All about the data
07 March 2017
The securities lending industry stands on the cusp of a new, data-driven era. Participants need to be ready, according to David Lewis of FIS Astec Analytics
Image: Shutterstock
Articles and discussions about ‘big data’ abound across the financial industry as much as, if not more than, they do in other commercial or industrial sectors.
The securities finance and collateral industry has been fundamentally changed by both the demand for, and consumption of, what could be referred to as big data—both of course being the very reasons behind the existence of Astec Analytics.
Our industry is now standing ready to receive the final Securities Financing Transactions Regulation (SFTR) technical standards from the European Securities and Markets Authority (ESMA), which will underpin one of the biggest undertakings our industry has made in many years. The industry has faced seismic change before of course, with more than one financial crisis occurring during my more than 23-year tenure in the business, but market shocks are very different from the fundamental changes being brought about by regulatory changes.
The implementation of the Financial Stability Board’s (FSB) transparency directive by regional and national competent authorities is being led by ESMA, but others are already on the path to delivering their own requirements. Under the ESMA rules, any party to a securities financing or, very importantly, “an economically equivalent trade”, must report it to a registered and approved trade repository within a given timeframe.
It is expected that late, under- and over-reporting could be met with fines from ESMA. Those repositories are then responsible for providing the data to ESMA, which, in turn, will provide aggregated data to the FSB in order to help build global images of the financing markets and their place in, what appears in many ways a negatively charged label, the so-called ‘shadow banking’ sector.
FIS has been involved in the process behind the development of these rules, almost from day one, through involvement with the FSB data experts group. Over the years, it has taken to reach this point, the development track has demonstrated a maturing of the underlying requirements of the FSB.
In early meetings, the FSB was keen to understand the trials and challenges of mass data collection experienced by companies such as FIS Astec Analytics and how they might be overcome. Such data requirements were, at that time, simply defined as the data that would be needed to fulfil the desire for transparency, without a clear understanding of what the real, underlying question actually was.
Transparency is not an end in itself, and this is something the FSB appears to have realised. Jump forward to 2017 and the picture regarding the requirements and aims of gathering such data are much clearer, although there are, of course, areas where market participants and regulators remain some distance apart as to the best way to answer those requirements. However, in a very well-attended market-wide meeting (organised by the International Securities Lending Association on 8 February) a well-known member of the market made an accurate, if blunt, observation that the “time for moaning is over” and the time for getting on with it is here.
It is certainly fair to say that the implementation of SFTR has finally reached the top of the regulatory, compliance and technical agendas of most market participants, including all those we speak to here at FIS Securities Finance.
As every eligible European counterparty to a securities finance transaction is required to report on a double-sided basis, the ESMA net is being cast wide over the market, encompassing beneficial owners, borrowers, brokers and end-users. Many entities may well take up the opportunity to delegate their reporting requirements, the most obvious example being beneficial owners, which are likely to rely on their agent lenders to report on their behalf, but it is not certain that those conversations will always be easy ones.
The additive effect of a number of pieces of legislation affecting the securities finance and collateral industry has added costs and friction to the market, such as the rising capital costs of indemnities extended by agent lenders. Each incremental effect puts downward pressure on the profitability of the financing function for certain clients, and as particular straws bend and break certain camel’s backs, that beneficial owner drops out of the market, and not always voluntarily.
The logical defence is, typically of this age, technological efficiency. This is certainly something we are prioritising here at FIS, working with our clients and prospects to develop a straight through SFTR solution, bypassing the delays and costs that will be associated with inserting third parties into the reporting chain.
There are two sides to a profitability equation, of course, with the need to raise revenues every bit as important as managing the costs of doing business.
FIS Astec Analytics data shows that the market is continuing to pivot away from the reliance on lower-margin, higher-volume businesses and concentrating on more profitable opportunities. Capital requirements have certainly constrained some lenders who have actively moved into more ‘special’ equity lending opportunities and the increasing rates being earned in some segments of the fixed income markets.
Cost is not the only issue of concern of course. It has been mentioned by some participants currently outside the reach of ESMA that they are considering ceasing to lend to European entities that would be reportable under SFTR. Such business would instead be moved to non-reporting borrowers (ie, those in other jurisdictions) although, as the FSB’s global transparency requirements roll out, this may provide only a short-lived extension of the anonymity they currently enjoy.
If current estimated timetables are correct, by the last quarter of 2018, the requirements of SFTR will become real for banks and investment firms, with more organisation types drawn in over the next three quarters.
Between now and then there is a great deal of work to do. ISLA is working hard to set an industry agenda, aimed at steering the business through the trials of implementing the requirements of ESMA’s regulations, to the benefit of all the market’s participants.
FIS is working closely with ISLA and others to help ensure that our market finds the most cost efficient, accurate, effective and friction-free way to not only comply with the regulators needs for big data, but to bring competitive advantages from doing it efficiently.
The securities finance and collateral industry is facing a new trial that will help shape the way it does business in the future, but there is sufficient capability within the market to turn the pressure to change into opportunities rather than threats.
The securities finance and collateral industry has been fundamentally changed by both the demand for, and consumption of, what could be referred to as big data—both of course being the very reasons behind the existence of Astec Analytics.
Our industry is now standing ready to receive the final Securities Financing Transactions Regulation (SFTR) technical standards from the European Securities and Markets Authority (ESMA), which will underpin one of the biggest undertakings our industry has made in many years. The industry has faced seismic change before of course, with more than one financial crisis occurring during my more than 23-year tenure in the business, but market shocks are very different from the fundamental changes being brought about by regulatory changes.
The implementation of the Financial Stability Board’s (FSB) transparency directive by regional and national competent authorities is being led by ESMA, but others are already on the path to delivering their own requirements. Under the ESMA rules, any party to a securities financing or, very importantly, “an economically equivalent trade”, must report it to a registered and approved trade repository within a given timeframe.
It is expected that late, under- and over-reporting could be met with fines from ESMA. Those repositories are then responsible for providing the data to ESMA, which, in turn, will provide aggregated data to the FSB in order to help build global images of the financing markets and their place in, what appears in many ways a negatively charged label, the so-called ‘shadow banking’ sector.
FIS has been involved in the process behind the development of these rules, almost from day one, through involvement with the FSB data experts group. Over the years, it has taken to reach this point, the development track has demonstrated a maturing of the underlying requirements of the FSB.
In early meetings, the FSB was keen to understand the trials and challenges of mass data collection experienced by companies such as FIS Astec Analytics and how they might be overcome. Such data requirements were, at that time, simply defined as the data that would be needed to fulfil the desire for transparency, without a clear understanding of what the real, underlying question actually was.
Transparency is not an end in itself, and this is something the FSB appears to have realised. Jump forward to 2017 and the picture regarding the requirements and aims of gathering such data are much clearer, although there are, of course, areas where market participants and regulators remain some distance apart as to the best way to answer those requirements. However, in a very well-attended market-wide meeting (organised by the International Securities Lending Association on 8 February) a well-known member of the market made an accurate, if blunt, observation that the “time for moaning is over” and the time for getting on with it is here.
It is certainly fair to say that the implementation of SFTR has finally reached the top of the regulatory, compliance and technical agendas of most market participants, including all those we speak to here at FIS Securities Finance.
As every eligible European counterparty to a securities finance transaction is required to report on a double-sided basis, the ESMA net is being cast wide over the market, encompassing beneficial owners, borrowers, brokers and end-users. Many entities may well take up the opportunity to delegate their reporting requirements, the most obvious example being beneficial owners, which are likely to rely on their agent lenders to report on their behalf, but it is not certain that those conversations will always be easy ones.
The additive effect of a number of pieces of legislation affecting the securities finance and collateral industry has added costs and friction to the market, such as the rising capital costs of indemnities extended by agent lenders. Each incremental effect puts downward pressure on the profitability of the financing function for certain clients, and as particular straws bend and break certain camel’s backs, that beneficial owner drops out of the market, and not always voluntarily.
The logical defence is, typically of this age, technological efficiency. This is certainly something we are prioritising here at FIS, working with our clients and prospects to develop a straight through SFTR solution, bypassing the delays and costs that will be associated with inserting third parties into the reporting chain.
There are two sides to a profitability equation, of course, with the need to raise revenues every bit as important as managing the costs of doing business.
FIS Astec Analytics data shows that the market is continuing to pivot away from the reliance on lower-margin, higher-volume businesses and concentrating on more profitable opportunities. Capital requirements have certainly constrained some lenders who have actively moved into more ‘special’ equity lending opportunities and the increasing rates being earned in some segments of the fixed income markets.
Cost is not the only issue of concern of course. It has been mentioned by some participants currently outside the reach of ESMA that they are considering ceasing to lend to European entities that would be reportable under SFTR. Such business would instead be moved to non-reporting borrowers (ie, those in other jurisdictions) although, as the FSB’s global transparency requirements roll out, this may provide only a short-lived extension of the anonymity they currently enjoy.
If current estimated timetables are correct, by the last quarter of 2018, the requirements of SFTR will become real for banks and investment firms, with more organisation types drawn in over the next three quarters.
Between now and then there is a great deal of work to do. ISLA is working hard to set an industry agenda, aimed at steering the business through the trials of implementing the requirements of ESMA’s regulations, to the benefit of all the market’s participants.
FIS is working closely with ISLA and others to help ensure that our market finds the most cost efficient, accurate, effective and friction-free way to not only comply with the regulators needs for big data, but to bring competitive advantages from doing it efficiently.
The securities finance and collateral industry is facing a new trial that will help shape the way it does business in the future, but there is sufficient capability within the market to turn the pressure to change into opportunities rather than threats.
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