Looking at the big picture

In many respects, Paul Squires has experienced a relatively smooth succession on taking over as global head of trading and securities financing (TSF) at AXA Investment Managers (AXA IM), having worked directly under predecessor Christophe Roupie for 10 years. Before taking the top job six months ago, one area wit

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In many respects, Paul Squires has experienced a relatively smooth succession on taking over as global head of trading and securities financing (TSF) at AXA Investment Managers (AXA IM), having worked directly under predecessor Christophe Roupie for 10 years.

Before taking the top job six months ago, one area with which Squires was less familiar was securities finance, as he was not directly responsible for it in his previous role as global head of trading. “The securities financing desk sits there quietly generating revenue each year, in a very operationally efficient, client-centric way. Despite working alongside that department for 10 years, I hadn’t fully appreciated its role,” he says. “As well as generating significant revenues for AXA IM and its clients, the securities finance team also delivers wider benefits in terms of fund performance uptick through its collateral transformation capabilities and access to the repo market.”

Like trading, the value added by AXA IM’s securities financing activities is beyond what can be easily measured. As such, there are similarities with the trading desk in that neither is evaluated via a formal P&L in the same way that a prop desk might. “In terms of our execution services, we measure our performance against appropriate benchmarks in order to monitor the cost savings to clients. It’s an indirect measure but it’s quantifiable and incentivises best practice. Similarly, securities lending is viewed not just in terms of revenue but also in terms of performance pick-up,” says Squires.

Complex relationships

Understandably, the new role has led Squires to appreciate AXA IM’s counterparty relationships in a wider context. “Counterparty dynamics can take on many different dimensions,” he explains. “As well as discussing trading coverage in the fixed income markets for example, we might also be looking at stock lending opportunities with different counterparties. And some banks that we might deal with on the securities financing or execution side might also be distribution agents for our funds or have another aspect to their relationship with us. Having previously regarded bank’s broking arms largely as service providers to my desk, it has been interesting to discover other elements of the overall relationship.”

This process of adjustment has been lent an added layer of complexity by the wave of structural reforms currently reshaping the European securities landscape. Adapting business and operating models to take account of evolving regulatory frameworks is a major task in its own right for major asset management firms. But Squires and his peers must also take into consideration the impact of on their counterparties too. The integration and harmonisation of securities trading, clearing and settlement processes poses multiple challenges for European market participants and operators, but the impact of global, macro-prudential reforms is, if anything, just as profound. In particular, the capital, liquidity and leverage rules imposed on banks by Basel III in order to reduce systemic risk have changed and in many cases weakened sell-side appetite for securities financing and repo market activity. As same time, Basel III has forced many sell-side firms to reassess their liquidity provision capabilities in the sovereign and corporate credit markets.

“We’ve noticed a shift toward a more collaborative approach among counterparts in the securities financing market, with some offering to provide agent lending services to us, and others looking to utilise our capabilities,” says Squires. “At the moment, such conversations are probably largely opportunistic or exploratory. On the trading side, we’ve seen a huge change in terms of the appetite of sell-side firms to provide liquidity in the fixed income markets. But on the securities financing side, the use of collateral is increasingly a challenge for us in that counterparts don’t necessarily want to provide government bonds because of the impact on their balance sheet. Operationally, this adds complexity as we apply high levels of regulatory, client and internal risk controls to be able to support the management of a wider range of collateral types, or risk missing out on certain opportunities.”

Market intelligence

In terms of sheer revenue-generating capacity, Squires says there are probably larger securities financing opportunities for AXA IM in the US and Asia, but Europe remains a key area of focus because of the growing importance of collateral transformation or optimisation capabilities, as the impact of market reforms on liquidity conditions is felt. “Historically, a trader or portfolio manager might have under-estimated liquidity considerations on the basis that a stock can almost always be accessed if you’re prepared to pay the price,” says Squires. “But in the present environment, delivery and settlement considerations are becoming much more relevant and as such we’re looking to share information more effectively. There is an opportunity to leverage information on stock borrowing activity and pricing to provide extra insight on liquidity conditions which could influence investment or trading decisions and offer opportunities for performance upside. Overall it’s about pooling and maximising the market intelligence we receive collectively as a firm.”
In this respect, the response of buy-side firms to Europe’s market reforms is similar to that of sell-side counterparts: improved coordination of existing internal resources to deliver greater value to the client. The growing scarcity of collateral, both due to Basel III’s impact on sell-side balance sheets and the incoming requirements for asset managers and owners to clear derivatives, is creating new client expectations, says Squires, which in turn is prompting new service models.

“Whilst we do trade credit default swaps and interest rate swaps on an OTC basis across the securities financing and trading desks, notably from our fixed income investment expertise, a separate execution team for more structured derivatives has traditionally supported the needs of our insurance clients. But increasingly, clients are looking to explore repo opportunities or use our collateral management capabilities. This kind of change in demand from external clients is very much a driver of greater internal collaboration between securities financing and trading. Effective collateral management will become increasingly important as an offering by the buy-side,” he says.
In terms of the increasing importance of collateral considerations for market participants, Squires sees the clearing obligations coming into force in 2016 under the European Market Infrastructure Regulation (EMIR) as one example of a common theme in this intensive period of regulatory reform, where laudable regulatory objectives meet with higher costs for market participants.

“While on the one hand, the industry can appreciate that central clearing of derivatives meets an important regulatory objective, on the other, there is a lot of cost and complexity involved in supporting the model. The industry has already experienced higher costs through EMIR’s transaction reporting requirements and these will only increase as MiFID II broadens the scope of buy-side reporting to more instruments. Greater transparency is important but the incoming reporting requirements add a significant direct cost, with limited certainty about the benefits to the end-user,” says Squires.

Efficiency through integration

Industry concerns are being heeded to a certain extent. Regulators worldwide are increasingly required to provide a cost-benefit analysis of proposed reforms. In Europe, the Capital Markets Union initiative involves a consultation that may smooth off some of the sharper edges of recent rule changes.

In the meantime, the evolving regulatory environment demands that all firms pursue cost savings and efficiency gains. AXA IM is exploring a number of avenues across securities financing and trading. “On the trading side, our COO is currently focused on a number of requirements such as onboarding funds to RFQ platforms for execution purposes, but there may be scope for him to leverage securities financing’s integrated trade administration team, which does some very smart automation of downstream processes,” he says. “There could also be efficiency benefits from absorbing the trading desk’s centralised middle-office function more fully into the wider TSF framework. Because we face regulatory requirements across different pockets of our activity, it makes sense to be as harmonised and integrated as possible to seek opportunities for efficiency.”

On Squires’ home turf – the trading desk – the pace of change is not letting up. MiFID II’s impacts are many and far-reaching (as underlined by this edition’s separate story on the directive), one of its more substantial changes is the adoption of pre- and post-trade transparency rules in Europe’s fixed income markets. Having presided over the integration of AXA IM’s trading capabilities, Squires supports moves toward a common regulatory framework for securities trading.
“The extension of MiFID II to include non-equity instruments has been essential. A certain level of convergence between the equities and fixed income markets is healthy. We’ve had a multi-asset trading team for around a decade and have established an operating framework accordingly. As such, I welcome the fact that discussions on regulation and market structure take account of different asset types, whereas previously they were very skewed toward equities,” he says.
Moreover, rule changes are inspiring much-needed innovation. Squires views as a major positive outcome of regulatory reform the increase in industry discussions reflecting the changing role of market participants and infrastructures, such as the more pro-active role taken by the buy-side in response to changes impacting sell-side capacity. “The most interesting developments are the ones that challenge the status quo, such as Plato in the equities market and Neptune in fixed income, both of which reconsider the way we have historically interacted, with the common goal of driving costs lower, using standard protocols. To me, it’s important that both these initiatives are designed as not-for-profit utilities, rather than profit-making models, which can lead to bilateral interactions that end up being expensive to maintain and stifling to innovation,” asserts Squires.

Shared interest

The Plato Partnership was formed by leading European brokers and asset managers to create a not-for-profit equity trading platform focused on large block trades, in response to the restrictions due to be imposed on non-exchange trading by MiFID II. Neptune is also backed by both buy- and sell-side firms and aims to automate and standardise processes supporting liquidity provision in European fixed income markets.

The driving logic behind Plato is the shared interest large buy- and sell-side firms have in design a dark pool that is parameterised to facilitate the large block trades that are required by fund managers, while discouraging trading strategies that is detrimental to trading in size, i.e. predatory high-frequency trading activity. Such a pool should soon gain its own momentum, especially if it is also designed to meet MiFID II’s best execution requirements.
“Plato should help to shift us away from the current mindset, which dictates that we divide our business up among 20 or so dark pools in the hope of accessing dark liquidity effectively, to prioritising a venue purpose-built for our needs. And because it is a buy- and sell-side initiative, it should capture a significant amount of flow both from the asset managers on the steering committee that designed the platform – and their peers – and also from the sell-side firms that will no longer operate broker crossing networks under MiFID II,” says Squires.

Another big shift effected by MiFID II is the increased onus on Europe’s asset managers to provide clients with information on the costs and quality of the processes for implementing investment decisions.

This is achieved in a number of ways, but from a trading perspective increased reporting requirements, separation of research payments from execution fees and tougher best execution standards loom largest. From one perspective, these changes can be seen as adding cost, which at some stage will be borne by the end-client. Squires is sensitive to the imposition of extra costs, but admits greater scrutiny can lead to improved service quality in an increasingly integrated market.

“Due to EMIR reporting requirements, for example, we’ve identified very different approaches to futures reporting,” he explains.

“Most of our clearing brokers have done it well but not all. In the past, it might have been possible to let that situation drift due to a focus on other priorities. But increasingly the spotlight falls quickly on areas of under-performance from service providers, in part because of the increased transparency and unbundling of services across the transaction chain, but also due to an escalation in the level of due diligence we’re now expected to carry out.”