Simon, having been with BNY Mellon for the past 18 years, how have you seen the business evolve over this time?
Simon Tomlinson: BNY Mellon has been a fantastic company to be a part of as we transformed into an agent lender that has been, and remains to be, at the forefront of a number of notable market developments in the industry.
Regarding evolution, much has changed since I started at BNY Mellon; a merger in 2007 between Mellon Bank and the Bank of New York, a banking crisis in 2008, various material regulatory changes such as Dodd-Frank, Basel III, the Securities Financing Transactions Regulation (SFTR) and the Central Securities Depositories Regulation (CSDR). In addition, there has been a sovereign debt crisis, followed by negative rates and, most recently, a pandemic.
While in a fast-moving business we tend to focus on what is in front of us, such as Basel III Endgame, T+1 settlement or mandatory clearing, when you step back and reflect you are quickly reminded why the industry has had to transform itself over the years.
There is no doubt that regulation has had the largest impact borne out of the various crises, truly shaping the borrow demand of today. As regulation has placed additional pressure on limited resources, the need to optimise has become paramount. Automation, smart buckets, pledge structures, central counterparties (CCPs), collateral expansion and term structures including evergreens, all form part of the success equation to run the business of today. Then there is the digital technology question and the opportunities presented by digitisation, tokenisation and artificial intelligence (AI), all of which we are highly focused on at BNY Mellon.
Beyond that, we have a new global head of securities finance who has just joined us, Nehal Udeshi, and we are looking forward to Nehal bringing her wealth of experience to the business as we enter a new chapter of evolution to meet the ever-changing demands of this industry.
Nehal, having been in the financial services industry for more than 17 years, what is your perspective on the current securities finance and lending landscape?
Nehal Udeshi: Every market cycle brings new considerations for the securities finance industry and this moment is no different.
The regulatory landscape, whether that is capital or liquidity rules, T+1 or mandatory clearing, continues to drive the agenda for securities finance. The capital rules have sharpened the focus on the cost of doing business, with indemnification being central to those discussions. Our clients remain focused on balancing returns with managing risk and ESG considerations.
Huge strides have been made across the industry with respect to technology and automation, and we continue to find additional ways to streamline processes and improve operational efficiency, including through the consideration of fintech solutions, blockchain and AI. Alongside this, data analytics remain an important tool for decision-making in securities lending and participants continue to invest in these capabilities to gain insights into lending opportunities and risks.
All of these focuses point the industry towards important market innovations that will help to optimise the way we are transacting on a daily basis. Collaboration across lenders, borrowers and market partners — collaboration designed to navigate these changes — has never been better.
How is BNY Mellon looking to advance its securities finance and lending services over the coming 12 months? How are you investing in your technology stack?
Tomlinson: Outside of the obvious new markets, such as Saudi Arabia, we are looking to include further integration of digital trading — such as HQLAX and the tokenisation of assets. This is an exciting area and one that we believe can bring meaningful efficiency — while, more interestingly, providing an opportunity to access new pools of liquidity.
We are also very focused on central clearing for both our securities lending and repo businesses and we are confident that CCPs will play a greater role over the coming 12 months, given the benefits of clearing from a capital, risk and liquidity perspective.
In terms of technology stack investment, it is important to remember that we partnered with Trading Apps in 2012 on a new trading system. Since then, we have continuously invested in advancing our technology capabilities — for example, through the acquisition of the underlying lending IP — to enhance our products and ultimately to deliver market leading solutions to our clients.
Our trading system is constantly evolving, we are adding new capabilities around resource management and optimisation, as well as updating our predictive analytics — while ensuring we are connecting with other product offerings as seamlessly as possible to maintain high levels of automation.
How are the impacts of regulation, quantitative tightening and loan indemnification shaping the role of the agent lender?
Udeshi: Evolving regulations since the financial crisis have required agent lenders to enhance risk management practices and increase transparency. These are positive developments for the industry. However, they also bring the challenge of increasing the cost base for the agent lender. The industry continues to debate the role of the agent lender in providing credit intermediation — which continues to be important to many clients — as their requirements and trading strategies evolve to meet their own regulatory changes.
Tomlinson: The impact of quantitative tightening on market liquidity has prompted agent lenders to adopt new strategies, and to employ new routes to market, to meet the demands of our clients. We witnessed in 2019, with the Federal Reserve’s quantitative tightening, how quickly liquidity can change. As such, we strive at BNY Mellon to ensure that we offer a range of liquidity solutions to our clients which are easily accessible as market conditions alter.
Udeshi: Regulatory change, central banks’ quantitative tightening policy, combined with the interest rate environment and market specific events — for example, the US debt ceiling and UK mini-budget crisis — have led to an evolving role for agent lenders, offering solutions and credit intermediation to clients, while balancing risk, compliance and profitability.
What trends are you noting in terms of securities finance trading and where are you seeing the most opportunity for your clients?
Tomlinson: 2023 has been a year of low volatility, with pockets of meaningful activity.
Fixed Income has fared well in the first half of the year as rate uncertainty continued. However, this has started to tail off as the end of the interest rate tightening cycle appears to be moving closer. On the flip side, as long inventory pools at prime brokers are bolstered by the equity market rallies, we are seeing a demand for further upgrade trades which had been lacklustre until recently.
Equities have also had a good year so far, driven by highly concentrated specials such as AMC and, more recently, JNJ and Kenvue, but this is a far cry from the broader specials space we saw in late 2022 and early 2023. With the market more long than short, there is increased internalisation occurring and therefore less need to source externally, which is evidenced by lower balances. As terminal rates look more likely, there is hope that the initial public offering (IPO) backlog will start to ease. To date, the US IPO space — a relatively lucrative space for securities finance clients — is down by more than 30 per cent year-over-year.
The standout performer for 2023 is corporate bonds, which have continued from their stellar 2022 performance. The environment for corporates remains challenged, especially in the high yield space, and short demand remains strong with wider spreads holding steady.
For clients, the age-old flexibility question remains key. Borrowers are laser-focused on risk-weighted asset (RWA) and efficiency, so clients that have the most options available — be it collateral flexibility of both cash and non-cash, term structures and participation in CCPs — will no doubt fare the best.
What are your priorities for H2 2023 and going forward into 2024? What can the industry expect next from BNY Mellon?
Udeshi: For the rest of this year, I think we are already well into our journey as we look to develop a more client-centric, innovative solutions-orientated approach which will help our clients to make easier connections across the financing, liquidity and collateral ecosystem. Recognising the upcoming regulatory change agenda impacting various client types, we will continue to stay close to our clients, to support them as they navigate the impact of these challenges, and require a nimble approach to their financing needs.
Tomlinson: That will continue to be a priority, alongside the need to optimise the use of limited resources by working with the CCPs to develop meaningful solutions for scalability and cost effectiveness. CCPs will form an integral part of the securities finance distribution chain. Current engagement with CCPs is progressing well and we feel confident that the time is right to bring SFT clearing to fruition.
Beyond this, we will continue to invest in our technology and I expect there will be several new enhancements to our trading system to improve efficiency and automation.
There continues to be much debate on the impact of the move to T+1 in both the US and Canada, but it is clear that the shorter settlement cycle could have an effect on how assets are lent. The potential that some buffer levels will be increased to reduce the likelihood of fails is a real possibility.
As the accelerated settlement landscape picks up pace, we anticipate seeing similar proposals across the EU and UK in due course and note that UK policymakers are now reviewing the potential benefits and pitfalls of introducing a T+1 settlement cycle in the UK. Global product-level interoperability will be key to ensure a smooth transition and BNY Mellon is well-positioned to support our clients in this changing environment.
Next interview →
SIX
Nerin Demir
Image: stock.adobe/t0pkul3 
