Trading Technology
A number of countries in Asia could still be
defined as frontier markets and therefore require synthetic or other bespoke
market access solutions. As a result, in many respects the region remains a
fragmented CSD environment, further complicated by the fact that many banks
still clear through their EU or US entities.
The Asian securities lending market is
characterised by comparatively high volumes, offset by a rich specials market
generating high returns, says Philip Morgan, head of business development at
Pirum Systems.
“Settlement
transaction costs are generally quite high, which when paired with both new
loan and return volumes can be a significant factor in ensuring a profitable
programme. There is typically more sensitivity around the recalls process and
sell fails in Asian markets due to quite strict policies around settlement
failures on the exchanges, which often results in clients holding higher
buffers (up to 50% in some cases) for in-region securities. This means that
significant specials revenue can be left on the table.”
By closing the right position and using tools
that allow minimum duration and return size, agent lenders can limit their
transaction costs. Additionally, markets such as India have very specific CCP requirements
and unique operating models, which require local technology builds.
Solution
adoption
Without
technology, trading and post-trade activities can be prone to errors from the
manual processes involved. “Automated trading platforms and post-trade
technology not only allow agent lenders and broker dealers to optimise their
efficiency, but also reduce costs and minimise the risk of manual input errors,”
says Andrew McCardle, head of EquiLend Asia.
“Market data allows lenders and borrowers to
make informed trading decisions. However, there are still some domestic markets
within the region that are reluctant to accept technology vendors as eagerly as
the global participants have. Even when you have a global standard, it does not
mean that those standards are adopted by all markets.”
McCardle
suggests that beneficial owners in Asia Pacific face the same issues as their peers
in other parts of the world and are demanding a similar level of clarification on
performance. “There is certainly a better understanding of benchmarking by
beneficial owners in smaller regional markets than there ever has been, due to
the work agents have undertaken to educate these markets.”
Real-time
processing and a obtaining a multi-asset view of all securities and associated
collateral are becoming central requirements. Broadridge’s head of strategy and
business development Asia, James Marsden, says that he is surprised by the
number of legacy systems that are unable to cope with the shortening settlement
cycles coming through in Asia Pacific markets, such as the move to T+2 in
Australia and New Zealand and forthcoming changes in Japan.
“These
shortening settlement cycles increase the need to borrow due to the higher
likelihood of failed settlements with non-residents as a result of time zone
differences,” says Marsden. “As the market evolves we expect this drive towards
greater transparency to become a feature of Asian markets. The ability to
aggregate data, visualise it in a way that supports strategic decision making
and then automate internal, client and regulatory reporting of this data is the
key to dealing with the demands of the new market and regulatory environment.”
Holistic perspective
The
principal factors that strategic partners can provide are accurate and
transparent data and analytical tools “The quality of corporate action and
instrument reference data is vital, along with accurate management of
collateral positions, with associated marking to market, to manage exposures,”
adds Marsden.
Centralisation
and standardisation of data across siloed business lines includining securities
finance and derivatives enables a more holistic, real-time view of risk at
different levels of the firm. The ability to source and deploy eligible
collateral at low cost quickly and efficiently in an automated way can also
provide huge benefits during times of market stress.
“From
a buy-side perspective, there is a trend for moving down the liquidity curve in
the collateral being accepted and demand from the sell side for longer term
structures due to regulations such as the Basel III liquidity coverage ratio,”
says Marsden. “The ability to manage the eligibility and concentration risk of
this collateral using sophisticated technological solutions allows the buy side
to increase returns from lending programmes and expand business opportunities
in a way that is acceptable to the firm’s risk profile.”
Technology enables agent lenders to map supply
with borrower demand regardless of the account structure and execute trades
based on specific parameters, which reduces the amount of human intervention
required for high volume daily flow activity, says Roy Zimmerhansl, global head
of securities lending at HSBC.
“This facilitates increased volumes, but more
importantly the borrower can direct their activity to lending clients that
satisfy other criteria, such as the identity of the entity at a principal
level, which determines the amount of capital the borrower has to set aside,”
he says. “It also enables the borrower to allocate to the correct entity from a
collateral perspective.”
This
in turn supports more direct booking on a cost-effective basis, further
improving transparency. Borrowers can identify who they are trading with to
their regulator and the agent lender can show the borrowers where their
exposures are. Zimmerhansl says that the head of HSBC’s trading desk in Asia
talks about his team evolving from traders into engineers.
Once the trade has been agreed and
auto-booked, most organisations have straight through processing so the trade
is booked to the right account and instructions sent to the settlement agents,
so it can also be auto-reconciled, he says. “All this means that there is a
plethora of information available to customers, whereas in the past only some
of this information would have been available or maybe it would have been
available in its entirety only from select providers.”
SFTR
challenge
While
the benchmark rates delivered by market data service providers are helpful,
technology is set to have an even greater impact on securities lending in Asia
over the next 12 months as systems to support the Securities Financing
Transaction Regulation (SFTR) are built out in the EU. Once implemented by the
securities finance industry in EU, with support from vendors, it is seen as
just a matter of time before this technology makes its way to Asia Pacific.
There
has been a degree of negativity around the speed of some execution platform
build outs, according to Morgan, with agent lenders expressing the view that
there has been a lack of focus and knowledge in the region to assist with these
transitions.
However, he observes that non-differentiated
technology solutions are increasingly being considered by companies to improve
market access as well as operational, regulatory and risk processes. “This is
enabling participants to spend their limited technology budgets on alpha generation
strategies that make them more attractive to their clients.”
Monitoring of corporate actions on assets lent
out remains a key challenge, as does automating the collection of dividend
payments/management of stock splits. Says Marsden: “Many systems still lack
automation in these key workflows. Depending on the market there are often
specific rules on closing out and re-opening loans if there is a change in the
number of shares to simplify the operational flow. Of course, this is harder in
the retail space where the number of open positions may be significant and
clients may not have alternative collateral, so firms may vary their approach.”
Risk
mitigation
The
demands of central clearing and the forthcoming uncleared margin rules mean
buyside firms are required to source greater quantities of higher quality
collateral for margining derivatives trades. The buy side also needs to move
this collateral more frequently to more demanding settlement cut-offs.
According
to Marsden, technology solutions allow buy-side firms to identify internal
inventory that can be used to meet these needs at low cost, minimising the drag
on alpha from holding larger quantities of cash and high quality liquid assets (HQLA).
Securities
finance can also facilitate source margin in a cost effective way through
collateral upgrade trades. “For buy-side firms that are long HQLA, there is
also an opportunity to finance these assets in the market in collateral downgrade
trades to generate additional alpha,” he says. “Deploying technology solutions
that can help the firm to manage this interplay between collateral supply and
demand while also mobilising collateral in a more automated way can provide a
strong return on investment and ease the burden of meeting regulatory
deadlines.”
Morgan says that when it comes to paying for
services, agent lenders typically cover their own operational and transactional
costs while borrowers pay for tri-party collateral management. “Additionally,
agent lenders maintain an indemnification programme for many beneficial owners
and absorb the cost of this. Clearly, the fee split agreed with the beneficial
owner should be reflective of the value
McCardle
adds that the firms that are paying directly for systems are the agent lenders
and the prime brokers, but these costs and risk mitigation tools are part of
the process that every agent lender highlights when they work with beneficial owners.
“There is obviously a cost to running a better
risk management process, but global risk mitigation tools such as contract
comparison are no longer a nice-to-have for many in Asia,” he adds. “They fall
in line with global standards as expected products within the securities-based
lending programme of participants. Many would argue that they are a small price
to pay for the risk mitigation that they provide.”
Most
clients take reporting from their agent lender, which is no different to how
they would work with an investment manager, adds Zimmerhansl. “The most
sophisticated clients might use more than one agent, in which case they need to
aggregate the information. In some cases these clients are investing in
specific technology that enables them to manage risk across multiple agents,
but most are taking the agent data and running it through their existing risk
engines.”
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