Using data and tech to safeguard in an evolving market

Using data and tech to safeguard in an evolving market

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As the global securities financing market is becoming more automated and transparent, thanks in part to regulatory development such as that of Europe’s Securities Financing Transactions Regulation (SFTR), Nancy Allen, global product owner at DataLend, noted that agent lenders are “investing more in data and technology”.

Speaking at an industry roundtable in New York, held in December, Allen said: “As the market changes and evolves, agent lenders are investing more in data and technology. It’s critical that they take the beneficial owner along with them as they make these investments. Maintaining an informative and active dialogue with beneficial owners will help position both parties to capture optimal value going forward.”

Axel Hester, director of securities lending at State Street Global Advisors (SSGA), noted that “anything can be disrupted” and agent lenders “have to keep their eyes open” and be aware of all the challenges that the market may face.

That said, Hester stated that their business model is “relatively safe” and “well managed”. He added: “The fixed costs to create the securities lending infrastructure are significant, and to the extent that agent lenders properly invest to maintain that infrastructure, and invest to maintain the leading edge in developing new infrastructure - that’s valuable. There are a few asset managers that have the economies of scale to support sufficient infrastructure in-house, but very few that can economically develop and improve it on the scale that agent lenders can.”

However, Bill Smith, managing director, Americas sales executive at JP Morgan, added that to use the term ‘safeguard’ “almost presumes that the model is static; the model is very active”. Smith highlighted that JP Morgan is investing in technology in a number of ways, whether it be internally, developing technology they have acquired, or investing in fintech firms that are building tools to “continually try to stay ahead of the needs of our clients”.

“The business that you will see us in three years from today will be very different from the business we were in three years ago, or that we are in today. It will be about platform evolution and it will be achieved through investment. As we go through the next phases of the Uncleared Margin Rules (UMR) that’s going to drive a further convergence of traditional securities lending, collateral management, and liquidity management. This means we will be facing an environment where these are going to become increasingly interrelated. This is going to provide opportunities for clients to further leverage our securities lending platforms and services,” he said.

Addressing the regulatory aspect, John Fox, director, head of client management and sales for North America at BNY Mellon, added that due to the constant influx of new regimes and having to meet those regulatory requirements, this is a market that “requires innovation”.

Fox added: “It’s great if you have talented, innovative people on your team, but you need the funding support of the firm behind the agent lending programme in order to be able to commit the necessary capital so that those innovations come to fruition. That’s especially true in those years where securities lending returns aren’t on the high side, because we are complying with a constantly changing regulatory environment, and it’s important that the capital expenditure is there to allow agent lenders to solve these new issues.”

Speaking on behalf of beneficial owners, Greg Korte, partner, custody advisory services at Aon, underlined that some firms do not have the resources to drive innovation, stating: “You (agent lenders) can’t leave those firms behind; you have to make sure you are innovating for them.”

Technology can serve a number of purposes in the securities financing market, as highlighted by Smith, who said there is a “myriad of places where you see technology improvements”.

He continued: “(Technology is) enhancing inventory visibility through potentially broadcasting it to more platforms, to portfolio optimisation through AI, to trading platform integration, to incremental data sources. Technology can also be employed to address the convergence of collateral and securities finance, if for example, a beneficial owner is looking at their portfolio and asking, ‘How many purposes can this security serve today? Which is the most efficient and how do I optimise that against the cost of moving it from one use to another?’”

Fox commented on the speed of which new technologies are being developed and implemented, emphasising that the “velocity of change is accelerating” and gave the example of predictive analytics around loan activity, which was only discussed more broadly in the past couple of years, but is now on the “short-term horizon”.

“We talked earlier about the ability to invest in these latest innovations and that there is a huge capital expense to consider to make these things come to fruition, but the motivation is that we’re all working together – the beneficial owners, the borrowers and the agent lenders – to bring these tools to market,” he concluded.

These comments have been taken from Global Investor’s US Beneficial Owners Roundtable, held in New York in December. The discussion features in the Beneficial Owners Guide 2020.

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