Navigating through the road to efficiencies
16 October 2018
Find out what happened at the ISLA 9th Annual Post Trade Conference infrastructure in London
Image: Shutterstock
The International Securities Lending Association (ISLA) held its 9th post-trade conference this year in London with the theme “Road to Efficiencies”. The conference dealt with topics including post-trade processes and disciplines, the implications of Central Securities Depository (CSDR) amongst other significant developments the product faces.
Against a backdrop of uncertainty surrounding Securities Financing Transactions Regulation (SFTR) and its unfinished technical standards, Brexit, and how the current infrastructure around securities finance settlement needs to adapt to avoid potential impacts of the mandatory buy-in regime, delegates had interesting discussions throughout the conference.
In the opening keynote speech, Pooma Kimis, managing director of Official Monetary and Financial Institutions Forum (OMFIF), the independent think tank for central banking, economic policy and public investment, discussed policy, regulation, and investment strategies prescribing global macro perspectives.
Discussing stock, a decade after the post-Lehman crisis period, Kimis noted that the post-crisis responses have produced mixed results.
She added: “We saw seismic schisms develop after Lehman collapsed, which swallowed the great and mighty, so central banks moved in, and made up vast amounts of money out of thin air with unconventional policy to stabilise our financial system. Central banks have played a crucial role in the changes we have seen in the economic framework. For us at OMFIF, we are seeking to examine these immediate protective measures needed to safeguard the global financial system and the effective after-effects of these policies, which may even develop into new vulnerabilities if not managed and monitored.”
“We have ballooning central bank balance sheets in anchor economies such as the US, Europe and Japan, just as much as we have exponential rises in asset prices, particularly in private equity and real estate, and yet substantial yield compression in other asset classes.”
Kimis continued: “Despite the fact that the UK no longer actively operates quantitative easing measures, the Bank of England has a sizeable balance sheet. This matters because central bank balance sheets and its sterilisation or reduction will have an impact on liquidity if not managed properly.”
“The buybacks of these assets will happen, we don’t know when but it can take a long time and it can have a huge knock-on effect’’,
Kimis highlighted.
Discussing ongoing research developments at OMFIF, Pooma said: “We live in a generally capitalistic economy and so it is likely that there is going to be another crisis at some point in the next decade. Part of our thinking at OMFIF at the moment is looking into what tools the central banks have if this were to happen again.”
Kimis also discussed the US trade wars with China, which affects emerging markets and causes an increase in prices and inequality leading to trade pressures and questions over the nature of the monetary policy.
“It is important to distinguish the disparity in emerging market volatility observed over the last month. We have a great deal of volatility for different reasons, the volatility in Argentina is very different to Turkey or South Africa, for example.”
Discussing the US, Kimis explained that the Triffin dilemma is a short-term objective clashing with long-term demands internationally.
“This is important because of the short-term regulatory unwind that are happening in the US. Domestically the US is firing on all cylinders but that has an impact on dollar strength, capital flows and changes with counterparties internationally.”
“When the US makes changes that are domestically driven, one could argue it necessitates an assessment of impact internationally given the dollar is a reserve currency—and yet the mandate for US policymakers is to manage its national economy.”
The keynote speaker then discussed technology and regulation by outlining that policymakers are thinking profoundly about the changes that are happening in the market, “Regulators have generally had a free hand and a laissez-faire attitude toward fintech—spending a lot of time now encouraging innovation after spending 10 years encouraging investor protection”.
“I don’t think innovation and investor protection are mutually exclusive; it’s a balance and now the balance has tipped in favour of innovation around fintech to encourage a more efficient financial system, especially in the payments and
settlements space.”
Succeeding the keynote speech, the first panel of the day focused on the topic “business drivers”, with one panellist arguing that regulation has been the driving force [in the industry], with a significant amount of refiguring.
With many in the industry discussing the upcoming SFTR regulation, one panellist viewed regulation as a driver for opportunity and innovation going forward.
“We do have securities lending growing in importance and relevance,” the panellist argued, “but it has never been as relevant as it is today”.
Discussing key areas of focus in the industry, specifically, pledge, the panellist added: “One of the key areas of focus is the continued push for the balance sheet. Pledge has been at the top of our list in terms of it putting structure into place. It is also important because it is leveraging existing market infrastructures.”
“In my opinion, it makes it slightly quicker to market, it is also a dual-sided benefit, which makes it more attractive to borrowers—there is a premium in the transaction.”
This panel was followed by an ISLA update, where Andy Dyson, ISLA CEO, reflected upon a busy period for the association. Alluding to the title of the conference, “The Road to Efficiencies”, Dyson opened his remarks with a positive by explaining that the industry has come a long way since it began.
He said: “If you look as recently as the late to mid-1990’s, that journey of efficiency is something that we can all be proud of in the securities lending world and we should keep that in mind today.”
“In Europe, there are 2.1 trillion of securities on loan, and 46 percent are government bonds. Securities lending is one of the most efficient legal settlement constructs that we have”,
Dyson added.
“Growth of this type of business is a prime example of how banks have used securities lending in a certain way to reflect
market demand.”
He continued: “Non-cash collateral represents 67 percent of all collateral, which means that we have a business that is operationally very intensive.”
“I might argue that the repo guys have it a bit easy because they always have cash on their side of the trade.”
Elaborating on this, he said: “We have securities and potentially securities on the other side, which presents some challenges, and makes our business a little bit more complicated.”
Reflecting on almost a decade to the day that RBS announced its colossal share fall, Dyson commented: “Banks need to be adequately funded and they need to have the right level of equity.”
He added that there is a desire within EU 26 to have a more broadly market-based economy.
Dyson also discussed SFTR and highlighted that it is forcing the industry to shine a light on certain aspects that some often shy away from, such as legal entity identifiers.
“This is forcing us to the table of revision and re-thinking, it is the commission’s job to make markets safer and more resilient. We are stepping up.”
Following this, there was an industry associations panel, where CSDR proved to be a popular topic, “CSDR is not something that we can get out of—the train has left the station in that regard”, said one panellist.
The panellist added: “This is one of the topics that keeps us most busy. CSDR comes into force in September 2020.”
David Hiscock, senior director at the Institute of Cost and Management Accountants, said: “Absolutely the train has left the station, but not only has it left the station it should already be at its destination. We have been working on this for years.”
Hiscock added: “Just yesterday, we published a paper which looks specifically at the mandatory buy-ins on the SFT.”
Another panellist said: “Our concern is that our market has worked quite well but the mandatory nature of the structure takes that control and gives it to a third party who may not be able to execute the cash option, which seems to me quite problematic.”
The panel was then asked if Europe is becoming a difficult place to do business in, to which Hiscock replied: “There is a highly competitive world out there, so yes I think it is at risk.”
Meanwhile, another panellist said: “Regulations are making life very difficult. I am not sure that the approach that is currently being taken is the right one.”
Turning to technology, one panel discussed post-trade technology. On the topic of prematching, one speaker said: “There are a lot technological tools out there, contract compare prematching needs two sides interacting: I have seen cycles were one bank may be fully engaged then something in the cycle changes causing them to be disengaged.”
The speaker added: “CSDR might drive people to use the platforms more and use them consistently. There is real benefit in pre-matching.”
Outlining the issues with outdated technological tools, one panellist said: “Where things seem to be breaking down (mismatching) are instances were things have been done manually. It’s about cleaning up that static data.”
“There is a lot of efficiencies that can be gained from using the tools but they need to be used efficiently. The tools are there but some are older and need updating. We need to engage to work on how we can improve these tools.”
In the final panel of the day, one panellist said that regulation tends to focus the mind, however, another panellist saw the regulatory changes as adding complexity to the industry. He said: “There is a fundamental dilemma, at the moment we are making the business ever more complex, now we have a lot of ways of doing business from a lot of different collateral clients.”
“It seems that CSDR is getting the limelight. In the background, there has been an effort to create best practice papers in regards to regulation but is that really effectively working?”
He continued: “If that is not proving to be effective then do we need more statistical data to put us in a name-and-blame culture to see who isn’t recording and reporting to the industry?”
In response, one speaker said: “It will take more than one individual market system, that will not fix it. It is going to have to be a combined effort.”
Concluding the day, the chair mediated on the theme, the road to efficiencies, “Take it [the title] as a road journey, which started today and the destination is 2020 and being CSDR compliant.”
“I would predict some traffic ahead: March 2019 with Brexit, may mean that we might have to make some slight diversions, we may have some roadworks to get through. There are some alternate routes being suggested such as central counterparties which we may wish to consider.”
“If we keep the technology updated regularly, then hopefully the satnav will not drive the big SFT bus under the bridge, and we will arrive on time. As an industry, we pull together very well and I hope we will get there.”
Against a backdrop of uncertainty surrounding Securities Financing Transactions Regulation (SFTR) and its unfinished technical standards, Brexit, and how the current infrastructure around securities finance settlement needs to adapt to avoid potential impacts of the mandatory buy-in regime, delegates had interesting discussions throughout the conference.
In the opening keynote speech, Pooma Kimis, managing director of Official Monetary and Financial Institutions Forum (OMFIF), the independent think tank for central banking, economic policy and public investment, discussed policy, regulation, and investment strategies prescribing global macro perspectives.
Discussing stock, a decade after the post-Lehman crisis period, Kimis noted that the post-crisis responses have produced mixed results.
She added: “We saw seismic schisms develop after Lehman collapsed, which swallowed the great and mighty, so central banks moved in, and made up vast amounts of money out of thin air with unconventional policy to stabilise our financial system. Central banks have played a crucial role in the changes we have seen in the economic framework. For us at OMFIF, we are seeking to examine these immediate protective measures needed to safeguard the global financial system and the effective after-effects of these policies, which may even develop into new vulnerabilities if not managed and monitored.”
“We have ballooning central bank balance sheets in anchor economies such as the US, Europe and Japan, just as much as we have exponential rises in asset prices, particularly in private equity and real estate, and yet substantial yield compression in other asset classes.”
Kimis continued: “Despite the fact that the UK no longer actively operates quantitative easing measures, the Bank of England has a sizeable balance sheet. This matters because central bank balance sheets and its sterilisation or reduction will have an impact on liquidity if not managed properly.”
“The buybacks of these assets will happen, we don’t know when but it can take a long time and it can have a huge knock-on effect’’,
Kimis highlighted.
Discussing ongoing research developments at OMFIF, Pooma said: “We live in a generally capitalistic economy and so it is likely that there is going to be another crisis at some point in the next decade. Part of our thinking at OMFIF at the moment is looking into what tools the central banks have if this were to happen again.”
Kimis also discussed the US trade wars with China, which affects emerging markets and causes an increase in prices and inequality leading to trade pressures and questions over the nature of the monetary policy.
“It is important to distinguish the disparity in emerging market volatility observed over the last month. We have a great deal of volatility for different reasons, the volatility in Argentina is very different to Turkey or South Africa, for example.”
Discussing the US, Kimis explained that the Triffin dilemma is a short-term objective clashing with long-term demands internationally.
“This is important because of the short-term regulatory unwind that are happening in the US. Domestically the US is firing on all cylinders but that has an impact on dollar strength, capital flows and changes with counterparties internationally.”
“When the US makes changes that are domestically driven, one could argue it necessitates an assessment of impact internationally given the dollar is a reserve currency—and yet the mandate for US policymakers is to manage its national economy.”
The keynote speaker then discussed technology and regulation by outlining that policymakers are thinking profoundly about the changes that are happening in the market, “Regulators have generally had a free hand and a laissez-faire attitude toward fintech—spending a lot of time now encouraging innovation after spending 10 years encouraging investor protection”.
“I don’t think innovation and investor protection are mutually exclusive; it’s a balance and now the balance has tipped in favour of innovation around fintech to encourage a more efficient financial system, especially in the payments and
settlements space.”
Succeeding the keynote speech, the first panel of the day focused on the topic “business drivers”, with one panellist arguing that regulation has been the driving force [in the industry], with a significant amount of refiguring.
With many in the industry discussing the upcoming SFTR regulation, one panellist viewed regulation as a driver for opportunity and innovation going forward.
“We do have securities lending growing in importance and relevance,” the panellist argued, “but it has never been as relevant as it is today”.
Discussing key areas of focus in the industry, specifically, pledge, the panellist added: “One of the key areas of focus is the continued push for the balance sheet. Pledge has been at the top of our list in terms of it putting structure into place. It is also important because it is leveraging existing market infrastructures.”
“In my opinion, it makes it slightly quicker to market, it is also a dual-sided benefit, which makes it more attractive to borrowers—there is a premium in the transaction.”
This panel was followed by an ISLA update, where Andy Dyson, ISLA CEO, reflected upon a busy period for the association. Alluding to the title of the conference, “The Road to Efficiencies”, Dyson opened his remarks with a positive by explaining that the industry has come a long way since it began.
He said: “If you look as recently as the late to mid-1990’s, that journey of efficiency is something that we can all be proud of in the securities lending world and we should keep that in mind today.”
“In Europe, there are 2.1 trillion of securities on loan, and 46 percent are government bonds. Securities lending is one of the most efficient legal settlement constructs that we have”,
Dyson added.
“Growth of this type of business is a prime example of how banks have used securities lending in a certain way to reflect
market demand.”
He continued: “Non-cash collateral represents 67 percent of all collateral, which means that we have a business that is operationally very intensive.”
“I might argue that the repo guys have it a bit easy because they always have cash on their side of the trade.”
Elaborating on this, he said: “We have securities and potentially securities on the other side, which presents some challenges, and makes our business a little bit more complicated.”
Reflecting on almost a decade to the day that RBS announced its colossal share fall, Dyson commented: “Banks need to be adequately funded and they need to have the right level of equity.”
He added that there is a desire within EU 26 to have a more broadly market-based economy.
Dyson also discussed SFTR and highlighted that it is forcing the industry to shine a light on certain aspects that some often shy away from, such as legal entity identifiers.
“This is forcing us to the table of revision and re-thinking, it is the commission’s job to make markets safer and more resilient. We are stepping up.”
Following this, there was an industry associations panel, where CSDR proved to be a popular topic, “CSDR is not something that we can get out of—the train has left the station in that regard”, said one panellist.
The panellist added: “This is one of the topics that keeps us most busy. CSDR comes into force in September 2020.”
David Hiscock, senior director at the Institute of Cost and Management Accountants, said: “Absolutely the train has left the station, but not only has it left the station it should already be at its destination. We have been working on this for years.”
Hiscock added: “Just yesterday, we published a paper which looks specifically at the mandatory buy-ins on the SFT.”
Another panellist said: “Our concern is that our market has worked quite well but the mandatory nature of the structure takes that control and gives it to a third party who may not be able to execute the cash option, which seems to me quite problematic.”
The panel was then asked if Europe is becoming a difficult place to do business in, to which Hiscock replied: “There is a highly competitive world out there, so yes I think it is at risk.”
Meanwhile, another panellist said: “Regulations are making life very difficult. I am not sure that the approach that is currently being taken is the right one.”
Turning to technology, one panel discussed post-trade technology. On the topic of prematching, one speaker said: “There are a lot technological tools out there, contract compare prematching needs two sides interacting: I have seen cycles were one bank may be fully engaged then something in the cycle changes causing them to be disengaged.”
The speaker added: “CSDR might drive people to use the platforms more and use them consistently. There is real benefit in pre-matching.”
Outlining the issues with outdated technological tools, one panellist said: “Where things seem to be breaking down (mismatching) are instances were things have been done manually. It’s about cleaning up that static data.”
“There is a lot of efficiencies that can be gained from using the tools but they need to be used efficiently. The tools are there but some are older and need updating. We need to engage to work on how we can improve these tools.”
In the final panel of the day, one panellist said that regulation tends to focus the mind, however, another panellist saw the regulatory changes as adding complexity to the industry. He said: “There is a fundamental dilemma, at the moment we are making the business ever more complex, now we have a lot of ways of doing business from a lot of different collateral clients.”
“It seems that CSDR is getting the limelight. In the background, there has been an effort to create best practice papers in regards to regulation but is that really effectively working?”
He continued: “If that is not proving to be effective then do we need more statistical data to put us in a name-and-blame culture to see who isn’t recording and reporting to the industry?”
In response, one speaker said: “It will take more than one individual market system, that will not fix it. It is going to have to be a combined effort.”
Concluding the day, the chair mediated on the theme, the road to efficiencies, “Take it [the title] as a road journey, which started today and the destination is 2020 and being CSDR compliant.”
“I would predict some traffic ahead: March 2019 with Brexit, may mean that we might have to make some slight diversions, we may have some roadworks to get through. There are some alternate routes being suggested such as central counterparties which we may wish to consider.”
“If we keep the technology updated regularly, then hopefully the satnav will not drive the big SFT bus under the bridge, and we will arrive on time. As an industry, we pull together very well and I hope we will get there.”
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