Technological advance: opportunities or threats?
18 September 2018
David Lewis of FIS discusses how the four ‘superpowers’ of technology will drive and shape our world going forward
Image: Shutterstock
Technology is here to make our lives easier and our businesses more efficient. According to some, there are four ‘superpowers’ of technology that will drive and shape our world going forward: the cloud, mobile devices, connected gadgets and artificial intelligence. Individually and respectively, they change the way we use or purchase computing power, stay connected wherever we are, leave mundane tasks to machines and even make basic decisions on their own. Combined, they can deliver services and capabilities not yet dreamed of. A recent article observed that supercomputers buried deep in frozen areas of the world, allowing quantum computing theories which need super cooling to become reality, will address mathematical and data problems we haven’t yet thought of, such as real-time monitoring of biometric to tell you that you may be ill before you even know it. But for some, these four superpowers could be more easily recognised as the four horsemen of the apocalypse, bringing disruption, danger and an end to the world as we know it.
In the UK this week, the Trade Union Congress (TUC) is calling for a four-day week, leveraging the efficiency opportunities that technology brings to allow people to work four days instead of five and, importantly, be paid the same amount for producing the same output in a shorter time through the application of technology. Some would argue that the ability to produce more at the same cost with the same resources is the very definition of growth, but the suggestion of the shorter working week gives away the underlying concern that eventually, on some level, most jobs that are done by unionised staff will be replaced by technology. Driverless trucks and taxis are already in use and will likely change the way goods and people are transported forever. The next generation will no doubt marvel at the novel idea of driving their own car in the same way children today look at phones that connect to a wall socket.
Looking at a specific industry, real estate agency markets have come under significant pressure from market disruptive technology providers. Anyone wishing to sell or let their house can employ an online agent and manage most of the process from their mobile device, transferring the largest asset people would normally own, without the assurance of the lawyer and agent effectively indemnifying them against a poor deal. Much of the success of this is down to the application of technology users are already comfortable with, allowing them to move what they had previously considered as a risky and complicated transaction into their own control, using widely adopted technology and mediums.
Expand that idea into the securities finance market and consider how data and technology are allowing growth in efficiency, but also, to an extent, threatening the status quo. In a recent meeting with a client, the securities lending manager introduced herself as the European head of securities finance and collateral management and equity execution—a title that reflects not only her substantial capabilities but also the integration of the securities finance business unit into a more integral component of the bank itself. Enterprise collateral management, a term not heard of a few short years ago, has ensured that the securities finance desk of a bank is often now directly responsible for the provision of collateral across a number of other business disciplines.
With the best will in the world, securities lending, as was, could not really be described as a dynamic industry, taking years to adapt to structural changes rather than months. However, as it becomes increasingly integral to the wider workings and disciplines of the parent bank or financial organisation, it is having to adapt their timescales and meet their expectations. Technology will begin to merge and providers like FIS are adapting to meet that need, delivering concept systems that allow multiple trading activities from one browser. While much of this change may be being pushed on the industry by regulatory changes, there are other pressures happening outside the banks that, if ignored, will disrupt the market just as online estate agents have put power into the client’s hands.
New exchange-like services, offering all-to-all or peer-to-peer financing solutions, are growing in their influence. Central counterparty (CCP) clearing houses, which as a concept have been around for longer than many care to admit when explaining bilateral trading to non-securities financing types, still carry only a small proportion of the market flow, but will most likely turn those proportions on their heads in just a few years. There is a multitude of reasons why this will happen, but to note is the increasing engagement of beneficial owners and the impending arrival of the single counterparty credit limit (SCCL) expected in January 2020.
Beneficial owners, at least the leaders of that group, see securities lending revenues as an integral part of their investment product, and with increased engagement comes a glut of supply, particularly of cheap liquid general collateral assets. To keep revenues meaningful, beneficial owners will be seeking cheaper and more direct routes to market. Note the recent announcement of zero-fee funds from Fidelity Asset Management; they will almost certainly be looking to securities lending revenues to offset the loss of fees and given the announcements impact on their share price and that of their competitors, they have started a race to the bottom on fees that will force greater numbers of assets into lending.
The SCCL will apply a 15 percent exposure limit for Globally Systemically Important Banks, based on tier-one capital, on any individual counterparty, which means that more profitable lines of business will get the first claim on such limits, particularly when it is noted that the SCCL does not apply to CCPs.
It is far from news to state that the industry is currently more than fixated on the impending arrival of SFTR, and other jurisdictions’ application of the Financial Stability Board’s transparency directive. However, the industry must not ignore the other activities going on outside its gates and instead leverage the efficiencies that the four superpowers of technology can bring to our market, for the benefit of our clients and our business, even if it means we will still have to work five days a week.
In the UK this week, the Trade Union Congress (TUC) is calling for a four-day week, leveraging the efficiency opportunities that technology brings to allow people to work four days instead of five and, importantly, be paid the same amount for producing the same output in a shorter time through the application of technology. Some would argue that the ability to produce more at the same cost with the same resources is the very definition of growth, but the suggestion of the shorter working week gives away the underlying concern that eventually, on some level, most jobs that are done by unionised staff will be replaced by technology. Driverless trucks and taxis are already in use and will likely change the way goods and people are transported forever. The next generation will no doubt marvel at the novel idea of driving their own car in the same way children today look at phones that connect to a wall socket.
Looking at a specific industry, real estate agency markets have come under significant pressure from market disruptive technology providers. Anyone wishing to sell or let their house can employ an online agent and manage most of the process from their mobile device, transferring the largest asset people would normally own, without the assurance of the lawyer and agent effectively indemnifying them against a poor deal. Much of the success of this is down to the application of technology users are already comfortable with, allowing them to move what they had previously considered as a risky and complicated transaction into their own control, using widely adopted technology and mediums.
Expand that idea into the securities finance market and consider how data and technology are allowing growth in efficiency, but also, to an extent, threatening the status quo. In a recent meeting with a client, the securities lending manager introduced herself as the European head of securities finance and collateral management and equity execution—a title that reflects not only her substantial capabilities but also the integration of the securities finance business unit into a more integral component of the bank itself. Enterprise collateral management, a term not heard of a few short years ago, has ensured that the securities finance desk of a bank is often now directly responsible for the provision of collateral across a number of other business disciplines.
With the best will in the world, securities lending, as was, could not really be described as a dynamic industry, taking years to adapt to structural changes rather than months. However, as it becomes increasingly integral to the wider workings and disciplines of the parent bank or financial organisation, it is having to adapt their timescales and meet their expectations. Technology will begin to merge and providers like FIS are adapting to meet that need, delivering concept systems that allow multiple trading activities from one browser. While much of this change may be being pushed on the industry by regulatory changes, there are other pressures happening outside the banks that, if ignored, will disrupt the market just as online estate agents have put power into the client’s hands.
New exchange-like services, offering all-to-all or peer-to-peer financing solutions, are growing in their influence. Central counterparty (CCP) clearing houses, which as a concept have been around for longer than many care to admit when explaining bilateral trading to non-securities financing types, still carry only a small proportion of the market flow, but will most likely turn those proportions on their heads in just a few years. There is a multitude of reasons why this will happen, but to note is the increasing engagement of beneficial owners and the impending arrival of the single counterparty credit limit (SCCL) expected in January 2020.
Beneficial owners, at least the leaders of that group, see securities lending revenues as an integral part of their investment product, and with increased engagement comes a glut of supply, particularly of cheap liquid general collateral assets. To keep revenues meaningful, beneficial owners will be seeking cheaper and more direct routes to market. Note the recent announcement of zero-fee funds from Fidelity Asset Management; they will almost certainly be looking to securities lending revenues to offset the loss of fees and given the announcements impact on their share price and that of their competitors, they have started a race to the bottom on fees that will force greater numbers of assets into lending.
The SCCL will apply a 15 percent exposure limit for Globally Systemically Important Banks, based on tier-one capital, on any individual counterparty, which means that more profitable lines of business will get the first claim on such limits, particularly when it is noted that the SCCL does not apply to CCPs.
It is far from news to state that the industry is currently more than fixated on the impending arrival of SFTR, and other jurisdictions’ application of the Financial Stability Board’s transparency directive. However, the industry must not ignore the other activities going on outside its gates and instead leverage the efficiencies that the four superpowers of technology can bring to our market, for the benefit of our clients and our business, even if it means we will still have to work five days a week.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
