It ain’t what you do, it’s the way that you do it
26 June 2018
With the rise of technology, machines have already transformed much of the landscape beyond imagining. Market participants explain what they are doing in the securities finance space
Image: Shutterstock
The march of technology in the securities services industry is as pronounced as in any other sphere of commercial activity. Machines have already transformed much of the landscape beyond imagining.
A clerk transported from Midland Bank International’s securities department in Mariner House in London in 1981 to its equivalent at any major custodian today would be like fictional Royal Navy Captain Horatio Hornblower stepping off the deck of any of his 19th century vessels and onto the bridge of the USS Enterprise.
Some wags would, however, suggest as a retort that it would be more like walking on to the rickety set of an early Doctor Who episode. The rise of the robots is an enduring theme in industry commentary, but the fax machine and Excel cling stubbornly on.
One market participant observes: “It’s a bit of a mixed bag in the securities finance industry.”
They add: “You have many firms using the latest and greatest technology, like EquiLend’s Next Generation Trading, but then you also still see some firms (sometimes even different desks at the same firms) sending faxes for reconciliations and the like.”
“So while the technology, and the adoption of it, has come quite a long way over the past decade and a half or so—you can see this with the massive increase in trade and post-trade volumes on EquiLend over the years (trades on EquiLend, for instance, are up a reported third overall since it launched Next Generation Trading three years ago)—there remain plenty of opportunity for firms to automate more of their activity and benefit from the associated efficiencies.”
Another market participant, said: “It depends on whose office you are in.”
“In terms of business, the complexity of trades and structures is unrecognisable, but in terms of systems not so much. Some firms have full automation, interoperability etc, whereas other participants are still using legacy systems and technology-savvy traders are managing mission-critical parts of the business on Excel spreadsheets or macros.”
Ken DeGiglio, CIO of EquiLend revealed that for the first time the firm is working on certain new technologies.
DeGiglio said: “These are exciting times in the financial technology space. I have been in the financial technology industry for more than three decades. I can count on one hand the number of true inflection points there have been in this space through that time: the shift from mainframe to PCs and client server; the advent of the internet and the world wide web; the migration to relational databases; the proliferation of mobile computing; and now the movement to cloud native platforms. These were all very gradual paradigm shifts. In the future, I believe we will see more rapid technological change as new, disruptive technologies emerge. Ultimately, as technology is revolutionised and reinvented, firms will be able to redirect their staff toward more impactful activities as human-machine collaboration becomes more important than ever.”
He explains that when it comes to technology investment, especially in the securities finance industry, “firms are laser focused on driving down costs, maximising efficiency and keeping up with evolving regulations”.
He notes: “EquiLend, in its function as a securities finance industry utility, is uniquely situated to help firms accomplish all of these things—and that is and has always been our primary focus.”
“However, when most technology investment by firms these days is directed toward these must-haves, emerging technology that may offer a competitive advantage oftentimes takes a back seat. Technologies such as artificial intelligence (AI) and blockchain are real, valid and exciting, and they have the possibility to truly revolutionise the way we all operate, but I think they will be somewhat more slowly adopted by securities finance market participants than some of the buzz would suggest.
“That said, a technology provider such as EquiLend is ideally placed to incorporate these revolutionary technologies into services already used by firms throughout the industry, such as NGT, EquiLend Clearing Services, DataLend or our post-trade suite. In fact, we are doing exactly that. We are currently building enhancements to our post-trade suite that leverage AI, and we expect to extend the technology to other services as well.”
DeGiglio explains that EquiLend are actively working on cloud deployments as well as implementing a shared ledger model that can be easily extended to leverage distributed ledger technology (DLT) and “smart contract” frameworks in the future.
He says: “By incorporating these technologies into our services, firms can reap the benefits of them via their existing connections to a trusted intermediary, EquiLend, with little to no extra technology investment on their end.”
“This is a true value-add for our clients. As with all of our services, we have always said that we will implement new features, small or large, as and when there is an appetite from the market to use them. AI, shared ledger and smart contracts are all examples of us listening to where our clients’ pain points are and building technology to alleviate them,” he concludes.
Also active in the DLT space, is Zurich-based HQLAx, which completed the first blockchain-enabled securities lending transaction in the first quarter of this year. Guido Stroemer, CEO at HQLAx, explains that the firm is close to the completion of the build phase of its technology and that to prove it could be done it executed a real transaction in which Crédit Suisse and ING Bank exchanged bonds.
“During the live pilot transaction, each bank moved €25 million of government bonds into a segregated custody account, which was then linked to digital collateral record (DCR),” he says.
“These DCRs were then exchanged automatically on our platform on a delivery versus delivery basis. The DCR exchange effected legal title transfer of the accounts (and the inventory of securities within the accounts) and we proved this by each bank removing securities from the DCR account for which it had taken ownership via the DCR exchange.
“The live pilot was a big milestone for HQLAx, and we have received a great deal of incoming interest from market participants eager to learn more about our platform. We are also very excited about the letter of intent we signed with Deutsche Boerse Group to form a strategic partnership, which will accelerate market adoption of the HQLAx platform.”
Specifically, he explains, the Deutsche Boerse partnership will provide front-end connectivity of the Eurex Repo platform to facilitate bilateral DCR upgrades/downgrades. Very importantly, Deutsche Boerse will also provide the back-end connectivity to multiple custodians to create a network effect to mobilise pools of securities sitting in different locations, thereby improving collateral fluidity.
“The improved operational efficiency will allow market participants to save on costs related to balance sheet management for intra-day credit liquidity exposures, settlement fails, and the liquidity coverage ratio,” he states.
Trading Apps, which expands its customers’ technology solution without disrupting downstream solutions and decommissioning obsolete technology, states the case for further advances in automation, as the trend towards increased volumes and decreased spreads experienced by the securities finance market is unsustainable.
It is against this backdrop that the market has welcomed a number of new technology vendors who offer trade automation and matching services which allow for a more sophisticated marketplace, she observes.
Laura Allen, director of sales at Trading Apps, says: “Looking forward, I believe the ability to seamlessly connect and auto-trade will become increasingly critical and organisations will put more emphasis on data analysis.”
“Traders will become more quantitative in nature and will require tools to manipulate and use data to analyse pricing trends and dislocations to ensure trades are accurately priced for both profitability and risk.”
Regardless of where in the value chain a firm sits whenever a big technology investment is being considered, stakeholders from various functional and regional divisions have to reach consensus on a strategy in order to move forward, she adds. Therefore it is of paramount importance that the process requirements and business objectives are clear and known.
“All financial markets are moving towards a standard, integrated and more transparent model. Whether that’s regulatory driven or just common sense, technology is constantly evolving to support the process. Although blockchain is a relatively new entrant, it is a very viable vehicle that is perfectly tailored to support changes that were already happening. The industry is evolving from a silo’d to a fully integrated structure; blockchain should continue to fuel that integration and along with it the standardisation of data and workflows.”
“New trading platforms offer targeted access to multiple pools of liquidity meeting the growing capital and regulatory needs of participants and further new entrants are to be expected as the market calls for disintermediation, increased automation and complexity. Technology will improve efficiency by delivering tools to create smarter workflows and effective decision-making processes, providing and consuming real-time data feeds and developing digital highways for interoperability, which will drive the change that will ultimately re-shape the structure of our market.
Allen issues a note of caution about the hype surrounding the potential role that AI, and the rise of machine learning. She says: “Some market practitioners suggest that AI and robotics will reshape the financing market and drive change; this is a massive claim considering the global securities lending market continues to be a predominately fractured marketplace where many transactions continue to happen the old-fashioned way via email, Bloomberg Message and the telephone. I suggest market participants get the basics right first, enabling them to respond systematically to multiple vehicles on a global basis.”
“There is a theory that algorithms will replace free thought and decision-making across many industries, and there is some evidence of this already within securities finance. However, algorithms are only one of the ingredients that extract the power from data, the other is knowledge of what the data holds and for this, human input is required,” she concludes.
She thus provides further confirmation that carbon-based life forms will retain a role in the industry for some time yet.
Greenwich Associates blockchain
The financial services industry is spending about $1.7 billion per year on blockchain, as banks and other firms move beyond the proof-of-concept stage and start rolling out commercial DLT products.
This is one of the main conclusions of a new report by Greenwich Associates, which presents the results of one of the largest and most comprehensive studies on the topic to date. The firm says that for “Blockchain Adoption in Capital Markets - 2018” it conducted over 200 interviews with market participants covering blockchain budgets, team sizes, use case exploration, key challenges and other issues. The study results show that blockchain budgets increased 67 percent last year, with one in 10 of the banks and other companies now reporting blockchain budgets in excess of $10,000,000.
Headcount dedicated to blockchain initiatives doubled in 2017, as banks and other firms launched new proof-of-concept projects or shifted top product implementation. The typical top tier bank now has about 18 full-time employees working on the technology.
A clerk transported from Midland Bank International’s securities department in Mariner House in London in 1981 to its equivalent at any major custodian today would be like fictional Royal Navy Captain Horatio Hornblower stepping off the deck of any of his 19th century vessels and onto the bridge of the USS Enterprise.
Some wags would, however, suggest as a retort that it would be more like walking on to the rickety set of an early Doctor Who episode. The rise of the robots is an enduring theme in industry commentary, but the fax machine and Excel cling stubbornly on.
One market participant observes: “It’s a bit of a mixed bag in the securities finance industry.”
They add: “You have many firms using the latest and greatest technology, like EquiLend’s Next Generation Trading, but then you also still see some firms (sometimes even different desks at the same firms) sending faxes for reconciliations and the like.”
“So while the technology, and the adoption of it, has come quite a long way over the past decade and a half or so—you can see this with the massive increase in trade and post-trade volumes on EquiLend over the years (trades on EquiLend, for instance, are up a reported third overall since it launched Next Generation Trading three years ago)—there remain plenty of opportunity for firms to automate more of their activity and benefit from the associated efficiencies.”
Another market participant, said: “It depends on whose office you are in.”
“In terms of business, the complexity of trades and structures is unrecognisable, but in terms of systems not so much. Some firms have full automation, interoperability etc, whereas other participants are still using legacy systems and technology-savvy traders are managing mission-critical parts of the business on Excel spreadsheets or macros.”
Ken DeGiglio, CIO of EquiLend revealed that for the first time the firm is working on certain new technologies.
DeGiglio said: “These are exciting times in the financial technology space. I have been in the financial technology industry for more than three decades. I can count on one hand the number of true inflection points there have been in this space through that time: the shift from mainframe to PCs and client server; the advent of the internet and the world wide web; the migration to relational databases; the proliferation of mobile computing; and now the movement to cloud native platforms. These were all very gradual paradigm shifts. In the future, I believe we will see more rapid technological change as new, disruptive technologies emerge. Ultimately, as technology is revolutionised and reinvented, firms will be able to redirect their staff toward more impactful activities as human-machine collaboration becomes more important than ever.”
He explains that when it comes to technology investment, especially in the securities finance industry, “firms are laser focused on driving down costs, maximising efficiency and keeping up with evolving regulations”.
He notes: “EquiLend, in its function as a securities finance industry utility, is uniquely situated to help firms accomplish all of these things—and that is and has always been our primary focus.”
“However, when most technology investment by firms these days is directed toward these must-haves, emerging technology that may offer a competitive advantage oftentimes takes a back seat. Technologies such as artificial intelligence (AI) and blockchain are real, valid and exciting, and they have the possibility to truly revolutionise the way we all operate, but I think they will be somewhat more slowly adopted by securities finance market participants than some of the buzz would suggest.
“That said, a technology provider such as EquiLend is ideally placed to incorporate these revolutionary technologies into services already used by firms throughout the industry, such as NGT, EquiLend Clearing Services, DataLend or our post-trade suite. In fact, we are doing exactly that. We are currently building enhancements to our post-trade suite that leverage AI, and we expect to extend the technology to other services as well.”
DeGiglio explains that EquiLend are actively working on cloud deployments as well as implementing a shared ledger model that can be easily extended to leverage distributed ledger technology (DLT) and “smart contract” frameworks in the future.
He says: “By incorporating these technologies into our services, firms can reap the benefits of them via their existing connections to a trusted intermediary, EquiLend, with little to no extra technology investment on their end.”
“This is a true value-add for our clients. As with all of our services, we have always said that we will implement new features, small or large, as and when there is an appetite from the market to use them. AI, shared ledger and smart contracts are all examples of us listening to where our clients’ pain points are and building technology to alleviate them,” he concludes.
Also active in the DLT space, is Zurich-based HQLAx, which completed the first blockchain-enabled securities lending transaction in the first quarter of this year. Guido Stroemer, CEO at HQLAx, explains that the firm is close to the completion of the build phase of its technology and that to prove it could be done it executed a real transaction in which Crédit Suisse and ING Bank exchanged bonds.
“During the live pilot transaction, each bank moved €25 million of government bonds into a segregated custody account, which was then linked to digital collateral record (DCR),” he says.
“These DCRs were then exchanged automatically on our platform on a delivery versus delivery basis. The DCR exchange effected legal title transfer of the accounts (and the inventory of securities within the accounts) and we proved this by each bank removing securities from the DCR account for which it had taken ownership via the DCR exchange.
“The live pilot was a big milestone for HQLAx, and we have received a great deal of incoming interest from market participants eager to learn more about our platform. We are also very excited about the letter of intent we signed with Deutsche Boerse Group to form a strategic partnership, which will accelerate market adoption of the HQLAx platform.”
Specifically, he explains, the Deutsche Boerse partnership will provide front-end connectivity of the Eurex Repo platform to facilitate bilateral DCR upgrades/downgrades. Very importantly, Deutsche Boerse will also provide the back-end connectivity to multiple custodians to create a network effect to mobilise pools of securities sitting in different locations, thereby improving collateral fluidity.
“The improved operational efficiency will allow market participants to save on costs related to balance sheet management for intra-day credit liquidity exposures, settlement fails, and the liquidity coverage ratio,” he states.
Trading Apps, which expands its customers’ technology solution without disrupting downstream solutions and decommissioning obsolete technology, states the case for further advances in automation, as the trend towards increased volumes and decreased spreads experienced by the securities finance market is unsustainable.
It is against this backdrop that the market has welcomed a number of new technology vendors who offer trade automation and matching services which allow for a more sophisticated marketplace, she observes.
Laura Allen, director of sales at Trading Apps, says: “Looking forward, I believe the ability to seamlessly connect and auto-trade will become increasingly critical and organisations will put more emphasis on data analysis.”
“Traders will become more quantitative in nature and will require tools to manipulate and use data to analyse pricing trends and dislocations to ensure trades are accurately priced for both profitability and risk.”
Regardless of where in the value chain a firm sits whenever a big technology investment is being considered, stakeholders from various functional and regional divisions have to reach consensus on a strategy in order to move forward, she adds. Therefore it is of paramount importance that the process requirements and business objectives are clear and known.
“All financial markets are moving towards a standard, integrated and more transparent model. Whether that’s regulatory driven or just common sense, technology is constantly evolving to support the process. Although blockchain is a relatively new entrant, it is a very viable vehicle that is perfectly tailored to support changes that were already happening. The industry is evolving from a silo’d to a fully integrated structure; blockchain should continue to fuel that integration and along with it the standardisation of data and workflows.”
“New trading platforms offer targeted access to multiple pools of liquidity meeting the growing capital and regulatory needs of participants and further new entrants are to be expected as the market calls for disintermediation, increased automation and complexity. Technology will improve efficiency by delivering tools to create smarter workflows and effective decision-making processes, providing and consuming real-time data feeds and developing digital highways for interoperability, which will drive the change that will ultimately re-shape the structure of our market.
Allen issues a note of caution about the hype surrounding the potential role that AI, and the rise of machine learning. She says: “Some market practitioners suggest that AI and robotics will reshape the financing market and drive change; this is a massive claim considering the global securities lending market continues to be a predominately fractured marketplace where many transactions continue to happen the old-fashioned way via email, Bloomberg Message and the telephone. I suggest market participants get the basics right first, enabling them to respond systematically to multiple vehicles on a global basis.”
“There is a theory that algorithms will replace free thought and decision-making across many industries, and there is some evidence of this already within securities finance. However, algorithms are only one of the ingredients that extract the power from data, the other is knowledge of what the data holds and for this, human input is required,” she concludes.
She thus provides further confirmation that carbon-based life forms will retain a role in the industry for some time yet.
Greenwich Associates blockchain
The financial services industry is spending about $1.7 billion per year on blockchain, as banks and other firms move beyond the proof-of-concept stage and start rolling out commercial DLT products.
This is one of the main conclusions of a new report by Greenwich Associates, which presents the results of one of the largest and most comprehensive studies on the topic to date. The firm says that for “Blockchain Adoption in Capital Markets - 2018” it conducted over 200 interviews with market participants covering blockchain budgets, team sizes, use case exploration, key challenges and other issues. The study results show that blockchain budgets increased 67 percent last year, with one in 10 of the banks and other companies now reporting blockchain budgets in excess of $10,000,000.
Headcount dedicated to blockchain initiatives doubled in 2017, as banks and other firms launched new proof-of-concept projects or shifted top product implementation. The typical top tier bank now has about 18 full-time employees working on the technology.
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