Behind the technology curve
A drive in transformation and innovation is required to get ahead of the technology curve, where the securities finance sector is seemingly lagging behind. With a greater focus on tokensiation and native digital assets, pressure mounds on the sector to tackle data and automation issues. Carmella Haswell reports
Image: stock.adobe.com/ilya_levchenko
As the securities finance industry travels down a clear path toward automation and standardisation, it is falling behind the technology curve in comparison to some other product areas. Technology has been key in catapulting the industry forward, but predictions estimate a turnaround within five years for the industry to catch up with the rest of the financial sector.
According to a “FutureTech” panel at the recent Securities Finance Technology Symposium, securities finance needs to move away from its traditional sentiment and allow new players to enter this “relationship business” and welcome new technologies.
David Shone, director of market infrastructure and technology at the International Securities Lending Association (ISLA), notes: “By becoming more efficient, embracing technology, and becoming smarter, quicker, and more cost effective, you will improve upon these relationships.”
Currently, Shone is seeing sub-groups of people within ISLA’s membership form use-case collaboration groups to look into specific issues. For instance, the Association has a trading working group which focuses on how to standardise and automate the process flow for evergreen and extendables. “Despite those products being around for a while, we did not have a standard legal agreement until just before Christmas, with the launch of the ISLA Master Confirmation Annex,” explains Shone. “Once you put those standards in then you can start to automate.”
Additionally, there is an increase in collaboration around the table. Taking a look at distributed ledger technology (DLT), Shone explains that groups of peers within the industry have begun to talk about what to do with DLT, digital assets and tokenisation, and how these technologies can aid the industry.
Similarly, Wassel Dammak, head of collateral solutions strategy at VERMEG, suggests that there is room to explore how technologies can help the industry cope with regulations such as the Central Securities Depository Regulation (CSDR) penalties, which have already impacted the current technology being seen on the market.
He says: “If we want to push it further and talk about T+1 and T+0, we also heard real-time settlement, instant settlement which we are beginning to see on the cash side for different ledgers. DLT and other technologies can assist this process, the technology will help to comply with those kinds of regulations in a quicker manner and will simplify the settlement and processes a lot.”
Comparing the sector to other areas of capital markets — from how businesses transact to how the technology works — Martin Walker, head of product management, securities finance and collateral management at Broadridge, says securities finance is on the right track. However, areas including foreign-exchange and cash equities have been moving along in this direction for several years already.
“This ties in with familiar themes of electronic trading, standardisation of booking models and data, and using data a lot more intensively and, to an extent, replacing people in a lot of the decision making processes,” Walker explains. “We are travelling along that path but we have been slower at moving along it than a lot of other asset classes. It is inevitable that we follow the direction of that path.”
With regard to the vision that Broadridge has set its sights on, the firm has been focusing on how to automate the recalls process and convert it to be fundamentally more data driven.
EquiLend has made substantial investments in cloud and artificial intelligence, machine learning, big data capabilities — these are now in the past — now EquiLend is looking ahead to DLT and blockchain.
Chief information officer at EquiLend Ken DeGiglio comments: “The industry has done a lot and firms like EquiLend have helped a lot to make continuous improvement and incremental change. What is clear is that we need to drive transformation and innovation. It is not just technology — we need to adopt new work flows and paradigms.
“We do not know what the future of technology in securities finance is, but we can all agree that it is not going to stay the way it is today, because it cannot. Data is growing at an unyielding pace, the regulatory pressures are not dissipating, we are all forced by our stakeholders to bend the risk curve and cost curve down. Transparency is not going to be an option anymore; it is going to be a mandate. The desire for real-time quality data is going to be an imperative.”
A measurement of success
VERMEG’s Dammak explores collateral management as an operational area which has seen improvement over the past decade — predominantly driven by regulation. “We have seen increased automation of the various parts of the collateral lifecycle and good collaboration across the industry to improve efficiency.” Dammak says.
Despite the discrepancies between the different asset classes and the fact that certain processes are in need of improvement in terms of automation, Dammak indicates that technology developments such as software-as-a-service and cloud open architecture with native APIs have been key to transform the collateral infrastructure and streamline the connectivity within the collateral ecosystem.
While the industry does not remain stagnant in its technology journey, when will the sector attain success in this domain and how can success be measured?
According to ISLA’s Shone, “the measure of success from an industry body point of view is that there remains an industry to represent, a healthy competitive one”. He adds: “If in three years’ time we are still talking about trading being done on spreadsheets, or collateral management still being done on spreadsheets, and telephone calls as the norm, then we have not solved our automation problems, and have not yet moved into the future.”
For Broadridge’s Walker, success is measured through the success of the company’s clients. “This is a capital markets business, so fundamentally people are interested in P&L generation, efficiency and risk management. If you end up with systems that allow you to generate more P&L in a more controlled way, these are the fundamental measures of success.”
EquiLend’s DeGiglio notes the industry is “all in this together”. He suggests: “I think we are going to see more volume. I do not think we have any control over the volume as we unlock more collateral to the world. My definition of success, a simple litmus test would be if we are on this panel two years out and we asked the question ‘are we behind?’, everybody has a unanimous “no” rather than a unanimous “yes”.”
DeGiglio believes it is not about the success of any one technology provider; the entire securities finance industry is either going to be successful or not. “I do think there is going to be a lot more interoperability and a lot more collaboration and coopetition.”
Furthermore, DeGiglio finds that there are numerous factors at play that will determine how long it will take to reach the curve. On the technology side, explains DeGiglio, there is “no silver bullet”. “Transformation is not easy and it is a journey. It will be a lot quicker than I would have answered a couple of years ago. This is due to the evolution of some of the technologies that have been out there and some of the work companies like EquiLend have done to embrace those technologies.”
Whereas on the non-technology side, there are people issues, budget constraints and resource issues.
The panel unanimously agreed on a less than five year term for the securities lending sector to catch up with other service areas. However, it was said that if everyone can get onboard and move forward correctly it could easily be a two to three year term. In the process, the industry could see incremental improvements and some real step functions.
However, Broadridge’s Walker advises that it will take more than just a reliance on technology. “It is the combination of people’s desire to change and commit the required investment to these business cases, combined with the external pressures which come with regulation and changes in the market.” Walker notes.
Reflecting back to the aftermath of 2008, where the securities finance market received a raft of regulation, ISLA’s Shone explains that people built solutions based on these regulations without necessarily considering how firms can utilise this regulation to the benefit of the business.
“Why did this happen in the first place?” Shone questions. “The regulators came to the industry and wanted information, and we could not deliver it to them in a standardised consistent fashion, nor give them the information that they wanted. If we do not get this next step in technology right — if we do not get tokenisation and native digital assets right, and if we still have data issues, lack of automation, and manual amends — and the regulators come to us again and find us in the same position, then we have failed.”
Shone volunteers that as an industry, participants should be approaching the regulators with “our ducks in order”, ready to give over the correct information and avoid having regulators “impose upon us rules that we must interpret, as everyone interprets differently”. He interjects: “We need to regain control of the industry in that sense and not be in a position where we get an additional layer of regulation, which adds to the cost of trading and operations and requires firms to buy another solution.”
According to a “FutureTech” panel at the recent Securities Finance Technology Symposium, securities finance needs to move away from its traditional sentiment and allow new players to enter this “relationship business” and welcome new technologies.
David Shone, director of market infrastructure and technology at the International Securities Lending Association (ISLA), notes: “By becoming more efficient, embracing technology, and becoming smarter, quicker, and more cost effective, you will improve upon these relationships.”
Currently, Shone is seeing sub-groups of people within ISLA’s membership form use-case collaboration groups to look into specific issues. For instance, the Association has a trading working group which focuses on how to standardise and automate the process flow for evergreen and extendables. “Despite those products being around for a while, we did not have a standard legal agreement until just before Christmas, with the launch of the ISLA Master Confirmation Annex,” explains Shone. “Once you put those standards in then you can start to automate.”
Additionally, there is an increase in collaboration around the table. Taking a look at distributed ledger technology (DLT), Shone explains that groups of peers within the industry have begun to talk about what to do with DLT, digital assets and tokenisation, and how these technologies can aid the industry.
Similarly, Wassel Dammak, head of collateral solutions strategy at VERMEG, suggests that there is room to explore how technologies can help the industry cope with regulations such as the Central Securities Depository Regulation (CSDR) penalties, which have already impacted the current technology being seen on the market.
He says: “If we want to push it further and talk about T+1 and T+0, we also heard real-time settlement, instant settlement which we are beginning to see on the cash side for different ledgers. DLT and other technologies can assist this process, the technology will help to comply with those kinds of regulations in a quicker manner and will simplify the settlement and processes a lot.”
Comparing the sector to other areas of capital markets — from how businesses transact to how the technology works — Martin Walker, head of product management, securities finance and collateral management at Broadridge, says securities finance is on the right track. However, areas including foreign-exchange and cash equities have been moving along in this direction for several years already.
“This ties in with familiar themes of electronic trading, standardisation of booking models and data, and using data a lot more intensively and, to an extent, replacing people in a lot of the decision making processes,” Walker explains. “We are travelling along that path but we have been slower at moving along it than a lot of other asset classes. It is inevitable that we follow the direction of that path.”
With regard to the vision that Broadridge has set its sights on, the firm has been focusing on how to automate the recalls process and convert it to be fundamentally more data driven.
EquiLend has made substantial investments in cloud and artificial intelligence, machine learning, big data capabilities — these are now in the past — now EquiLend is looking ahead to DLT and blockchain.
Chief information officer at EquiLend Ken DeGiglio comments: “The industry has done a lot and firms like EquiLend have helped a lot to make continuous improvement and incremental change. What is clear is that we need to drive transformation and innovation. It is not just technology — we need to adopt new work flows and paradigms.
“We do not know what the future of technology in securities finance is, but we can all agree that it is not going to stay the way it is today, because it cannot. Data is growing at an unyielding pace, the regulatory pressures are not dissipating, we are all forced by our stakeholders to bend the risk curve and cost curve down. Transparency is not going to be an option anymore; it is going to be a mandate. The desire for real-time quality data is going to be an imperative.”
A measurement of success
VERMEG’s Dammak explores collateral management as an operational area which has seen improvement over the past decade — predominantly driven by regulation. “We have seen increased automation of the various parts of the collateral lifecycle and good collaboration across the industry to improve efficiency.” Dammak says.
Despite the discrepancies between the different asset classes and the fact that certain processes are in need of improvement in terms of automation, Dammak indicates that technology developments such as software-as-a-service and cloud open architecture with native APIs have been key to transform the collateral infrastructure and streamline the connectivity within the collateral ecosystem.
While the industry does not remain stagnant in its technology journey, when will the sector attain success in this domain and how can success be measured?
According to ISLA’s Shone, “the measure of success from an industry body point of view is that there remains an industry to represent, a healthy competitive one”. He adds: “If in three years’ time we are still talking about trading being done on spreadsheets, or collateral management still being done on spreadsheets, and telephone calls as the norm, then we have not solved our automation problems, and have not yet moved into the future.”
For Broadridge’s Walker, success is measured through the success of the company’s clients. “This is a capital markets business, so fundamentally people are interested in P&L generation, efficiency and risk management. If you end up with systems that allow you to generate more P&L in a more controlled way, these are the fundamental measures of success.”
EquiLend’s DeGiglio notes the industry is “all in this together”. He suggests: “I think we are going to see more volume. I do not think we have any control over the volume as we unlock more collateral to the world. My definition of success, a simple litmus test would be if we are on this panel two years out and we asked the question ‘are we behind?’, everybody has a unanimous “no” rather than a unanimous “yes”.”
DeGiglio believes it is not about the success of any one technology provider; the entire securities finance industry is either going to be successful or not. “I do think there is going to be a lot more interoperability and a lot more collaboration and coopetition.”
Furthermore, DeGiglio finds that there are numerous factors at play that will determine how long it will take to reach the curve. On the technology side, explains DeGiglio, there is “no silver bullet”. “Transformation is not easy and it is a journey. It will be a lot quicker than I would have answered a couple of years ago. This is due to the evolution of some of the technologies that have been out there and some of the work companies like EquiLend have done to embrace those technologies.”
Whereas on the non-technology side, there are people issues, budget constraints and resource issues.
The panel unanimously agreed on a less than five year term for the securities lending sector to catch up with other service areas. However, it was said that if everyone can get onboard and move forward correctly it could easily be a two to three year term. In the process, the industry could see incremental improvements and some real step functions.
However, Broadridge’s Walker advises that it will take more than just a reliance on technology. “It is the combination of people’s desire to change and commit the required investment to these business cases, combined with the external pressures which come with regulation and changes in the market.” Walker notes.
Reflecting back to the aftermath of 2008, where the securities finance market received a raft of regulation, ISLA’s Shone explains that people built solutions based on these regulations without necessarily considering how firms can utilise this regulation to the benefit of the business.
“Why did this happen in the first place?” Shone questions. “The regulators came to the industry and wanted information, and we could not deliver it to them in a standardised consistent fashion, nor give them the information that they wanted. If we do not get this next step in technology right — if we do not get tokenisation and native digital assets right, and if we still have data issues, lack of automation, and manual amends — and the regulators come to us again and find us in the same position, then we have failed.”
Shone volunteers that as an industry, participants should be approaching the regulators with “our ducks in order”, ready to give over the correct information and avoid having regulators “impose upon us rules that we must interpret, as everyone interprets differently”. He interjects: “We need to regain control of the industry in that sense and not be in a position where we get an additional layer of regulation, which adds to the cost of trading and operations and requires firms to buy another solution.”
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