A time of reflection
Weaving through the woods of a particularly unusual and unpredictable year that was 2021, the financial industry seems to have maintained high standards of risk management and service delivery, providing an optimistic light at the end of the tunnel. Prominent themes for 2021 were the challenges of adapting to new regulations, evolving technologies and the push for further integration of environmental, social and governance (ESG) principles.
Looking forward, SFT spoke to 12 different firms within the securities lending and finance market about their priorities and hopes for 2022. Mike Lambert, head of securities finance for Broadridge’s securities finance and collateral management (SFCM) division, represented most people in the industry when he wished for a “healthier new year for the world and for the securities finance market”. Samuel Riley, head of investor services and financing at Clearstream, echoed this sentiment as he hoped to put COVID-19 behind us and continue to drive Clearstream’s agenda in the digital and data space.
It is perhaps unsurprising that a number of financial market participants prioritised improved customer services and business growth for the coming 12 months. CIBC Mellon’s chief capital markets officer Rob Ferguson foretells a year of continuous improvement in technology, innovation and efforts by CIBC Mellon to bring their clients “the best of both worlds: local expertise and global capabilities”.
According to Kaizen Reporting’s senior regulatory reporting specialist for SFTR, Jonathon Lee, the firm plans to aid clients in keeping “the wolf from the door” and to maintain compliance with Securities Financing Transactions Regulation (SFTR), along with the broader spectrum of their money market and transaction reporting obligations.
More broadly, the survey reveals that the top two priorities driving firms’ development agenda into 2022 are technology investment — with a quarter of respondents listing digital development as a focal point for their company — and excellence in client service. A third of survey participants indicated that delivering top quality services to clients will be key for the coming year.
The challenge of managing regulatory adaptation kept the industry busy for the most part of 2021, with the main regulatory touch points being the implementation of Phase 5 of Uncleared Margin Rules (UMR), the Settlement Discipline Regime (SDR) component of Central Securities Depository Regulation (CSDR) and SFTR validation rules.
Commenting on the impact of this regulatory agenda, Kaizen Reporting’s Lee comments: “The publication of new SFTR validation rules and schemas will continue to have a significant impact on our clients, particularly those with obligations to report under EU and UK SFTR, where any welcome harmonisation is offset by a two and a half month delay before the UK will adopt the same validation rules.”
Despite SFTR having been implemented more than a year ago, Andrew Whyte, group president of post-trade services at FIS, agreed that this regulation casts a “significant shadow” over the securities finance and collateral market, with issues surrounding reporting results.
Almost half of respondents listed SFTR as having the heaviest regulatory impact on their securities lending and finance business, with several participants raising concerns about the challenges buyside and sell-side firms will face from this regulation. Respondents indicated that applying two sets of SFTR validation rules between the end of January and 11 April is likely to be one of the biggest challenges for firms required to report under both regimes. Entering year three of SFTR reporting, regulators are likely to increase data quality scrutiny and have less patience with poor reporters.
Reflecting on the regulatory path for 2022, Val Wotton, managing director of product development and strategy, repository and derivatives services at DTCC, comments: “During 2022, there will be two key client-impacting regulatory deliverables from an SFTR reporting perspective. The first is the ISO Schema implementation — it is important that reporting entities and trade repositories are ready for the EU implementation date of 31 January 2022 in order to mitigate post-implementation issues.”
Preparation will be key to firms facing regulatory changes this year, according to Anthony Venditti, head of equity finance at South Street Securities. Venditti predicts FINRA Rule 4210, involving implementation of mandatory margin requirements for To-be-Announced (TBA) transactions, specified pools, collateralised mortgage obligations (CMOs) and other covered agency transactions will be a big challenge for unprepared firms. He indicates that South Street’s finance technology division Matrix Applications continues to refine its solutions to this compliance hurdle.
Michael Saunders, head of agency lending, Americas at BNP Paribas, predicts early 2022 will see the business formulating a strategic plan to address the pending SEC Rule 10c-1, where the US regulator will require lenders to report the terms of a securities lending transaction to a registered national securities association. This “will inevitably require swift action from both the industry, vendors and beneficial owners,” he says.
For Sunil Daswani, global head of securities lending at Standard Chartered Bank, digitisation will be key to both regulatory and market endeavours to drive standardisation and efficiency. He indicates that securities lending is already advanced in the use of technology, with more than 90 per cent of securities lending trading volume now done through automated lending platforms, a shift that few would have anticipated 20 years ago.
Survey participants were unanimous that steps to promote ESG standards across the investment lifecycle will continue to have huge importance during 2022 and beyond. This has become an agenda item for every meeting, pitch and business review according to BNP Paribas’ Saunders, as beneficial owners grasp and develop their internal ESG policies and relate those to their securities lending business.
Shareholders and fund managers are going the extra mile to demonstrate that they are meeting ESG challenges, says Broadridge’s Lambert — and the COP26 summit in November has reinforced the importance of these efforts to build a greener industry. He adds: “[Share] recalls are especially impacted. Firms need to know when to recall and if they are going to be recalled. Yet more upcoming US legislation will likely oblige firms to keep more detailed records on recalls.”
However, Radek Stech, CEO and founder of Global PSSL, says: “The positive drive has been overshadowed by some greenwashing claims in the broader sustainable finance markets.” Greenwashing has become a top concern for financial firms in 2021, as explained by an SFT issue 292 feature titled ‘Sustainable repo: finding the balance’. The claims of incorrectly classifying products as green investments, or double-counting green collateral, provides a reputational risk to firms.
To combat ESG issues and advance the movement, Nicole Giffuni, director of finance, human resources and business management at EquiLend, explains that the firm has enlisted the help of charity, diversity and sustainability committees that are continuing to tackle identified areas to improve ESG related practices in 2022.
Standard Chartered Bank’s Daswani warns there is a long way to go in establishing a consistent way of measuring and comparing a fund’s ESG performance at an industry level. Notably, the ESG priorities for each investor differs — with some focusing on carbon emissions while others look at corporate governance or other priorities — in turn, creating a challenge for those promoting sustainable finance objectives. Despite this, Daswani is seeing various initiatives emerge to develop ESG measurement and comparison tools, such as Standard Chartered’s collateral filtering and ongoing monitoring service. This gives asset managers a level of assurance that their investors’ ESG priorities are reflected from end-to-end through the securities lending process.
SFT asked survey respondents to highlight the main challenges confronting their firms in applying ESG criteria to securities lending and repo activity. Broadridge’s Lambert says: “There are many ESG data providers but no prevailing standards. Everyone has a differing view of what ESG is and how it should be measured.” Lambert believes that until organisations have market standardisation and consensus, the difficulty will lie in defining sustainability. He adds: “The combination of market forces and regulatory pressure is likely to drive towards more standardisation.”
BNP Paribas’ Saunders says clients wish to accept specific ESG compliant collateral as a new bucket of collateral takers. “For example, if an agent historically were to offer clients three collateral buckets of main index equities, G7 sovereigns and corporate bonds, the wider the collateral schedule, the greater the market opportunities and thus higher return,” he adds. However, by adding a fourth bucket of ESG compliant collateral, this could potentially affect performance. “Additionally, for the concept of ESG compliant collateral to gather momentum, the counterparty community must be able to facilitate such segregation and the implementation of ESG scoring. Ultimately, liquidity of ESG compliant collateral will become the forefront of securities finance,” explains Saunders.
Commenting on the role that will be played by technology innovation and process standardisation in driving greater efficiency within the securities finance industry, a number of firms predicted a growth during 2022 in digitisation, Distributed Ledger Technology (DLT) projects and tokenisation.
FIS’ Whyte suggests tokenisation of assets and digitisation of collateral schedules will increase collateral velocity and further enhance optimisation opportunities, while enabling regulatory compliance and EFG drivers. “We see further steps being adopted by the market towards a DLT-based future for securities finance with the goal of increasing efficiency and transparency,” he says.
CIBC Mellon’s Ferguson indicates that ‘the remote pandemic-driven environment’ has accelerated long term trends of “digitisation, remote working, and the streamlining of operating models as organisations focus increasingly tightly on the areas where they can most deliver core value to clients”.
For South Street’s Venditti, building partnerships with fintech companies is essential for eliminating trading and post-trade inefficiencies. “Marrying entrenched legacy platforms with new, cutting-edge technologies will be key in increasing the efficiency of the current process,” he says, indicating that Matrix Applications, the firm’s fintech affiliate, is critical in driving South Street’s standardisation and digitisation process flow.
For Matt Johnson, director, ITP digital strategy and platform management and industry relations at DTCC, prioritising the automation of the post-trade, pre-settlement process to lower the possibility of late settlement — with the Settlement Discipline Regime around the corner — is imperative advice to their clients. Johnson explains: “This means eliminating the use of faxes and other manual processes to confirm trades, as these are extremely error-prone and more likely to delay trade settlement, which could cause firms to incur settlement fines.”
While on a journey to a fully-digitised future, FIS’ Whyte says the inherent inefficiencies and friction in the current trading and post-trade infrastructure, combined with pressure on margins, will drive investment from technology vendors to adopt common standards as a means of achieving digitised, DLT based markets. “Performance data fully embedded in trading analytics, combined with regulatory initiatives such as the upcoming transparency rules in the US, will increase that momentum,” he adds.
Respondents also noted that standardisation initiatives — particularly further refinement and adoption of the Common Domain Model (CDM) across securities lending, repo and derivatives transactions — will be key in reducing trade mismatches and easing the burden of post-trade reconciliations.
In responding to this SFT survey, securities finance specialists also took the opportunity to highlight some of the key technology projects that they have in the pipeline for 2022. Broadridge’s Lambert, for example, says the company is working on its trade submission service for the DTCC’s Securities Financing Transaction clearing service, along with further automation in recalls management and a securities finance order router. He also indicates that the company is collaborating with Asterisk Network, WeMatch, Bloomberg and Pirum on new interfaces and products.
With more releases on the way, EquiLend expects to add to its Premium Pulse product in 2022 and will be releasing a post-trade Settlement Monitor to facilitate settlement and help clients manage CSDR.
Meanwhile, FIS will be delivering its new FIS Global Inventory and Optimization Platform, as part of its series of next generation components, which it began to develop in early 2021. This platform will help maximise the inventory potential across lending, funding, cross-product collateral and regulatory capital requirements. “This follows the FIS Securities Finance Trading and Collateral Platform, which combines the capabilities of our Global One system with trading analytics, workflow and cross-product collateral management. The next phase brings this same modernisation to our Loanet suite of products,” adds Whyte.
South Street plans to continue to expand its newly-formed equity finance team, with Matrix Applications aiding its expansion into equities securities lending. Venditti explains: “Rather than relying on just one vendor, we are exploring partnerships with best-in-class narrowlyfocused fintechs for Order Management Systems, portfolio optimisation, settlement and clearance, and credit and risk management.”
AccessFintech’s CEO Roy Saadon explains that the firm’s expansion from securities in the payments and loan products will continue across asset classes such as foreign exchange, derivatives and shared services such as margin, onboarding / KYC. AccessFintech aims to fix inefficiencies driven by partial data and move the market to predictive workflow.
Market dynamics and liquidity conditions
Collateral flexibility will be key in shaping lenders’ ability to optimise securities lending revenues during 2022, according to survey respondents. For Standard Chartered Bank’s Daswani, this has been a byword in the securities lending industry for some time. “This has meant an increasing focus on non-cash collateral, particularly in the form of government securities and main index equities, in addition to the more traditional cash collateral programmes, which is becoming a prerequisite for those lenders looking to optimise programme performance and revenue generation,” explains Daswani.
He predicts that this trend will continue as borrowers set their focus on managing collateral inventory and sourcing their loans from more flexible lenders. “Equity collateral will become increasingly prevalent in this regard, and we see this as a key tool in the lender’s armoury,” comments Daswani. He predicts that other forms of non-cash collateral, including ETFs and ADRs, are likely to be deployed from a wider range of borrowers, as well as debt instruments outside of the traditional government issues.
Mike Norwood, global product owner at EquiLend adds: “While the crystal ball is notoriously foggy, supply will continue to increase as asset owners look for incremental revenue and continue to see the value to be derived from lending. Demand will remain robust for high-quality assets that can be used for collateral, as well as for the specials, evidenced and driven by the volatility and associated revenues in the meme stock and special-purpose acquisition company (SPAC) space. Peer-to-peer, clearing (broker-to-broker and bank-to-broker) and automation will remain hot topics.”
Inevitably, the COVID-19 pandemic has had a significant impact on the performance of securities lending and financing markets since March 2020 and has also prompted industry participants to review how they manage their business strategies.
“The movements across all asset classes spurred unease among market participants, with several participants opting to temporarily freeze or withdraw from a lending programme,” says BNP Paribas’ Saunders. “The need for clients to obtain access to liquidity became paramount, with several clients leveraging their securities lending programme to either raise liquidity or lean on their agent to assist them in managing their excess liquidity, post the coordinated global central bank easing campaigns.”
Adapting to this change, FIS’ Whyte explains that the company has seen a peak in interest in managed and hosted services as organisations pivot toward remote working. He notes that this has helped organisations to gain confidence in remote service management and outsourcing certain technical and business processes to third party providers. This, in turn, has boosted activity around FIS’ Business Processing as a Service (BPAAS) offerings and footprint.
EquiLend’s Norwood says the global COVID-19 outbreak was managed relatively smoothly by the securities lending industry. However, it did reinforce the need to have a strong foundation of technology and business continuity. He says: “As strong NGT volumes have continued — we saw a new record quarter in Q3 2021 and a record fixed income trading day in March 2021 — we are further investing in our platform to ensure we continue to offer our clients a consistent user experience. We realise that easy-to-use technology solutions are going to become even more important for clients looking to monitor activity and keep their finger on the pulse of industry trends. This is driving our product roadmap and has largely informed our decisions around exciting, strategic platform improvements to come in 2022.”
While AccessFintech confirms that volume spikes and workforce restrictions placed strain on the firm’s systems, it was able to manage this by leveraging shared cloud resources on capacity issues and shared workflow on reducing workload on staff. Saadon explains: “Operational efficiency is an eternal and universal quest across the finance sector, with asset managers, custodians and buy-side firms alike, continually seeking new ways to create lean environments, aiming to do more with less.”
As an endnote to a challenging two years for the financial services industry CIBC Mellon’s Ferguson concludes: “Our response to the pandemic was underpinned by our business continuity programme, which supported the stable delivery of products and services to our clients throughout this pandemic. We continue to maintain open lines of communication and collaboration with our employees, clients, vendors and other stakeholders to work through these challenging times together.”
Publication: Securities Finance Times