Is there a technological revolution on the horizon within the securities finance industry?
We think that there most certainly is. New technologies will continue to find their way into an industry that has always been a bit cautious and deliberate in the past. And to that point, we believe that the adoption of the technology will, by virtue of the existing setup, have to be an organic rather than a revolutionary process. We are optimistic that post-Securities Financing Transaction Regulation (SFTR), there will be positive momentum from the existing players, but also participation from new market entrants (for example, direct lenders) that will experience some of the disjointed and rather outdated solutions and challenge the status quo by asking difficult questions and demanding change.
Where are the main opportunities for technological innovation in securities finance?
In terms of new technologies, we see distributed ledger technology (DLT) increasingly offering solutions for settlement and operations but also for pre-trade negotiations. We also see robotic process automation (RPA), which our Lender App implements, as a way to retain the benefits of legacy investment whilst moving to more exception based processing. Lastly, we think there will be economies of scale and standardisation through hosting and platform consolidation as part of middle and back-office outsourcing solutions. More generally, having seen a number of clients engaging in spend-to-save programmes, and with the ever-present focus on cost-reduction, architectures that aid decommissioning of legacy solutions or promote efficiency through better integration of the existing infrastructure will help in all business lines.
What challenges are firms facing?
Securities finance systems are deeply embedded in participant’s infrastructures, therefore any change is not limited to just the stock lending silo but will impact wider operational, risk and regulatory platforms. This creates in-built resistance to change and makes agreed improvements slower to implement as they pass through the governance, build and testing lifecycle of each dependent platform. We would also say that regulatory enhancements have had management focus, and although a cliché, it’s also a truism that regulatory budget is one of the few reliable growth areas in banking IT.
How are businesses updating their processes to optimise operations?
Businesses are still aspiring to the holy grail of full straight-through processing and exception, based processing, and are seeking automated booking tools for market and internal trades. In addition, they are implementing sophisticated inventory management, flattening internal shorts versus longs with full transfer pricing, generating auto-short cover or auto-return trades and automating the pull and distribution of long inventory for collateral or financing purposes. Systematic recalls across loan and collateral positions reduces settlement fails and automated bookings reduce contract breaks thereby improving operational efficiency.
Are you finding firms building new systems or building upon what they already have? Are there arguments for both build versus buy?
We are finding they are doing both. As a vendor we manage that approach by having a hybrid product/development team philosophy. This means that we are responsive to each client’s needs in a way that an in-house development team could be, whilst maintaining an architectural awareness of the product as a whole. The arguments for build versus buy are the same as they have always been. If a vendor has a product that has commoditised the functionality and ticks most of the boxes, it would be difficult to argue in favour of embarking on a build programme when faced with the in-house build cost and risk, and particularly the opportunity cost of not using that development team on differentiating, value-add work.
What is the demand for cross-product systems in the market?
We certainly receive a great deal of requests for a system that can handle securities lending, repo, and derivatives related workflows. Given the efficiency plays that most of our clients and prospects are after, a technological solution needs to be flexible enough to support multiple products across multiple business lines across the global marketplace.
Five years from now, how do you see the securities lending market developing in terms of technology?
It will be very interesting to see if the industry embarks on replacing the tried and trusted platforms that have been the work-horses of the securities financing business to date, or whether how, or indeed, if the established platforms embrace newer technology such as DLT and peer-to-peer. We think the standardisation of data is a problem waiting to be solved, with all the operational disconnects that result from different prices, instrument static, corporate actions data on the day to day business flows. It certainly goes without saying that automation, transparency, algorithmic trading and the utilisation of distributed ledger and AI technologies will certainly play an ever increasing role.
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