Systems upgrade: Securities finance technology

Systems upgrade: Securities finance technology

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The pace of technological development is expected to accelerate to ease the integration of securities finance functions and help participants meet regulatory demands. Andrew Neil explores how vendors are shaping solutions.

The once separate areas of operations, risk management and technology – the securities lending, repo, and collateral management functions – are morphing into a combined securities finance capability that requires greater levels of technology and systems integration.

“The silos are breaking down in terms of firm-wide risk exposure; a consolidated view of real-time positions is the new normal post-crisis,” wrote Bill Butterfield of capital markets consultancy Aite Group and co-author of the study Securities Lending: Technology Overview, perhaps one of the most detailed studies to date on securities finance technology. “A recent spate of vendor consolidation has been driven by the demand for multi-capability systems that can handle securities lending, repo, and collateral management and optimisation in a single solution.”

The drivers behind this, according to David Lewis, senior vice president at FIS, are increased costs of doing business through regulations and rising costs of capital. “More synergies need to be found,” Lewis says. “The consolidation of what were previously disparate disciplines, such as equity stock loan, fixed income repo and siloed collateral management continues to change the way our systems coordinate, reflecting the way our clients are doing business.”

Proprietary vs vendor options 

As Aite Group points out, the securities lending technology landscape is a mix of proprietary systems and vendor solutions that all connect to vendor trading and post-trade platforms. Inhouse-built technology dominates in the North American securities lending market especially within large agent lenders, usually custodian banks. Broker-dealers, meanwhile, appear more suited to utilising vendor tools either in conjunction with proprietary systems or with other vendor solutions.

Chris Ekonomidis, director at Sapient Global Markets, says all market participants are affected and the need to understand the interconnections between these areas versus all of a firm’s counterparties to maximise profits now justifies the investment in technology. “The variety of regulations and market forces affecting these areas, from securities lending and repo through to collateral, are wide-ranging,” Ekonomidis explains. “If a firm wants a solution that particularly addresses their needs, they need to build in-house. But that approach isn’t feasible for most participants. However, firms need to balance the benefits of a custom solution against the higher development and maintenance costs.”

He adds that vendor solutions can offer much of the benefit with lower total cost of ownershipdepending on a firm’s needs, complexity and risk appetite. However, Ekonomidis suggests the vendor landscape is wide but not yet deep enough across lending, repo and collateral management/optimization to see single-system solutions. “There has been consolidation under common companies – for example, one company may offer a securities lending platform and a collateral management platform but the technology solutions are not yet fully integrated,” he explains.

Dow Veeranarong, director, head of product, EquiLend, says due to pressure to reduce costs and increase efficiencies, market participants continue seeking the least number of systems to handle the most capabilities well. “That said, the one-size-fits-all model often does not cover all the necessary intricacies in these specialized areas of finance. As such, we expect continued demand for robust, specialised systems that cover all the necessary activities in securities lending, repo and collateral management.”

Best-of-breed systems

FIS’s Lewis says that the systems that strike a balance between flexibility, capability and cost will win the greater share of the market. “We are seeing a significant rise in the number of clients moving to our managed services solutions, for example,” Lewis continues. “Market participants looking to reduce the total cost of ownership of their systems can benefit from having experts from the provider host and manage the systems outside the bank. Many organisations want to focus on doing what they do best – securities financing and collateral management – while leaving system management to the technology provider.”

Martin Seagroatt, marketing director, securities finance and collateral management at Broadridge, suggests that platforms that offer strong global inventory management combined with securities lending, repo and derivatives collateral management are certainly positioned well as the trend for de-siloing gathers pace.

“Solutions that can provide market connectivity, aggregation and execution, and front-to-back office trade lifecycle support can also provide huge benefits to customers,” Seagroatt explains. “Some solutions vendors entering the market have origins in the derivatives collateral business but do not understand the complexities of the securities finance process. This can sometimes lead to sub-optimal performance around collateral management and optimisation due to the increasing convergence of collateral management with securities financing.”

Another trend experts at Broadridge have identified, Seagroatt notes, is the securities finance and collateral management ecosystem becoming more integrated. Systems therefore need to interface seamlessly with a wide range of market infrastructure, electronic trading networks, posttrade solutions, trade repositories and market utilities.

“The industry is moving from an environment of individual competing firms to extended value chains of networked organisations,” he adds. “This model, underpinned by technology, is the key to unlocking maximum efficiency and reducing costs in response to the regulatory tsunami that has engulfed the business in recent years.”

Technology budgets

According to Aite, firms currently spend close to $500m annually on securities lending technology. Spending is split near-equally between proprietary and vendor solutions. However, the consultancy predicts that the market for commercial vendor securities lending solutions alone will grow to $307m in 2020.

“Budgets are definitely on the increase in finance tech,” says Ekonomidis. “Firms are realising that they have been cobbling together existing solutions for too long. While workable at the time, point solutions solving one particular problem cannot address the wide range of complexities occurring across the securities finance market.”

FIS’s Lewis says many market participants are looking to technology advances in their middle and back office as the primary areas for return on investment. “There are many ways technology can streamline our industry, bringing down costs and improving the return on equity and capital employed.”

EquiLend’s Veeranarong says that technology budgets and resources are generally allocated according to priorities “with tech to help a firm meet regulatory requirements rising to the top”.

“Technology that is proven to add efficiencies, decrease costs and potentially lead to greater revenue for a firm is very attractive to clients. When EquiLend launched NGT, our global client base prioritised the migration to the platform because they foresaw those benefits.”

Seagroatt suggests that IT spending appears to be growing steadily year-on-year. “Complying with the Securities Financing Transactions Regulation (SFTR) rules and other upcoming regulations will drive IT budgets for the foreseeable future. However, many firms are also using legacy technology solutions that have not moved with market trends and are now creaking at the seams.

“There is also some budget allocation towards more speculative and potentially disruptive technology such as blockchain and artificial intelligence,” he adds. “No one wants to be left behind or in the worst case see disruption to their business model in the event we see widespread adoption of these technologies.”

Technology firm M&A

As Aite Group notes in its study, tie-ups between vendors have become common across the securities finance market. In June 2016, Broadridge acquired 4Sight Financial. IHS and Markit also merged last year. Two months later EquiLend acquired Automated Equity Finance Markets, which has since been invested in and rebranded as EquiLend Clearing Services (ECS). SunGard was acquired by FIS in 2015. Partnerships have also been formed for specific services, such as
IHS Markit and Pirum’s work to build an SFTR reporting tool. ECS has also teamed up with OCC for greater access to central counterparty clearing. Could more consolidation and collaboration occur?

“Possibly – but there is a finite limit on this,” says FIS’s Lewis. “Healthy competition benefits us all, and especially the clients, providing choice and competitive pricing. Both technology providers and the market participants should be wary of too much consolidation in any one technology provider.”

“M&A deals are part of the natural cycle of the market,” EquiLend’s Veeranarong adds. “We expect to see more strategic partnerships and joint ventures among technology providers and market infrastructures.”

Chris Valentino, North American sales and client director at Trading Apps – which offers a suite of securities finance solutions – says he sees the logic behind partnerships and acquisitions. However, he also understands the pain associated with mergers. “Such deals can be time consuming and it takes time and energy for systems to integrate, yet clients need things quickly. In an M&A environment, a tech firm that can turn things around quickly by being nimble and flexible will stand out. We’re up against some big players, but we are very quick to market and on the forefront with our technology.”

Blockchain

Meanwhile, when it comes to distributed ledger technologies – also known as blockchain – securities finance technology vendors are closely monitoring progress and in some cases already investing capital. Lewis says it has the potential to bring significant benefits to this and other financial markets, however, he adds he would be wary of the “cure all ills” qualities of the technology.

“It is, relatively speaking, still in its infancy as a process and adoption will not be quick. As with any new technology, particularly when so much value could be at stake, there will need to be a period of testing before full confidence can be given to such a transformational technology. FIS is, of course, monitoring developments closely and looking at options to include it in our clients’ workflows.”

While it is still early days, Broadridge’s Seagroatt believes there could be an application for blockchain technology in certain areas of the securities finance lifecycle.
“We have made strategic investments internally and with a number of fintech vendors in the blockchain space and are currently working with several customers on proof-of-concepts in the bi-lateral repo area,” he says. “We continue to see an accelerating evolution of the number and complexity of blockchain initiatives affecting the financial services sector. Broadridge is determined to understand and participate in this trend.”

EquiLend’s Veeranarong says blockchain could completely transform the securities finance space. “We’re paying close attention,” she adds.

 

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