While CCPs appear to be a large part of the way forward for solving some of the challenges in the securities lending industry, panelists at the RMA Conference on Securities Lending in Naples, Florida, generally agreed that technology will also play a key role going forward to ease the industry’s burden.
“I think the main thing that lenders are looking for from technology is efficiency; it’s truly an expensive business to run,” said Daniel McGuiggin, vice president, Brown Brothers Harriman. “Anything we can do to lower that expense and allowing our traders to focus on higher margin trades by allowing straight-through processing and automated trading on the lower margin trades…is truly efficient and really helps us gain more revenue streams and allows us to lower our cost basis.”
“In addition to efficiency, we’re looking for better exchange of information,” added Steven Schneider, executive director at Morgan Stanley. “A lot of information is already made available to the marketplace, it’s just in very fragmented forms of distribution.”
Rather than fragmentation, having systems that provide a more consolidated view of things such as availability of securities would help on a pre-trade basis in terms of deciding what decisions to make.
“When it comes to the actual trading itself, the exchange of availability rates are something that happen already, but having it in one consolidated platform would enable us to trade on a larger scale, [having] greater portfolio utilization in a more efficient manner,” said Schneider.
Efficiency emerged as a key theme, as more automated, consolidated technology can streamline processes.
“With firms having to reduce staff over the years as a result of the credit crisis, STP rates and operational efficiency is becoming very important,” said John Grimaldi, president, SunGard’s North American securities operations and securities finance. “The mantra of doing less with more is here to stay.”
The panelists agreed that adoption of technology changes and investment in this area are starting to pick up, as the market conditions around cost have become a driver for change, rather than the industry simply waiting for a regulatory initiative to prompt more advanced systems.
“As an industry, we’ve recently done a much better job collaborating and trying to figure out what makes sense for everybody collectively to try to adopt uniform protocols for the exchange of information,” said Schneider.
However, there could be some more work to do in terms of bringing both sides of securities lending together.
“I think it’s an eventual fallacy that in order for the market to be more efficient, lenders have to be more transparent,” in terms of showing all prices, even for more volatile securities, said Patty Hostin, head of U.S. equity securities lending trading at BlackRock. “I can’t think of another market necessarily that operates that way where one side show everything and the other side gets to choose what they want, except for a supermarket. Transparency is a two way street. In order for the market to continue to become more efficient, it’s going to take a little bit of give from both sides…It’s definitely gotten better over time, but I think there’s still a continued reluctance from the lenders, because at the end of the day, you may have shown your cards and then you end up regretting it later when you can’t get a rate change through.”
Hostin added that lenders are generally transparent and efficient, with automation levels above 85%, which fall closely in line with other books of trading.
“The goal as we move forward the next couple years is to really just automate everything where a trader’s hand is not adding unique value,” she added. “Traders will continue to be focused on recognizing changes in momentum, volatility, understanding structures behind corporate actions trade, [etc.], but everything else we’re going to have a continued focused on automating, but that’s really just a refinement.
Securities Lending Industry Embraces Technology to Reduce Cost
While CCPs appear to be a large part of the way forward for solving some of the challenges in the securities lending industry, panelists at the RMA Conference on Securities Lending in Naples, Florida, generally agreed that technology will also play a key role going forward to ease the industry’s burden.