to deliver further quantitative and qualitative development.
The reasoning is based on the fact that the large bulk (an estimated 75 to 80 percent) of volume today comes from low revenue general collateral.
Further improvements in the automation of that will free humans to concentrate on maximising the opportunities by collateral that is already special or might become special, if a way can be found. The subsequent automation of that activity in due course would make the sky the limit. In this scenario, profit, whether through increased revenue, reduction of costs, or a combination of both, is the driving force.
For other market participants, risk mitigation is the primary objective. The automation that might be delivered by the pursuit of risk mitigation is a welcome by-product, but very much the icing on the cake.
Simon Heath, head of agency trading of Europe, the Middle East and Africa at State Street Global Markets, identifies three key strands in the automation of securities lending. Firstly, the evolution of trading platforms themselves, which have helped cause an explosion in data and the ability to process that data over the past five to seven years, as trade, cash and other flows have grown. He explains: “Computing power helps us swim in the resultant data lakes.”
Secondly, the aggregation of data improves human decision-making because it allows them to focus on the more value-add aspects of their business as well as offering insights that weren’t possible without computing power.
Finally, he suggests that improved connectivity with counterparties, such as broker-dealers, beneficial owners and clients with help with automation in the industry. In addition, he notes that a higher processing speed, will only increase, leading in turn to reductions in the number of manual interventions required, he argues.
For Philippe Seyll, co-CEO of Clearstream Banking, automation is not, by contrast, the major issue, his primary concern is, rather, risk mitigation. Seyll explains: “We are working on a solution in that area.”
“The idea behind this is a system that builds on our existing central counterparty (CCP) solution with Eurex Clearing. By leveraging Deutsche Börse’s clearing house, we can automate securities lending and eliminate counterparty risk.”
He continues: “Most securities lending is done via an agent lender, but straight lending entails greater risk and higher balance sheet constraints than if you use risk management solutions.”
“If Eurex Clearing stands in the middle, lenders lend to the clearing house and borrowers borrow from it—this helps mitigate the risk. I’d expect that the industry will move further into this direction. Automation is part of this development, rather than a goal in itself,” he adds.
According to Seyll, his ideal world would feature a central global organisation gathering assets in a single location. But today’s reality is that pockets of assets are scattered around the globe and borrowers have no option but to borrow pocket by pocket. The ambitions for HQLAX represent a step in what he sees as the right direction.
Deutsche Börse Group recently announced that it has signed a letter of intent to form a strategic partnership for the creation of an innovative securities lending solution using the R3 Corda blockchain platform. In a traditional settlement of a securities lending transaction, underlying securities are transferred between custody accounts.
In the HQLAX operating model, legal title transfer of baskets of securities will be achieved by the transfer of ownership of HQLAX digital collateral records (DCRs) while the underlying securities remain static within unique DCR-linked custody accounts.
The use of DCRs to effect transfers of securities will enhance regulatory transparency, mitigate systemic risk, reduce operational risk, and help financial institutions mobilise collateral and manage capital more efficiently.
Saheed Awan, an independent consultant on capital market infrastructures and chairman of Treasury Spring, a treasury investing and funding specialist, notes that whilst an end-to-end integrated trading, clearing and settlement system is the ultimate in securities lending automation, the key to realising this has less to do with technology or automation.
He says: “The key will be to get key intermediaries in the current over-the-counter (OTC) stock loan market to collectively participate through persuasion, incentives or perhaps finally through regulatory sanction. Without their wholesome participation the new breed of peer-to-peer securities finance platforms will keep on burning cash for their backers.”
Dow Veeranarong, global head of product of EquiLend, highlights the continuing importance of automation. “In an increasingly competitive market with thinning spreads, market participants are turning to automation to optimise and thrive in their securities finance businesses,” she says.
But the question of resource allocation remains a perennial issue. She says: “Upgrading technology requires investment in resources and time in order to change behaviours, update internal processes and implement full front-to-back automation.”
“Sometimes this takes a back seat to, for instance, technology upgrades necessary to comply with regulations such as Securities Financing Transactions Regulation (SFTR) and the second Markets in Financial Instruments Directive II (MiFID II).”
“Firms generally do not have excess development resources, so they will address first the most urgent priorities (such as regulation) over what may be important (but less urgent) projects such
as automation.”
However, she adds that automation is the most efficient way for firms to maximise their resources. “We are seeing the direct impact of this with the record-breaking trade volumes we are seeing on our Next Generation Trading platform (NGT) this year.”
There is no question that the likes of EquiLend have made a difference in automating previously labour-intensive processes, according to Will Gow, director, agency lending and collateral management at Societe Generale Prime Services.
But more work remains to be done. In the pre-trade area, he identifies the automation of know-your-client (KYC) efforts and the simplification and standardisation of legal documentation as a way to improve onboarding for clients.
Where there remains work to be done, there remain commercial opportunities. Asset managers still have much to do in terms of reporting and managing reporting for regulatory purposes. Gow states: “There is a role for banks to play in providing
that service.”
What improvements would you like to see?
Simon Heath:
In brief, automation, innovation and transformation. In longer form, one, there is a war on talent in the securities lending industry. We are all looking for motivated, highly numerate and technologically adept people. I’d like to ensure that as an industry we continue to hire the best people we can, and open to fact that this talent may come from sectors other than banking
Making sure that we foster those people through the industry and through their career, and spending on technology for where we will be in the next three to five years
I’d like to see the continued development of trading desks into sales-traders. As the lines blur between sales, trading and relationship management functions, this allows us to really focus on the client experience. If we do one and two, three will naturally follow
Will Gow:
Improvements in client onboarding through the automation of KYC and legal documentation
Collateral optimisation, paving the way for artificial intelligence, algo-driven trading
The breaking down of siloes at banks between equity and fixed income inventories
Philippe Seyll:
Increased usage of central counterparties. If I were the CEO of a borrower or a lender, I’d definitely look to use a CCP in order to get a single streamlined process
Usage of financial technology, especially blockchain solutions. We’ve all heard over and over again about ‘proofs of concept’ for blockchain-related services. But indeed, blockchain offers some elements that I’d really like to see in securities lending. One of them is the immutability of the blockchain: once a chain has recorded an event, no one can alter the chain or delete it
Success for HQLAX; there is currently very little connection between the myriad pockets of assets held globally. Custodians are not interlinked but work in siloes. Our solution aims to solve this conundrum: assets remain where they are but are available to lend via tokenisation. The first transaction has already been completed.
The reasoning is based on the fact that the large bulk (an estimated 75 to 80 percent) of volume today comes from low revenue general collateral.
Further improvements in the automation of that will free humans to concentrate on maximising the opportunities by collateral that is already special or might become special, if a way can be found. The subsequent automation of that activity in due course would make the sky the limit. In this scenario, profit, whether through increased revenue, reduction of costs, or a combination of both, is the driving force.
For other market participants, risk mitigation is the primary objective. The automation that might be delivered by the pursuit of risk mitigation is a welcome by-product, but very much the icing on the cake.
Simon Heath, head of agency trading of Europe, the Middle East and Africa at State Street Global Markets, identifies three key strands in the automation of securities lending. Firstly, the evolution of trading platforms themselves, which have helped cause an explosion in data and the ability to process that data over the past five to seven years, as trade, cash and other flows have grown. He explains: “Computing power helps us swim in the resultant data lakes.”
Secondly, the aggregation of data improves human decision-making because it allows them to focus on the more value-add aspects of their business as well as offering insights that weren’t possible without computing power.
Finally, he suggests that improved connectivity with counterparties, such as broker-dealers, beneficial owners and clients with help with automation in the industry. In addition, he notes that a higher processing speed, will only increase, leading in turn to reductions in the number of manual interventions required, he argues.
For Philippe Seyll, co-CEO of Clearstream Banking, automation is not, by contrast, the major issue, his primary concern is, rather, risk mitigation. Seyll explains: “We are working on a solution in that area.”
“The idea behind this is a system that builds on our existing central counterparty (CCP) solution with Eurex Clearing. By leveraging Deutsche Börse’s clearing house, we can automate securities lending and eliminate counterparty risk.”
He continues: “Most securities lending is done via an agent lender, but straight lending entails greater risk and higher balance sheet constraints than if you use risk management solutions.”
“If Eurex Clearing stands in the middle, lenders lend to the clearing house and borrowers borrow from it—this helps mitigate the risk. I’d expect that the industry will move further into this direction. Automation is part of this development, rather than a goal in itself,” he adds.
According to Seyll, his ideal world would feature a central global organisation gathering assets in a single location. But today’s reality is that pockets of assets are scattered around the globe and borrowers have no option but to borrow pocket by pocket. The ambitions for HQLAX represent a step in what he sees as the right direction.
Deutsche Börse Group recently announced that it has signed a letter of intent to form a strategic partnership for the creation of an innovative securities lending solution using the R3 Corda blockchain platform. In a traditional settlement of a securities lending transaction, underlying securities are transferred between custody accounts.
In the HQLAX operating model, legal title transfer of baskets of securities will be achieved by the transfer of ownership of HQLAX digital collateral records (DCRs) while the underlying securities remain static within unique DCR-linked custody accounts.
The use of DCRs to effect transfers of securities will enhance regulatory transparency, mitigate systemic risk, reduce operational risk, and help financial institutions mobilise collateral and manage capital more efficiently.
Saheed Awan, an independent consultant on capital market infrastructures and chairman of Treasury Spring, a treasury investing and funding specialist, notes that whilst an end-to-end integrated trading, clearing and settlement system is the ultimate in securities lending automation, the key to realising this has less to do with technology or automation.
He says: “The key will be to get key intermediaries in the current over-the-counter (OTC) stock loan market to collectively participate through persuasion, incentives or perhaps finally through regulatory sanction. Without their wholesome participation the new breed of peer-to-peer securities finance platforms will keep on burning cash for their backers.”
Dow Veeranarong, global head of product of EquiLend, highlights the continuing importance of automation. “In an increasingly competitive market with thinning spreads, market participants are turning to automation to optimise and thrive in their securities finance businesses,” she says.
But the question of resource allocation remains a perennial issue. She says: “Upgrading technology requires investment in resources and time in order to change behaviours, update internal processes and implement full front-to-back automation.”
“Sometimes this takes a back seat to, for instance, technology upgrades necessary to comply with regulations such as Securities Financing Transactions Regulation (SFTR) and the second Markets in Financial Instruments Directive II (MiFID II).”
“Firms generally do not have excess development resources, so they will address first the most urgent priorities (such as regulation) over what may be important (but less urgent) projects such
as automation.”
However, she adds that automation is the most efficient way for firms to maximise their resources. “We are seeing the direct impact of this with the record-breaking trade volumes we are seeing on our Next Generation Trading platform (NGT) this year.”
There is no question that the likes of EquiLend have made a difference in automating previously labour-intensive processes, according to Will Gow, director, agency lending and collateral management at Societe Generale Prime Services.
But more work remains to be done. In the pre-trade area, he identifies the automation of know-your-client (KYC) efforts and the simplification and standardisation of legal documentation as a way to improve onboarding for clients.
Where there remains work to be done, there remain commercial opportunities. Asset managers still have much to do in terms of reporting and managing reporting for regulatory purposes. Gow states: “There is a role for banks to play in providing
that service.”
What improvements would you like to see?
Simon Heath:
Will Gow:
Philippe Seyll:
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