New players in the world of securities finance
23 November 2021
Clear Street’s managing director of securities finance Robert Chiuch and South Street Securities’ head of equity finance Anthony Venditti, speak to Carmella Haswell about their experiences in leading their newly formed securities finance divisions and the role of agile, adaptive disruptors in this industry space
Image: stock.adobe.com/lassedesignen
Within the space of a year, the industry has welcomed new securities finance divisions including Clear Street’s CS Financing Solutions and South Street Securities’ equity finance business. The two initiatives have led several industry heavyweights out of retirement and back into action, pooling together decades-long experience to offer flexibility and high-quality securities finance services to their clients.
Clear Street, which has brought together a team of industry veterans including Robert Chiuch, James McDonald and Mark Skowron, sought to improve the profitability of securities financing activities for institutional investors, intermediaries and stakeholders when it launched its CS Financing Solutions division in August 2020. In building from this foundation, it will explore opportunities to serve a broader range of institutional clients including public, private-public and private pension funds, mutual funds, and endowments.
Prior to this, Anthony Venditti was welcomed to South Street Securities as head of equity finance in February 2020 to work on an exciting opportunity. In January 2021, the US broker-dealer firm announced that it had created a new equity finance business spearheaded by Venditti. The company aims to leverage its capital base and balance sheet to become a niche player in the specials (hard-to-borrow) space and provide solutions regarding the financing of securities and collateral.
Speaking to SFT, Venditti reflects on the motivation behind this new venture. He says: “South Street Securities is a well-capitalised fixed income and repo shop. Stock loan was the next logical step for us to expand because of its similarities with repo. The main purpose of this expansion was to get our shareholders comfortable with equity settlements, cash movements and all other processes around facilitating equity flow.”
After initial delays caused by the COVID-19 pandemic and the regulatory approval process, the team completed the first phase of the build which saw the creation of an equity finance platform on top of its fixed income activities.
Starting small
South Street Securities’ equity finance business facilitates banks, broker-dealers, clearing firms and trading firms that are either regulated or registered in the US, Canada and the UK. The plan is to begin small and build from the ground up. While the company gets “all the plumbing in place”, Venditti says the next phase of the operation is to secure membership approval from the Office of Comptroller of the Currency (OCC).
Establishing itself in the equity lending business first and foremost, the next step will be to enter into corporate bond lending in the second quarter of 2022. In the meantime, it awaits regulatory approval to extend its activities to trade equities, options and futures. With these approvals, South Street aims to launch its Delta 1 trading strategy, which is targeted for early 2023.
Focusing solely on the US for now, the team hopes to branch out to Canada. Venditti explains: “Because of my prior experience and network, [Canada] would be a natural growth market for us. Markets outside Canada are harder to predict, but I believe [we will look to expand] wherever our partners and clients take us.”
Venditti indicates that there are a lot of new players entering the US market, like retail and trading firms, that want to become self-clearing. But many of these small to mid-size firms don’t have the expertise, bandwidth or budget to make it happen. It can be challenging to hire people, implement new systems and obtain US regulatory approvals. “South Street can help with those challenges because we have balance sheet capacity and advanced technology,” he says.
“As we build out our own business, we’re teaching our fixed income systems and services group what an equity is, along with how to clear, settle and value them. So as we build that for ourselves, we can better serve any client that’s on our platform so they can benefit from either our technology or expertise in this market. Not many companies in our space can act the way we do or service clients as efficiently.”
Advancing the industry
Having led his team of experts over the past year, Venditti takes a moment to evaluate key changes in the securities finance landscape— from hard-to-borrow names to new players in the industry— during this period.
He explains: “We pay a lot of attention to hard-to-borrow names. There is a lot of activity, but also greater volatility due to rates and demand. Because of this volatility, traders are paying more to borrow securities. However, much of this demand is for very short time periods, making it hard to predict stability in levels and supply.
“The other interesting thing we are seeing is that there’s also a lot more supply in the market. This has been fuelled by supply coming from new players like US and foreign retail and robo-advisory firms. Retail supply by nature is not typically as stable as institutional supply. As a result, there are now larger recalls and more buy-in activity, both of which need to be monitored more closely.”
With “more cash on the street” and less leverage, the funding market is experiencing changes of its own. According to Venditti, collateral has been scarce and the yield curve relatively flat, so funding spreads have been very thin this year. As we edge toward the end of 2021, there is some widening of spreads, but it has not been a typical year end. He explains: “I do believe that somewhere between the GameStop volatility and Archegos unwind, there has been a long term effect on the liquidity and leverage within our markets.”
However, ending his analysis on a more positive note, Venditti adds: “I’ve never seen as many new players enter the market as this year. It’s an interesting time because even though the business and spreads have tightened, there is an influx of new players that are changing the landscape and creating new opportunities.”
Room for adapting
Clear Street’s managing director of securities finance, Chiuch, believes that the securities finance segment is experiencing Schumpeterian forces and traditional models are ripe for disruption in a manner that is constructive for consumers of prime brokerage services. The sector has seemingly evolved to a more progressive model that is open to more than one dimension of differentiation— “it’s often been a binary conversation focused on price or service quality,” Chiuch adds.
Clear Street’s CS Financing Solutions arrived on the scene 15 months ago, seeking to build next generation cloud-based infrastructure for prime brokerage securities finance and providing products to the supply side. In the eyes of the Clear Street’s Chiuch, products are essential to prime business. He says: “We believe there’s room for agile, adaptive disruptors in securities finance markets. If you look at the market today, you’ll see that heavy cost structures, outdated technology and inefficient organisational designs make it difficult for many traditional providers to profitably retain valuable customers.”
The core element of the division is technology. After all, the firm was founded by former traders who believed that the prime brokerage experience could be improved by building a modern, tech-forward prime for today’s investors. Chiuch indicates: “Technology is helping us overcome traditional barriers to entry. Current market forces support new entrants across customer segments, including pension funds and private investment funds, with new and innovative products and strategies for those asset managers and their service providers.”
He adds: “When Jim, Mark and I started in August 2020, Clear Street had fewer than 100 people. Today we are nearly 300 strong, and our demand side securities finance business has grown commensurately.”
With an expanding business comes a stronger demand to supply for clients. CS Financing Solutions is taking the hybrid approach— extracting material value at the margin and offering a differentiated customer experience in all three areas: price, quality and as segment specialists, according to Chiuch. The division is also challenging asset owners on whether they’re achieving optimal performance and returns with their current provider, and whether their performance is constrained because their provider is constrained. Chiuch continues: “It’s all too easy for post hoc rationalisation to hijack any feedback and get lost in the sauce”.
Similar to Venditti’s dreams of expanding his own division by taking the equity finance business to Canada and around the world, Chiuch has plans to broaden Clear Street’s range of institutional clients and reveals it is already making progress in this area. Institutional clients are bringing breadth of inventory and scale to the equation for the company. The benefits to CS Financing Solutions’ internal and external clients are enhanced liquidity and financing options across a broader spectrum of securities, Chiuch explains.
Reflecting on more than a year’s work with the division, Chiuch says: “Our strategic objectives are aligned across the organisation with a view on sustainable growth over the longer term.
“As we work toward that North Star of long-term objectives, we know that we still must remain flexible in the short-term. It is crucial that we can, and continue to, adapt and respond appropriately to client demands and market forces. That means occasionally re-stacking the deck — constantly re-evaluating our positioning to optimise the benefits to our clients and to Clear Street and our stakeholders.”
Clear Street, which has brought together a team of industry veterans including Robert Chiuch, James McDonald and Mark Skowron, sought to improve the profitability of securities financing activities for institutional investors, intermediaries and stakeholders when it launched its CS Financing Solutions division in August 2020. In building from this foundation, it will explore opportunities to serve a broader range of institutional clients including public, private-public and private pension funds, mutual funds, and endowments.
Prior to this, Anthony Venditti was welcomed to South Street Securities as head of equity finance in February 2020 to work on an exciting opportunity. In January 2021, the US broker-dealer firm announced that it had created a new equity finance business spearheaded by Venditti. The company aims to leverage its capital base and balance sheet to become a niche player in the specials (hard-to-borrow) space and provide solutions regarding the financing of securities and collateral.
Speaking to SFT, Venditti reflects on the motivation behind this new venture. He says: “South Street Securities is a well-capitalised fixed income and repo shop. Stock loan was the next logical step for us to expand because of its similarities with repo. The main purpose of this expansion was to get our shareholders comfortable with equity settlements, cash movements and all other processes around facilitating equity flow.”
After initial delays caused by the COVID-19 pandemic and the regulatory approval process, the team completed the first phase of the build which saw the creation of an equity finance platform on top of its fixed income activities.
Starting small
South Street Securities’ equity finance business facilitates banks, broker-dealers, clearing firms and trading firms that are either regulated or registered in the US, Canada and the UK. The plan is to begin small and build from the ground up. While the company gets “all the plumbing in place”, Venditti says the next phase of the operation is to secure membership approval from the Office of Comptroller of the Currency (OCC).
Establishing itself in the equity lending business first and foremost, the next step will be to enter into corporate bond lending in the second quarter of 2022. In the meantime, it awaits regulatory approval to extend its activities to trade equities, options and futures. With these approvals, South Street aims to launch its Delta 1 trading strategy, which is targeted for early 2023.
Focusing solely on the US for now, the team hopes to branch out to Canada. Venditti explains: “Because of my prior experience and network, [Canada] would be a natural growth market for us. Markets outside Canada are harder to predict, but I believe [we will look to expand] wherever our partners and clients take us.”
Venditti indicates that there are a lot of new players entering the US market, like retail and trading firms, that want to become self-clearing. But many of these small to mid-size firms don’t have the expertise, bandwidth or budget to make it happen. It can be challenging to hire people, implement new systems and obtain US regulatory approvals. “South Street can help with those challenges because we have balance sheet capacity and advanced technology,” he says.
“As we build out our own business, we’re teaching our fixed income systems and services group what an equity is, along with how to clear, settle and value them. So as we build that for ourselves, we can better serve any client that’s on our platform so they can benefit from either our technology or expertise in this market. Not many companies in our space can act the way we do or service clients as efficiently.”
Advancing the industry
Having led his team of experts over the past year, Venditti takes a moment to evaluate key changes in the securities finance landscape— from hard-to-borrow names to new players in the industry— during this period.
He explains: “We pay a lot of attention to hard-to-borrow names. There is a lot of activity, but also greater volatility due to rates and demand. Because of this volatility, traders are paying more to borrow securities. However, much of this demand is for very short time periods, making it hard to predict stability in levels and supply.
“The other interesting thing we are seeing is that there’s also a lot more supply in the market. This has been fuelled by supply coming from new players like US and foreign retail and robo-advisory firms. Retail supply by nature is not typically as stable as institutional supply. As a result, there are now larger recalls and more buy-in activity, both of which need to be monitored more closely.”
With “more cash on the street” and less leverage, the funding market is experiencing changes of its own. According to Venditti, collateral has been scarce and the yield curve relatively flat, so funding spreads have been very thin this year. As we edge toward the end of 2021, there is some widening of spreads, but it has not been a typical year end. He explains: “I do believe that somewhere between the GameStop volatility and Archegos unwind, there has been a long term effect on the liquidity and leverage within our markets.”
However, ending his analysis on a more positive note, Venditti adds: “I’ve never seen as many new players enter the market as this year. It’s an interesting time because even though the business and spreads have tightened, there is an influx of new players that are changing the landscape and creating new opportunities.”
Room for adapting
Clear Street’s managing director of securities finance, Chiuch, believes that the securities finance segment is experiencing Schumpeterian forces and traditional models are ripe for disruption in a manner that is constructive for consumers of prime brokerage services. The sector has seemingly evolved to a more progressive model that is open to more than one dimension of differentiation— “it’s often been a binary conversation focused on price or service quality,” Chiuch adds.
Clear Street’s CS Financing Solutions arrived on the scene 15 months ago, seeking to build next generation cloud-based infrastructure for prime brokerage securities finance and providing products to the supply side. In the eyes of the Clear Street’s Chiuch, products are essential to prime business. He says: “We believe there’s room for agile, adaptive disruptors in securities finance markets. If you look at the market today, you’ll see that heavy cost structures, outdated technology and inefficient organisational designs make it difficult for many traditional providers to profitably retain valuable customers.”
The core element of the division is technology. After all, the firm was founded by former traders who believed that the prime brokerage experience could be improved by building a modern, tech-forward prime for today’s investors. Chiuch indicates: “Technology is helping us overcome traditional barriers to entry. Current market forces support new entrants across customer segments, including pension funds and private investment funds, with new and innovative products and strategies for those asset managers and their service providers.”
He adds: “When Jim, Mark and I started in August 2020, Clear Street had fewer than 100 people. Today we are nearly 300 strong, and our demand side securities finance business has grown commensurately.”
With an expanding business comes a stronger demand to supply for clients. CS Financing Solutions is taking the hybrid approach— extracting material value at the margin and offering a differentiated customer experience in all three areas: price, quality and as segment specialists, according to Chiuch. The division is also challenging asset owners on whether they’re achieving optimal performance and returns with their current provider, and whether their performance is constrained because their provider is constrained. Chiuch continues: “It’s all too easy for post hoc rationalisation to hijack any feedback and get lost in the sauce”.
Similar to Venditti’s dreams of expanding his own division by taking the equity finance business to Canada and around the world, Chiuch has plans to broaden Clear Street’s range of institutional clients and reveals it is already making progress in this area. Institutional clients are bringing breadth of inventory and scale to the equation for the company. The benefits to CS Financing Solutions’ internal and external clients are enhanced liquidity and financing options across a broader spectrum of securities, Chiuch explains.
Reflecting on more than a year’s work with the division, Chiuch says: “Our strategic objectives are aligned across the organisation with a view on sustainable growth over the longer term.
“As we work toward that North Star of long-term objectives, we know that we still must remain flexible in the short-term. It is crucial that we can, and continue to, adapt and respond appropriately to client demands and market forces. That means occasionally re-stacking the deck — constantly re-evaluating our positioning to optimise the benefits to our clients and to Clear Street and our stakeholders.”
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