The buy side are doing it for themselves
28 May 2019
David Lewis of FIS explains that automation is not just the key to facilitating changes, it is also the product
Image: Shutterstock
At a recent industry panel, hosted by Securities Lending Times at their second annual Securities Finance Technology Symposium, we discussed the proposition that “data was the fuel of automation”. It was a discussion rather than a debate looking to reconcile opposing views, as few would argue that automation cannot exist as a concept without the fuel of data to keep it running. However, the conversation did morph into examining our thoughts on what the original question perhaps should have been. Instead of asking what the fuel for automation might be, we should have asked what sparks it in the first place?
Two broad themes emerged as drivers for automation, splitting drivers between discretionary and non-discretionary. The latter focused mainly on the regulatory imperatives facing the securities finance industry at present, forcing market participants to ensure compliance with new rules, or shut up shop. Being compliant is not always just about reporting, of course; it may extend to significant projects of process reengineering, including redesigning everything from trade booking systems to settlement procedures and trade confirmation messages. In a market where investment is always tight, there has to be a strong underlying theme of automation simply to ensure that these changes can be made efficiently and economically.
When it comes to discretionary drivers, however, the regulatory shackles of compliance come off, and any process or practice becomes fair game for automation. Further than that though, and arguably more transformational for an organisation, is using automation and new technological capability not to automate the pressing of a button, but to remove the need to press that button in the first place. With this kind of new capability, many organisations are looking at improving their internal processes and capabilities as effective ways to boost their returns.
Combining these two drivers of automation and innovation gives an extra boost to the potential results, and some buy-side firms are taking that step. Securities lending has been a valuable money maker for many firms over recent decades, but as the market around it has adapted, it has become a vital component of a wider securities finance and collateral management system—driven into existence by both the need to improve efficiency as well as meet increasingly complex regulatory demands. Large buy-side firms are meeting increased competition in their own industry, forcing a rush to the bottom for management fees which is, in turn, driving them to streamline their offerings and operations. One way to do this and raise fund income is to bring certain disciplines in-house, such as securities lending. Fidelity Investment Management, the mutual fund giant locked in fee price wars with its peers, has recently brought securities lending in-house, taking it from their agent lenders.
With zero management fee funds on the market, asset managers need to look to other activities to cover their costs, and securities lending income is an obvious vehicle to fill the income gap. Bringing that in-house gives the asset manager direct control over their lending activity while giving them access to 100 percent of the income raised. Much has been written over the years about the appropriate level of any fee retention by any asset manager, and it has become a hot topic again recently. But if that asset manager is undertaking the lending activity themselves, it may well be more easily justified in retaining a reasonable proportion of those fees to cover its costs and replace its lost management fees. Firms such as Fidelity Investments may not have considered this an option even a few years ago had the system capabilities been available, technically and economically speaking, to make it viable for them.
However, lending your own securities is just one part of the jigsaw. Others are going even further and reflecting the sea changes seen elsewhere across the securities finance and collateral industry. By combining the management of their own lendable assets with their need for funding other market activities, the demands being made for intraday liquidity or collateral required to meet margin calls on uncleared derivatives, large buy-side firms are taking control of their own end-to-end enterprise collateral management and financing businesses.
Such bold moves can only be undertaken with significant investment in the necessary technology, systems and expertise, but are increasingly seen by large sophisticated firms as a viable alternative to outsourcing those requirements to intermediaries and service providers. Disintermediation of the financing market is being combined with the need to meet organisations’ growing internal demands for collateral management and regulatory compliance, with the benefit of reducing costs and protecting net earnings. These changes cannot happen without the significant advances that are being seen in the provision and management of data, be that intraday lending fees, asset prices or credit ratings of issuers and counterparties. Interoperability and connectivity must play their parts as well. Enterprise collateral management can only occur if the enterprise is engaged; all the assets and liabilities must be managed across the business, in real time, in order to achieve the potential, these changes promise.
Automation is, therefore, not just the key to facilitating such changes, it is also the product. The spark that ignites the process is the need to meet ever-increasing demands for intraday data to satisfy intraday needs. These complex demands might include calculating and recalculating positions and exposures throughout the trading day, ensuring all liabilities are covered, assets are utilised in the most efficient way and net returns are maximised, and they will continue to rise, irrespective of how low the fees that the end user is being charged go.
Two broad themes emerged as drivers for automation, splitting drivers between discretionary and non-discretionary. The latter focused mainly on the regulatory imperatives facing the securities finance industry at present, forcing market participants to ensure compliance with new rules, or shut up shop. Being compliant is not always just about reporting, of course; it may extend to significant projects of process reengineering, including redesigning everything from trade booking systems to settlement procedures and trade confirmation messages. In a market where investment is always tight, there has to be a strong underlying theme of automation simply to ensure that these changes can be made efficiently and economically.
When it comes to discretionary drivers, however, the regulatory shackles of compliance come off, and any process or practice becomes fair game for automation. Further than that though, and arguably more transformational for an organisation, is using automation and new technological capability not to automate the pressing of a button, but to remove the need to press that button in the first place. With this kind of new capability, many organisations are looking at improving their internal processes and capabilities as effective ways to boost their returns.
Combining these two drivers of automation and innovation gives an extra boost to the potential results, and some buy-side firms are taking that step. Securities lending has been a valuable money maker for many firms over recent decades, but as the market around it has adapted, it has become a vital component of a wider securities finance and collateral management system—driven into existence by both the need to improve efficiency as well as meet increasingly complex regulatory demands. Large buy-side firms are meeting increased competition in their own industry, forcing a rush to the bottom for management fees which is, in turn, driving them to streamline their offerings and operations. One way to do this and raise fund income is to bring certain disciplines in-house, such as securities lending. Fidelity Investment Management, the mutual fund giant locked in fee price wars with its peers, has recently brought securities lending in-house, taking it from their agent lenders.
With zero management fee funds on the market, asset managers need to look to other activities to cover their costs, and securities lending income is an obvious vehicle to fill the income gap. Bringing that in-house gives the asset manager direct control over their lending activity while giving them access to 100 percent of the income raised. Much has been written over the years about the appropriate level of any fee retention by any asset manager, and it has become a hot topic again recently. But if that asset manager is undertaking the lending activity themselves, it may well be more easily justified in retaining a reasonable proportion of those fees to cover its costs and replace its lost management fees. Firms such as Fidelity Investments may not have considered this an option even a few years ago had the system capabilities been available, technically and economically speaking, to make it viable for them.
However, lending your own securities is just one part of the jigsaw. Others are going even further and reflecting the sea changes seen elsewhere across the securities finance and collateral industry. By combining the management of their own lendable assets with their need for funding other market activities, the demands being made for intraday liquidity or collateral required to meet margin calls on uncleared derivatives, large buy-side firms are taking control of their own end-to-end enterprise collateral management and financing businesses.
Such bold moves can only be undertaken with significant investment in the necessary technology, systems and expertise, but are increasingly seen by large sophisticated firms as a viable alternative to outsourcing those requirements to intermediaries and service providers. Disintermediation of the financing market is being combined with the need to meet organisations’ growing internal demands for collateral management and regulatory compliance, with the benefit of reducing costs and protecting net earnings. These changes cannot happen without the significant advances that are being seen in the provision and management of data, be that intraday lending fees, asset prices or credit ratings of issuers and counterparties. Interoperability and connectivity must play their parts as well. Enterprise collateral management can only occur if the enterprise is engaged; all the assets and liabilities must be managed across the business, in real time, in order to achieve the potential, these changes promise.
Automation is, therefore, not just the key to facilitating such changes, it is also the product. The spark that ignites the process is the need to meet ever-increasing demands for intraday data to satisfy intraday needs. These complex demands might include calculating and recalculating positions and exposures throughout the trading day, ensuring all liabilities are covered, assets are utilised in the most efficient way and net returns are maximised, and they will continue to rise, irrespective of how low the fees that the end user is being charged go.
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