Less data, more actionable information
11 July 2017
Securities finance must avoid analysis paralysis ahead of upcoming regulatory deadlines. David Lewis, vice president of FIS Astec Analytics, explains
Image: Shutterstock
Data, especially what we commonly describe as ‘big data’, is all around us, influencing and occupying ever greater parts of our lives. But this explosion of data can also bring problems, hiding the actual evidence or important nugget of information below terabytes of noise.
Much can be done to filter the noise, but data management, interpretation and data visualisation techniques are only one part of the answer, especially where the securities finance and collateral industries are concerned.
FIS Astec Analytics has been in the data industry for more than 15 years and during that time, we learnt much about how to collect and process data. But, arguably more importantly, how to present it so raw data becomes actionable information. Few lending providers lack a client reporting engine or facility of some description, and will have, no doubt, been through the same development paths.
However, the second, and important, part of the equation is knowing, with some certainty, what the actual questions are and whether we, as an industry, are answering them with the information we provide.
When we talk to our beneficial owner clients, it is interesting to note the change in tone and subject as time passes. Over the years leading up to the financial crisis, the focus had always been on profitability, returns to lendable and utilisation results. An under-performance by one or more basis points, when compared to the peer benchmark, would elicit some robust conversations and probing of an agent’s strategies. Immediately after the crisis, clients focus was primarily concerned with exposures and collateral coverage.
Profitability, while obviously still crucial, became, somewhat of a secondary subject and reporting benchmarks pivoted towards a confirmation of whether your particular fund, with its specific characteristics and asset profile, was in the ball park or not, when compared with the benchmark.
Where funds were more than one or two notches off the median, an explanation around collateral schedules and counterparty limits and approvals was often enough to explain the under or over performance. Should something appear under collateralised, that would have been a different story.
Move on to more recent times and that tone has changed appreciably once more. While funds are more problematic to align with a statistically significant peer group, owing to the increasingly unique characteristics of funds, especially where collateral profiles are concerned, the focus has once again shifted towards where the money is made.
This should not be surprising to anyone in the market, whether a participant agent, borrower or beneficial owner.
Lower yields and incomes from other market activities has put pressure on securities finance to deliver, not only in terms of absolute revenues, but also in cost and balance sheet optimisation.
Correlating with the renewed focus on fund performance is, comfortingly in many ways, a significant increase in engagement from asset owners. Pressure on the traditional transaction chain to yield more income for its participants has rarely been greater.
Fund types and domiciles that, only a few years ago, might have struggled to even consider lending their government bonds, are now pushing term trades against flexible collateral types. Some fund owners are actively pressing for peer-to-peer lending opportunities, potentially causing some disintermediation in the marketplace.
That said, agents represented on a panel at the International Securities Lending Association’s recent conference in Berlin, made good arguments as to why they should retain their position in the chain, but it is inarguable that change is coming.
Asset owners seeking actionable information on new trade types, such as evergreens, enabling them to make better informed decisions and understand more clearly how such trades are priced is driving many of the changes that we are seeing as a provider in this space.
Delivering both trading systems and market data, FIS is also seeing data and functionality requirements changing as a result of regulations and the strategic actions the industry is taking to respond to them as best it can.
The Securities Financing Transactions Regulation (SFTR) has become omnipresent in all industry-related conversations. The impact of what is effectively just a reporting requirement, could be seismic.
While asset owners are concerned with how they will meet their obligations, or how much it will cost them to have their agents undertake this work for them, market participants are looking to how the industry can be changed to turn a regulatory requirement into an opportunity.
Replacing agency lending disclosures is one potentially positive spin off from the implementation of SFTR, but other related changes may affect the lending disclosure process integral to the way trading is currently undertaken.
Advanced data around risk weighted asset usage and cost-effective counterparties will bring the trading process forward, moving allocation and disclosure up the timeline, potentially improving efficiency across the transaction chain. In order to achieve this, however, we will not only need to have the right data to hand, but we will need to know what questions to ask.
There are some questions that are very likely to flow to the top of the beneficial owner’s agenda, and these may include how such changes align with any sense of fairness in trade allocations.
The second Markets in Financial Instruments Directive describes client management and fairness obligations, including greater clarity around trading choices and the justifications behind them.
This will, no doubt, shine a light onto the new processes and procedures the industry is currently considering, particularly when the asset owners increased interest in incomes and profitability is borne in mind.
As market participants and providers throughout the transaction chain, we are all keen to both increase the size of the income pie, as well as perhaps increasing our own share of it, but with all the changes coming down the pipe at our business, not only will the answers and information be vital, but knowing what to actually ask will be key.
Much can be done to filter the noise, but data management, interpretation and data visualisation techniques are only one part of the answer, especially where the securities finance and collateral industries are concerned.
FIS Astec Analytics has been in the data industry for more than 15 years and during that time, we learnt much about how to collect and process data. But, arguably more importantly, how to present it so raw data becomes actionable information. Few lending providers lack a client reporting engine or facility of some description, and will have, no doubt, been through the same development paths.
However, the second, and important, part of the equation is knowing, with some certainty, what the actual questions are and whether we, as an industry, are answering them with the information we provide.
When we talk to our beneficial owner clients, it is interesting to note the change in tone and subject as time passes. Over the years leading up to the financial crisis, the focus had always been on profitability, returns to lendable and utilisation results. An under-performance by one or more basis points, when compared to the peer benchmark, would elicit some robust conversations and probing of an agent’s strategies. Immediately after the crisis, clients focus was primarily concerned with exposures and collateral coverage.
Profitability, while obviously still crucial, became, somewhat of a secondary subject and reporting benchmarks pivoted towards a confirmation of whether your particular fund, with its specific characteristics and asset profile, was in the ball park or not, when compared with the benchmark.
Where funds were more than one or two notches off the median, an explanation around collateral schedules and counterparty limits and approvals was often enough to explain the under or over performance. Should something appear under collateralised, that would have been a different story.
Move on to more recent times and that tone has changed appreciably once more. While funds are more problematic to align with a statistically significant peer group, owing to the increasingly unique characteristics of funds, especially where collateral profiles are concerned, the focus has once again shifted towards where the money is made.
This should not be surprising to anyone in the market, whether a participant agent, borrower or beneficial owner.
Lower yields and incomes from other market activities has put pressure on securities finance to deliver, not only in terms of absolute revenues, but also in cost and balance sheet optimisation.
Correlating with the renewed focus on fund performance is, comfortingly in many ways, a significant increase in engagement from asset owners. Pressure on the traditional transaction chain to yield more income for its participants has rarely been greater.
Fund types and domiciles that, only a few years ago, might have struggled to even consider lending their government bonds, are now pushing term trades against flexible collateral types. Some fund owners are actively pressing for peer-to-peer lending opportunities, potentially causing some disintermediation in the marketplace.
That said, agents represented on a panel at the International Securities Lending Association’s recent conference in Berlin, made good arguments as to why they should retain their position in the chain, but it is inarguable that change is coming.
Asset owners seeking actionable information on new trade types, such as evergreens, enabling them to make better informed decisions and understand more clearly how such trades are priced is driving many of the changes that we are seeing as a provider in this space.
Delivering both trading systems and market data, FIS is also seeing data and functionality requirements changing as a result of regulations and the strategic actions the industry is taking to respond to them as best it can.
The Securities Financing Transactions Regulation (SFTR) has become omnipresent in all industry-related conversations. The impact of what is effectively just a reporting requirement, could be seismic.
While asset owners are concerned with how they will meet their obligations, or how much it will cost them to have their agents undertake this work for them, market participants are looking to how the industry can be changed to turn a regulatory requirement into an opportunity.
Replacing agency lending disclosures is one potentially positive spin off from the implementation of SFTR, but other related changes may affect the lending disclosure process integral to the way trading is currently undertaken.
Advanced data around risk weighted asset usage and cost-effective counterparties will bring the trading process forward, moving allocation and disclosure up the timeline, potentially improving efficiency across the transaction chain. In order to achieve this, however, we will not only need to have the right data to hand, but we will need to know what questions to ask.
There are some questions that are very likely to flow to the top of the beneficial owner’s agenda, and these may include how such changes align with any sense of fairness in trade allocations.
The second Markets in Financial Instruments Directive describes client management and fairness obligations, including greater clarity around trading choices and the justifications behind them.
This will, no doubt, shine a light onto the new processes and procedures the industry is currently considering, particularly when the asset owners increased interest in incomes and profitability is borne in mind.
As market participants and providers throughout the transaction chain, we are all keen to both increase the size of the income pie, as well as perhaps increasing our own share of it, but with all the changes coming down the pipe at our business, not only will the answers and information be vital, but knowing what to actually ask will be key.
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