The new world of interconnected data
03 July 2020
David Lewis, of FIS, tracks the increasing use of data as a window into the market over the years and explains how the COVID-19 pandemic could also be the next driver of improvements
Image: Vit-Mar/shutterstock.com
With the rollout of the Securities Financing Transactions Regulation (SFTR), 2020 was going to be a pivotal year for regulation and data transparency across the securities finance industry. It has been more than 15 years since the idea of commercially available data brought rate and volume transparency to market participants, data I would deliver personally to client’s office on a compact disc, once a month. While the instant access to global intraday data, 24 hours a day, illustrates the huge advances in market transparency made since that pioneering time, 2020 was still going to mark a seismic change for the industry. The global financial crisis highlighted the need for greater transparency and control across the breadth and depth of what was referred to as shadow banking – arguably, an unnecessarily negative term for bank-like activities that occur outside normally regulated business. The Financial Stability Board’s transparency directive was part of the global response to the crisis and a significant step in bolstering the resilience of the financial markets to defaults.
One of the key objectives of the transparency directive was to gather sufficient data to understand the interconnectedness of financial counterparties as a way of understanding and, therefore, controlling contagion risk. While it might seem an unlikely comparison at first, the seismic events that have affected the entire world through the first half of 2020, and are likely to permanently change many aspects of the way we work and live, have created many parallels in the way the world has responded to these very different crises. Both the global financial crisis and the COVID-19 pandemic events caused significant market turmoil, a rush to safe assets such as government debt and gold, as well as increased margin calls and attention to market and counterparty risk. They also caused vilification of short sellers and multiple jurisdictions applied short selling bans in vain efforts to force markets to rise, or at least not fall further.
The events have also caused a significant uptick in the gathering, analysis and publication of data. At present, no news bulletin passes without a raft of terrifying statistics around the battle against COVID-19, often making many of us armchair experts in the R0 factor and the relative impacts of social distancing and the wearing of masks on contagion. But these statistics are vital if a viable response is to be determined. As a popular and appropriate maxim, “if you can’t measure it, you can’t manage it” applies equally to the containment and management of a viral pandemic as it does to the containment and management of a financial crisis. The global connections between the world’s population, through public transport and city living, as well as the trading and exchange of goods, provides a clearly comparative model with that of the financial industry. The interdependence of many nations upon each other has been brought into sharp focus by COVID-19, just as the collapse of Lehman Brothers identified the Jenga-style impact on a market when one brick is pulled from the bottom.
Few can argue that SFTR has presented the securities finance market with an extremely complex and demanding reporting regime, broad in its scope of inclusion and deep in the required data granularity. Many argued that it was too much, too hard and too invasive, and not without good cause. However, it is hard to argue such points with a great expectation of success while, at the same time, underlining the importance of the industry as a vital part of the very fabric and process of the wider financial community. The business of securities finance and collateral management is either in, or out of the business. It cannot be both.
There was a strong argument made for a delay in implementation of the SFTR regime, due to the impact of the virus on working practices and the capacity to deliver the required changes in time to meet the well-publicised deadlines. Due to the mechanisms of European Law, a formal extension would itself have been difficult to deliver given the need to make a change in the law and the lack of availability of the European institutions to make such a change.
As a result, the European Securities and Markets Authority (ESMA) delivered a pragmatic solution, allowing local, nationally competent authorities to turn a blind eye to the delivery of data under SFTR for three months. This will, no doubt, have created concerns because it wasn’t a complete shift of dates, it was simply a delay of phase one to align with and not displace phase two. Phases three and four remain as scheduled. This does mean the first two phases would be going live at the same time, but some respite was given to allow the industry time to adapt. The speed and strength with which those business practices were managed, and the degree of success achieved, is unlikely to support any further extensions to SFTR or indeed any other item on the upcoming regulatory calendar. Note the refusal to adjust the timeline for the Shareholder Rights Directive.
So, how to make lemonade from the lemons delivered to our doors? Many, including the CEO of the International Securities Lending Association, Andrew Dyson, have argued that this is a turning point for our market and for the good. It is an opportunity to redesign and redevelop the way the market works, improving standardisation and interoperability between participants and the companies, like FIS, that serve them. Significant effort has been expended on meeting the demands of SFTR; as a vendor, FIS, one of the largest providers on the street, we have invested heavily in our solutions as well as improved interoperability, with other service providers enjoying a more collegiate approach, even among competitors, than many have not seen before.
In a period that has seen margins and demand fall more recently, there has been a clearly identifiable direction of travel toward automation and doing more with less, be that less financial or human capital. The increasingly lean structures we all operate in make it all the more amazing that the challenges of the first half of 2020 presented by the COVID-19 pandemic have been managed relatively well. At the same time that market volatility explodes, markets crash then recover, the vast majority of market participants and their service providers are forced to work from home. While individual circumstances to do with home-working environments will vary greatly, where, for example, dogs and children may decide to participate in that vital conference call you are having, the performance of most firms has been phenomenal.
In a June Business Insider report, Fidelity Asset Management stated that they have improved productivity 147 percent in recent months, citing an investment in technology and agile team working as the main reasons for being able to change their business practices, effectively overnight. FIS is in a similar position to Fidelity, and indeed many of our thousands of clients, and have 98 percent of our 55,000+ staff working from home.
While this transition was going on, the markets were seeing huge increases in volumes and volatility. Collateral movements have been said to have increased by 70-80 percent, with margin calls rising five-fold and disputes by eight-fold. With failure rates of around 5 percent, it is not difficult to see how difficult this transition could have been without scalable technology and the ability to manage it effectively from a remote location, such as your kitchen table. The vital nature of the data we need to manage an increasingly complex market, including demands for collateral that change with increasing frequency and volume, is inarguable.
The ability to call upon scalable technology managed from remote locations, hosted by professional providers, has been proven in a worldwide disaster recovery event; a disaster-recovery event where having the traditional safety net of a physical disaster recovery site was no help. In the same way that the arguments about the effectiveness of working from home have been, potentially, answered for good, so have the arguments pitted against cloud-managed and hosted services, which have proved themselves indispensable this year.
Automation and the data upon which it functions has allowed the securities finance and collateral management industry to continue working and oil the wheels of the global financial machine. While there have been business failures across the world as a direct result of the pandemic, there haven’t yet been any failures of major financial institutions. Much was learned from the global financial crisis.
The data gathered since and the data yet to be gathered by SFTR and other implementations of the transparency directive around the world will help ensure that when the next financial crisis comes, as it will, the financial system will be in a better place to understand, manage and control the contagion risk and interconnectedness of the counterparties involved and limit the impact felt by those the industry serves.
One of the key objectives of the transparency directive was to gather sufficient data to understand the interconnectedness of financial counterparties as a way of understanding and, therefore, controlling contagion risk. While it might seem an unlikely comparison at first, the seismic events that have affected the entire world through the first half of 2020, and are likely to permanently change many aspects of the way we work and live, have created many parallels in the way the world has responded to these very different crises. Both the global financial crisis and the COVID-19 pandemic events caused significant market turmoil, a rush to safe assets such as government debt and gold, as well as increased margin calls and attention to market and counterparty risk. They also caused vilification of short sellers and multiple jurisdictions applied short selling bans in vain efforts to force markets to rise, or at least not fall further.
The events have also caused a significant uptick in the gathering, analysis and publication of data. At present, no news bulletin passes without a raft of terrifying statistics around the battle against COVID-19, often making many of us armchair experts in the R0 factor and the relative impacts of social distancing and the wearing of masks on contagion. But these statistics are vital if a viable response is to be determined. As a popular and appropriate maxim, “if you can’t measure it, you can’t manage it” applies equally to the containment and management of a viral pandemic as it does to the containment and management of a financial crisis. The global connections between the world’s population, through public transport and city living, as well as the trading and exchange of goods, provides a clearly comparative model with that of the financial industry. The interdependence of many nations upon each other has been brought into sharp focus by COVID-19, just as the collapse of Lehman Brothers identified the Jenga-style impact on a market when one brick is pulled from the bottom.
Few can argue that SFTR has presented the securities finance market with an extremely complex and demanding reporting regime, broad in its scope of inclusion and deep in the required data granularity. Many argued that it was too much, too hard and too invasive, and not without good cause. However, it is hard to argue such points with a great expectation of success while, at the same time, underlining the importance of the industry as a vital part of the very fabric and process of the wider financial community. The business of securities finance and collateral management is either in, or out of the business. It cannot be both.
There was a strong argument made for a delay in implementation of the SFTR regime, due to the impact of the virus on working practices and the capacity to deliver the required changes in time to meet the well-publicised deadlines. Due to the mechanisms of European Law, a formal extension would itself have been difficult to deliver given the need to make a change in the law and the lack of availability of the European institutions to make such a change.
As a result, the European Securities and Markets Authority (ESMA) delivered a pragmatic solution, allowing local, nationally competent authorities to turn a blind eye to the delivery of data under SFTR for three months. This will, no doubt, have created concerns because it wasn’t a complete shift of dates, it was simply a delay of phase one to align with and not displace phase two. Phases three and four remain as scheduled. This does mean the first two phases would be going live at the same time, but some respite was given to allow the industry time to adapt. The speed and strength with which those business practices were managed, and the degree of success achieved, is unlikely to support any further extensions to SFTR or indeed any other item on the upcoming regulatory calendar. Note the refusal to adjust the timeline for the Shareholder Rights Directive.
So, how to make lemonade from the lemons delivered to our doors? Many, including the CEO of the International Securities Lending Association, Andrew Dyson, have argued that this is a turning point for our market and for the good. It is an opportunity to redesign and redevelop the way the market works, improving standardisation and interoperability between participants and the companies, like FIS, that serve them. Significant effort has been expended on meeting the demands of SFTR; as a vendor, FIS, one of the largest providers on the street, we have invested heavily in our solutions as well as improved interoperability, with other service providers enjoying a more collegiate approach, even among competitors, than many have not seen before.
In a period that has seen margins and demand fall more recently, there has been a clearly identifiable direction of travel toward automation and doing more with less, be that less financial or human capital. The increasingly lean structures we all operate in make it all the more amazing that the challenges of the first half of 2020 presented by the COVID-19 pandemic have been managed relatively well. At the same time that market volatility explodes, markets crash then recover, the vast majority of market participants and their service providers are forced to work from home. While individual circumstances to do with home-working environments will vary greatly, where, for example, dogs and children may decide to participate in that vital conference call you are having, the performance of most firms has been phenomenal.
In a June Business Insider report, Fidelity Asset Management stated that they have improved productivity 147 percent in recent months, citing an investment in technology and agile team working as the main reasons for being able to change their business practices, effectively overnight. FIS is in a similar position to Fidelity, and indeed many of our thousands of clients, and have 98 percent of our 55,000+ staff working from home.
While this transition was going on, the markets were seeing huge increases in volumes and volatility. Collateral movements have been said to have increased by 70-80 percent, with margin calls rising five-fold and disputes by eight-fold. With failure rates of around 5 percent, it is not difficult to see how difficult this transition could have been without scalable technology and the ability to manage it effectively from a remote location, such as your kitchen table. The vital nature of the data we need to manage an increasingly complex market, including demands for collateral that change with increasing frequency and volume, is inarguable.
The ability to call upon scalable technology managed from remote locations, hosted by professional providers, has been proven in a worldwide disaster recovery event; a disaster-recovery event where having the traditional safety net of a physical disaster recovery site was no help. In the same way that the arguments about the effectiveness of working from home have been, potentially, answered for good, so have the arguments pitted against cloud-managed and hosted services, which have proved themselves indispensable this year.
Automation and the data upon which it functions has allowed the securities finance and collateral management industry to continue working and oil the wheels of the global financial machine. While there have been business failures across the world as a direct result of the pandemic, there haven’t yet been any failures of major financial institutions. Much was learned from the global financial crisis.
The data gathered since and the data yet to be gathered by SFTR and other implementations of the transparency directive around the world will help ensure that when the next financial crisis comes, as it will, the financial system will be in a better place to understand, manage and control the contagion risk and interconnectedness of the counterparties involved and limit the impact felt by those the industry serves.
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