Time to be forward thinking?
02 October 2018
Tim Smith of FIS Global discusses trends in the North America securities lending market ahead of this year’s Risk Management Association conference
Image: Shutterstock
This year’s Risk Management Association conference in Miami opens amid the seemingly perennial and continual regulatory and transparency focus, the same as it has been for the last 10 years. The General Data Protection Regulation, Securities Financing Transactions Regulation and Consolidated Audit Trail are all having their impact and every business is increasingly having to spend more and more time satisfying internal audit types looking to ensure that every one of these regulations and more are correctly reported on and no infringement at all is in the offing. My colleague penned a piece in the last issue of SLT on the accelerating impact and influx of technology required to ensure that we can undertake our business in good order and a timely fashion, and this is indeed the case.
However, we should not forget the fundamentals of what is happening in the North American markets, whether it be upward pressure on rates, an evolution of collateral in terms of type and quality, or even the increasing desire to achieve the ideal of using machine learning and predictive analytics. Not only efficiently monitor positions, but also get ahead of the game when it comes to re-rates and potential borrows or loans. This securities finance environment application of the society envisaged in films, such as The Minority Report, is surely where we all wish to go—and it may not be too far away.
First things first though, let’s look at the general trends in the North American securities lending market over the last year applying the usual measures. Figure one and figure two (on page 39) show the trends in terms of availability, volumes, rates and the split between cash and non-cash collateral. Immediately apparent is the somewhat easing of the desire to pursue non-cash collateral. On the back of slight rises in interest rates, it appears that cash may have regained some of its allure. In terms of volume, we can see that these have picked up in terms of value as have the relevant indices. Availability has increased in parallel with this trend as well. Average rates, however, would appear to have eased off, maybe as the result of increased availability leading to easier-to-borrow securities.
In any event, this is all anodyne and even intuitive at the macro level—some might even say boring so let’s get back to the future and see if any of this summer’s causes celebres have anything to offer us. The last few months have been eventful for Tesla and considering everything it’s been in the news for, the whole debacle could be analysed to see if it tells us anything from the securities lending front. We could all say what we would think would happen, but you never can be too sure and if we are ever going to get to that predictive state then we need to carry on analysing to the nth degree.
Figure one and figure two depict activity on an intraday basis for Tesla on and around the days of the following events—asking suppliers to delay invoices, an announcement that Tesla might go private, resignation of the CFO after one month in the job, Elon Musk smoking funny tobacco and the announcement that they are not going to go private after all. The first thing to note in terms of a common trend is that there would appear not to be a common trend.
Maybe Tesla is deemed too big to be rocked by these seemingly rocking events. Maybe some of them are prioritised differently by the cognoscenti in terms of risk and reputational impact. In the case of the resigning CFO, aggregate amounts remained fairly stable but there were a few big or bigger loans; similarly, for the smoking weed issue. For the abandonment of the re-privatisation plan, there seemed to be a delay while it sank in and then some activity occurred, but not on the day itself—maybe he was not believed. Maybe the next day’s reaction was for something else. Just as market impacts of tweeted China tariff plans have lessened over time with each new tweet, maybe our market’s participants are now assuming that there will be a slew of weird happenings at Tesla and that this is the new normal. However, by analysing each reaction or non-reaction and the timings thereof, it could someday become a predictive or foreshadowing tool.
Hence, ‘The Minority Report’ similarity—when rates are predicted, re-rates can be pre-planned and a day’s extra income or saving picked up automatically across the board. Some tools already exist for efficient and effective allocation, but there are still certain aspects of the securities lending world that remain firmly in the hands of the humans—and long may it be thus.
However, the tools are coming that will enable participants to concentrate on the analysis of the suggested actions rather than finding those actions in the first place. Watch this space.
Figure One
Figure Two
However, we should not forget the fundamentals of what is happening in the North American markets, whether it be upward pressure on rates, an evolution of collateral in terms of type and quality, or even the increasing desire to achieve the ideal of using machine learning and predictive analytics. Not only efficiently monitor positions, but also get ahead of the game when it comes to re-rates and potential borrows or loans. This securities finance environment application of the society envisaged in films, such as The Minority Report, is surely where we all wish to go—and it may not be too far away.
First things first though, let’s look at the general trends in the North American securities lending market over the last year applying the usual measures. Figure one and figure two (on page 39) show the trends in terms of availability, volumes, rates and the split between cash and non-cash collateral. Immediately apparent is the somewhat easing of the desire to pursue non-cash collateral. On the back of slight rises in interest rates, it appears that cash may have regained some of its allure. In terms of volume, we can see that these have picked up in terms of value as have the relevant indices. Availability has increased in parallel with this trend as well. Average rates, however, would appear to have eased off, maybe as the result of increased availability leading to easier-to-borrow securities.
In any event, this is all anodyne and even intuitive at the macro level—some might even say boring so let’s get back to the future and see if any of this summer’s causes celebres have anything to offer us. The last few months have been eventful for Tesla and considering everything it’s been in the news for, the whole debacle could be analysed to see if it tells us anything from the securities lending front. We could all say what we would think would happen, but you never can be too sure and if we are ever going to get to that predictive state then we need to carry on analysing to the nth degree.
Figure one and figure two depict activity on an intraday basis for Tesla on and around the days of the following events—asking suppliers to delay invoices, an announcement that Tesla might go private, resignation of the CFO after one month in the job, Elon Musk smoking funny tobacco and the announcement that they are not going to go private after all. The first thing to note in terms of a common trend is that there would appear not to be a common trend.
Maybe Tesla is deemed too big to be rocked by these seemingly rocking events. Maybe some of them are prioritised differently by the cognoscenti in terms of risk and reputational impact. In the case of the resigning CFO, aggregate amounts remained fairly stable but there were a few big or bigger loans; similarly, for the smoking weed issue. For the abandonment of the re-privatisation plan, there seemed to be a delay while it sank in and then some activity occurred, but not on the day itself—maybe he was not believed. Maybe the next day’s reaction was for something else. Just as market impacts of tweeted China tariff plans have lessened over time with each new tweet, maybe our market’s participants are now assuming that there will be a slew of weird happenings at Tesla and that this is the new normal. However, by analysing each reaction or non-reaction and the timings thereof, it could someday become a predictive or foreshadowing tool.
Hence, ‘The Minority Report’ similarity—when rates are predicted, re-rates can be pre-planned and a day’s extra income or saving picked up automatically across the board. Some tools already exist for efficient and effective allocation, but there are still certain aspects of the securities lending world that remain firmly in the hands of the humans—and long may it be thus.
However, the tools are coming that will enable participants to concentrate on the analysis of the suggested actions rather than finding those actions in the first place. Watch this space.
Figure One
Figure Two
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