Data is the key to settlement efficiency
16 October 2018
FIS’s David Lewis explains that although shining the regulatory light into the industry’s back-office processes may not be very welcome, but in reality, it might just be long overdue
Image: Shutterstock
The 4 October saw the 2018 International Securities Lending Association (ISLA) Operations conference take place and one of the many serious subjects discussed was that of Central Securities Depositories Regulation (CSDR), one of the most important pieces of legislation that will be affecting our industry soon. In 2020, the industry will see the implementation of CSDR, as well as being the expected commencement for the Securities Financing Transactions Regulation (SFTR). Combined, these two pieces of legislation will demand new and additional levels of rigor in the administration and management of the industry, particularly with regard to data management.
Big data is an oft-quoted phrase when considering alpha generation, acting as an important component to investment strategies in asset management just as it is for many new apps and services which trade your personal data as a currency. But there is a much less exciting end of this work. An aspect of the business that has often lacked the investment it perhaps deserved. Looking back a few years to a previous ISLA Operations conference, hosted by J.P. Morgan in its magnificent City School Hall, investment in operations and the ‘back office’ was described as offering the biggest bang for buck investment potential in our business. Now that effort is becoming a more likely reality. But, how much of this effort is simply because we are being dragged towards it, metaphorically kicking and screaming?
Andy Dyson, CEO of ISLA, remarked at the recent conference that perhaps the regulators were forcing us to shine a light on those parts of the business that we have traditionally been reluctant to focus on. This observation appeared to be met with a grudging acceptance, perhaps even respect that the regulators have a point. SFTR has been analysed extensively in this publication, as well as in many other mediums and articles, and does not need to be repeated here, save for the fact that it will demand a greater level of attention to data accuracy than the securities finance and collateral industry has ever required.
Reporting activity to a trade repository, and thereafter to a regulator, is largely new ground for securities finance, and it will force an examination of data management as well as trading and booking procedures. This is no bad thing, in reality. Running a tighter ship will undoubtedly be more expensive in the short term, but settlement efficiency and data accuracy can only improve the industry effectiveness and returns in the long run. It is not difficult to see exactly how when you look at some basic statistics.
SFTR has up to 153 fields requiring completion, subject to the trade and collateral types engaged, with over 80 of those fields being subject to matching processes and analysis when the regime is fully live. Now take an estimate of your daily lifecycle events. For reference, here at FIS Global, we have medium to large borrower clients easily producing more than a million lifecycle events per day. For every single field that is unmatched in 1 percent of those life cycle events, that borrower is looking at around 10,000 breaks per day. Looking at the recent CSDR survey published by ISLA, 10 to 20 percent of securities lending transactions fail, with most of those being return legs. Multiplying that out, using the more conservative 10 percent fail rate, that becomes 100,000 breaks per day, per unmatched field. And just to emphasis the issue, there are over 80 fields that require matching.
Another client suggested that one full-time operations analyst can be expected to manage 200 breaks per day. When you consider that means 500 staff are needed to sort the 100,000 breaks, it becomes transparent that the issue needs to be solved at source.
The ISLA survey identified incorrect settlement instructions to be a key issue with regard to transactions failing to settle. As previously stated, this affects returns disproportionately compared to new trades, suggesting that it may be the reallocation by agents failing to be communicated to registered by the borrower. In SFTR terms, this relates to identifying the trading counterparty associated with the return leg of your transaction, creating a break across multiple fields.
Regulatory reporting, under SFTR, MIFID II, and others, has received a great deal of attention. No market participant wishes to attract the ire of their regulator, not least when they consider the stinging fines that have been levied on some for reporting errors in the recent past. CSDR, which also requires reporting of failed trades, also has a sharp sting in its tail. Fines for failed settlements will be high, often dwarfing the potential income lending participants can earn from their assets. While there is an exception for securities financing trades with a sub 30-day duration, there remains a good deal of ambiguity around what that actually means? Typically, most “open” dated trades are technically rolled every day, effectively making a string of one-day trades. According to the latest ISLA Securities Lending Market Report, open trades account for 77 percent and trades over 30 days make up 21 percent of trades in the market. However, much longer durations exist, and indeed under capital adequacy legislation, certain trades must be over 30 days in duration to qualify, making them clearly subject to the threat of CSDR penalties.
A delegate at the ISLA Operations Conference asked whether it was a lack of return on investment that has kept market participants from investing in this area more. The response that was not given, but seems obvious in hindsight, is that the investment brings settlement security and increased market efficiency, both of which might be hard to measure in cash generated or saved. What is easier to measure, perhaps, is the reduction of risk with regard to the fines that market participants risk for getting it wrong, or by extension, not taking the time between now and go live, in September 2020, getting their data houses in order. Shining that regulatory light into our industry’s back-office processes may not be very welcome, but, in reality, it might just be long overdue.
Big data is an oft-quoted phrase when considering alpha generation, acting as an important component to investment strategies in asset management just as it is for many new apps and services which trade your personal data as a currency. But there is a much less exciting end of this work. An aspect of the business that has often lacked the investment it perhaps deserved. Looking back a few years to a previous ISLA Operations conference, hosted by J.P. Morgan in its magnificent City School Hall, investment in operations and the ‘back office’ was described as offering the biggest bang for buck investment potential in our business. Now that effort is becoming a more likely reality. But, how much of this effort is simply because we are being dragged towards it, metaphorically kicking and screaming?
Andy Dyson, CEO of ISLA, remarked at the recent conference that perhaps the regulators were forcing us to shine a light on those parts of the business that we have traditionally been reluctant to focus on. This observation appeared to be met with a grudging acceptance, perhaps even respect that the regulators have a point. SFTR has been analysed extensively in this publication, as well as in many other mediums and articles, and does not need to be repeated here, save for the fact that it will demand a greater level of attention to data accuracy than the securities finance and collateral industry has ever required.
Reporting activity to a trade repository, and thereafter to a regulator, is largely new ground for securities finance, and it will force an examination of data management as well as trading and booking procedures. This is no bad thing, in reality. Running a tighter ship will undoubtedly be more expensive in the short term, but settlement efficiency and data accuracy can only improve the industry effectiveness and returns in the long run. It is not difficult to see exactly how when you look at some basic statistics.
SFTR has up to 153 fields requiring completion, subject to the trade and collateral types engaged, with over 80 of those fields being subject to matching processes and analysis when the regime is fully live. Now take an estimate of your daily lifecycle events. For reference, here at FIS Global, we have medium to large borrower clients easily producing more than a million lifecycle events per day. For every single field that is unmatched in 1 percent of those life cycle events, that borrower is looking at around 10,000 breaks per day. Looking at the recent CSDR survey published by ISLA, 10 to 20 percent of securities lending transactions fail, with most of those being return legs. Multiplying that out, using the more conservative 10 percent fail rate, that becomes 100,000 breaks per day, per unmatched field. And just to emphasis the issue, there are over 80 fields that require matching.
Another client suggested that one full-time operations analyst can be expected to manage 200 breaks per day. When you consider that means 500 staff are needed to sort the 100,000 breaks, it becomes transparent that the issue needs to be solved at source.
The ISLA survey identified incorrect settlement instructions to be a key issue with regard to transactions failing to settle. As previously stated, this affects returns disproportionately compared to new trades, suggesting that it may be the reallocation by agents failing to be communicated to registered by the borrower. In SFTR terms, this relates to identifying the trading counterparty associated with the return leg of your transaction, creating a break across multiple fields.
Regulatory reporting, under SFTR, MIFID II, and others, has received a great deal of attention. No market participant wishes to attract the ire of their regulator, not least when they consider the stinging fines that have been levied on some for reporting errors in the recent past. CSDR, which also requires reporting of failed trades, also has a sharp sting in its tail. Fines for failed settlements will be high, often dwarfing the potential income lending participants can earn from their assets. While there is an exception for securities financing trades with a sub 30-day duration, there remains a good deal of ambiguity around what that actually means? Typically, most “open” dated trades are technically rolled every day, effectively making a string of one-day trades. According to the latest ISLA Securities Lending Market Report, open trades account for 77 percent and trades over 30 days make up 21 percent of trades in the market. However, much longer durations exist, and indeed under capital adequacy legislation, certain trades must be over 30 days in duration to qualify, making them clearly subject to the threat of CSDR penalties.
A delegate at the ISLA Operations Conference asked whether it was a lack of return on investment that has kept market participants from investing in this area more. The response that was not given, but seems obvious in hindsight, is that the investment brings settlement security and increased market efficiency, both of which might be hard to measure in cash generated or saved. What is easier to measure, perhaps, is the reduction of risk with regard to the fines that market participants risk for getting it wrong, or by extension, not taking the time between now and go live, in September 2020, getting their data houses in order. Shining that regulatory light into our industry’s back-office processes may not be very welcome, but, in reality, it might just be long overdue.
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