FIS’ David Lewis explores how new generations of employees and clients are driving change in securities finance and how performance in the 2020s will be measured by more than basis point returns
There is a well-known novel which focuses on some of the largest questions in the universe. Huge resources, including money and time, were spent seeking the answer, but once an answer was found it was less than fulfilling. It was only then that they realised they were asking the wrong question.
Data is great to have, but it needs to be actionable information if it is to add value to a decision-making process. But if the question to be answered, or the range of options that may be selected, is wrong, then even the best quality, deepest and most accurate data is not going to help.
A few weeks ago, the London Chapter of Women in Securities Finance hosted a networking event in London. The objective was to facilitate network building among new graduates and entrants to the industry – with 14 experienced members of the market making themselves available to be questioned about their experiences and to share advice. Those 14 senior figures took up positions around the room and speed dated their way through the evening, grilled by bright new faces keen to understand more about the securities finance and collateral industry.
High performance
It was a highly successful and interesting evening. This influx of new minds and new energy is vital for the regeneration, advance, and improvement of every industry, including securities finance. But it was the nature of the questions asked, and the deeper implications that sat behind those conversations, that stood out for many. One of the most powerful questions explored how we classify “high performance” in the securities finance industry – and how our categorisation of this term, and how it is measured, differed in the early 1990s from that today, nearly 30 years later.
To put this into historical context, in the early 1990s there were only four main TV channels in the UK (Channel 5 launched in 1997), and the “yuppie” period was coming to an end. Ahead of the looming financial issues of the mid-to-late 1990s, the focus was still on cash generation and profit making. Long hours and poor work-life balance were the norm – and even the expectation – in many industries, including banking and finance.
If we compare this period with the 2020s, performance measurement criteria have changed significantly. At least two major market players have issued press releases in recent weeks regarding the inclusion of Environmental, Social and Governance (ESG) measurements and policies in their securities lending programmes – and they are just two of many moving in this direction. Technology and mathematics can, of course, provide much of the data and actionable information that is required to generate these performance metrics, but it will be a complex transition for the market.
Measuring performance by the generation of financial returns is, on the surface, mathematically simple and easily comparable. The reality, as shown through the negotiation and creation of the ISLA Securities Lending Performance Measurement Guidelines, bears testament to just how difficult even (seemingly) simple standard measures can be to create. There are many ways, for instance, to measure utilisation of lendable assets, all of which have a direct impact on the basis point returns made for a given lendable value. Moving on to less data-driven measures will bring even greater challenges for comparability.
However, high performance in the 2020s is not just about basis point returns. The same new faces that bring new ideas also bring new expectations and different standards. Those joining the securities finance industry are not just new employees and contributors, they are a microcosm of wider changes in the client base the industry serves. Witness the rise of disruptor services that seek to democratise the financial markets, bringing direct share dealing to the app in clients’ pockets and opening lending markets to more retail clients. FIS, as the world’s largest fintech organisation, is, of course, deeply involved in the advancement of banking and payments. However, it is also deeply active in the capital markets side of the business, connecting transaction chains to match the original client demand through to execution and tokenised settlements.
Consider the possibility of buying a security through your app. Not only does it settle instantly, it is also immediately part of a lending programme and potentially lent out straight away. The opposite transaction is equally possible – instant short sales covered immediately as the borrow order is settled alongside the sale. With the advent of intraday lending and borrowing, we can open the markets wider and to a broader set of participants.
Instant actions are the standard expectations for those entering our markets, coupled with new standards and measurements of what is considered to be high performance. Much has been written over the years on the relationship between risk and reward. In the context of securities finance, it has always been the case that lending to a lower credit risk counterparty, or accepting what might be considered to be lower quality collateral, has led to higher lending returns. Those measurements and standards are set to change; counterparties and collateral will be measured by their ESG credentials, for example. Banks will find that their client base is less loyal and more inclined to move their service provider, should they fail to satisfy these new expectations. Customers will require not simply that their bank delivers to these expectations, but that it does so with evidential proof.
The answer to all of this is that the securities finance market, along with the rest of the financial industry, must move with the times and meet the expectations of the new generation of employees and clients. It just has to work out what the question is.
