Catch up on all the biggest talking points from the days six panels
“Nothing moves that quickly” when it comes to regulation, SFT Technology Symposium panellist says
Regulations will tighten if regulators find themselves unable to identify industry issues, agreed panellists at the Securities Finance Technology Symposium 2022.
During the Regulation panel, speakers discussed the current state of regulation in the industry, including the relationships between regulators and the market, what clients are looking for and what might lie ahead.
Jonathan Lee, senior regulatory reporting specialist at Kaizen Reporting, stated that central banks and regulators are “on heightened alert” when it comes to interest exposures, solvency issues, contagion and credit default risk. Predicting that the next financial crisis will be based on an inability to deal with increasing interest rates, Lee suggested that regulators will become more strict when they cannot deal with the aforementioned dangers.
Sam North, director and European head of product for repository and derivatives services at DTCC, noted increased regulator interactions with trade repositories on SFTR and EMIR data. This is due to increased technological capabilities on both sides of the equation, he said, along with improved resources for regulators to be able to understand the data that they are receiving.
Commenting on what clients are looking for in the current market environment, Fabien Romero, head of transaction reporting, managed services at S&P Global Market Intelligence Cappitech, highlighted the demand for data quality — something that is now expected as an indispensable foundation of a provider’s service. This is a direct reaction to ESMA’s April 2022 EMIR and SFTR data quality report, he said, which identified key issues that remain in the regulations.
The focus of 2022 has been inaccurate data, argued Iain Mackay, product owner of RegTech Solutions at EquiLend. Work is being done with industry bodies to ensure that data is up to regulatory demands, he said, but the fact that clients are using different reporting methods means that the data output is often muddled. The speed and success rate of reporting is good, he assured, but there is still a need for improved quality.
Panellists agreed that pricing was a significant concern. Ed Oliver, managing director of product development at eSecLending, reasserted the problems that emerge from market participants using different vendors, all of whom have different prices — this will impact the reconciliation of market value from January 2023 as there is a very low tolerance allowed. “The clients’ journey is ahead of the regulators’ journey” when it comes to how to use data, he said. Clients are already using appropriate oversight, while regulators are lagging behind. However, they are beginning to return data with analysis which should illuminate the problems that clients and vendors have already been noticing.
Lee commented that the fundamentals of the process need to be right — currently, prices are often expressed at the wrong category, with decimal and monetary misused. Additionally, a large proportion of trades are not subject to the reconciliation process and are therefore not regulated, which presents further problems.
Updates to regulations take place ‘incrementally’, said Romero. The current standards are not enough, he posited, adding that the large number of variations on similar regulatory ideas is unhelpful.
Developing this point, Lee explained that the lack of global standardisation means that many investors base themselves where regulations are most beneficial to them. Regulatory arbitrage is ‘inevitable’ with global discrepancies, another panellist argued.
Focusing in on the Central Securities Depositories Regulation (CSDR), Oliver affirmed that it is working as expected, but he questioned the efficacy of penalties. While he highlighted the preparation that the market had undergone in anticipation for CSDR’s rollout, Mackay countered that market participants and infrastructure were not as prepared as they could have been, which has resulted in an ‘unacceptable’ number of fines.
Data is inconsistent and hard to reconcile daily, he said, with costs difficult to manage. Settlement rates are “at best” equal to pre-CSDR levels, “maybe even worse,” he concluded. Despite this, he stated that he was “more optimistic” about the future now that the cause and effect of these low rates were being more thoroughly considered by the market. With vendors having developed solutions to address workflow, the industry has seen more transparent data and automated processes. These have helped to resolve some of the problems highlighted by CSDR, Mackay added.
Addressing the upcoming US move to T+1, North stated that this was a “number one priority” from an enterprise perspective. He anticipated a 2024 implementation, with building taking place in 2023. Technology and operations must be ready for the change, he warned, with Lee predicting bespoke models to be abandoned in favour of market simplification and standardisation.
The panel concluded that regulation still has a way to go, but reminded the audience that change can take a long time, with Lee suggesting that there will be five to ten years before any significant developments in standardisation are seen.
SFTS: UMR Phase 6 is not an ‘endpoint’ as firms are set to onboard late
Phase 6 of the Uncleared Margin Rules (UMR) is expected to continue for a “long period of time” as approximately 900 firms are in the monitoring phase and are not “fully engaged” in UMR.
The statement was made at the Securities Finance Technology Symposium in London, SFT’s second in-person event of 2022.
Moderated by Margin Reform’s founder and chief operating officer Chetan Joshi, the Initial Margin panel highlighted initial margin (IM) optimisation, lessons from UMR Phase 5 and first impressions of UMR Phase 6 since it went live in September.
Panellists included Clive Ansell, head of market infrastructure and technology at the International Swaps and Derivatives Association, Stuart Smith, co-head of business development at Acadia, and David Beatrix, head of over-the-counter (OTC) and collateral services, Securities Services at BNP Paribas.
Global head of collateral at State Street Staffan Ahlner and VERMEG’s head of collateral solutions product strategy Wassel Dammak, completed the panel.
Speaking at the event, Acadia’s Smith said: “Initial margin brought something new to the margin world, there was a risk-based calculation that firms were going to have to do.
“From Phase 1 to Phase 4, there were around 75 firms that Acadia saw reconcile margin on its platform, but Phase 5 and 6 saw another 400 firms. The magnitude of the firms being onboarded changed, as did the nature of those firms.
“The industry went from [having] enormously experienced, very large firms with sophisticated risk departments, to firms that were experiencing their first time engaging in daily risk calculation.”
The phasing approach drove the volume of clients coming into Phase 5 and 6, the panel heard.
“Firms had to perform various calculations to determine whether or not they were in scope of initial margin requirements,” ISDA’s Ansell explained. “When [the industry] reached Phases 5 and 6 — and for Phase 6 in particular — it appears there was a relatively low number of firms that qualified for the IM threshold calculations for posting margin on day one.”
From a liquidity and initial margin optimisation perspective, State Street’s Ahlner examined what he had seen from his clients.
He said that as a large custodian, State Street was working with a lot of new participants coming into this space. “What is interesting, is that the UMR side is forcing a lot of participants into the collateral space for the first time, in a regimented and strict way,” he continued. “Firms are facing a different set of problems on the buy-side.”
According to State Street’s Ahlner: “UMR is not just solving one problem, a firm needs to look at the holistic picture, particularly for the smaller buy-side firms that now have to figure out how to post margin and [they] will have to work out the demand on the asset from a funding, settlement, lending and OTC perspective, in addition to UMR.”
Acadia's Smith concluded that while a huge number of firms have already gone live on reconciling margin, the vast majority of firms are still in their monitoring phase.
“Phase 6 is not an endpoint, it is a stepping stone along the way as we expect to see a lot of those firms reaching thresholds and coming onboard later on in the process,” he added.
SFTS: 2023 could see the return of pre-2008 crisis markets
Collateral scarcity may no longer be a talking point for the industry in 2023 and market participants could begin to see a return to pre-financial crisis markets, said Gareth Jones, CEO of Euroclear GlobalCollateral.
The remarks were made at the 5th Securities Finance Technology Symposium, where Jones indicated that the industry may “be at a point of inflection”.
The Symposium’s Collateral Management panel, hosted by SFT’s Bob Currie, examined how firms manage their cash, collateral and margins, and how this is key to maintaining a competitive advantage.
Panellists included Martin Walker, head of product management, Securities Finance and Collateral Management at Broadridge, and Jerome Petit, EMEA market specialist manager at Adenza.
Solutions architect at HQLAX Martin O’Connell and EMEA head of collateral services at J.P. Morgan Graham Gooden, completed the panel line-up.
Euroclear’s Jones noted that a reduction in settlement efficiency “by a couple of percentage points” was a key change toward the end of 2021, which had declined further during the Russian invasion of Ukraine. Although settlement efficiency has improved, it has not returned to where it was in the first half of 2021, he added.
“The reduction in settlement efficiency is typically associated with volatility and higher trading volumes, but it has been sustained for a while, which is an indication that there is some scarcity of collateral and securities liquidity out there,” Jones explained.
Despite the fact that settlement efficiency is still down, Euroclear’s specialist borrowing programmes — GCA for HQLA and Autoborrow — linked to the firm’s settlement algorithm, are facing high record volumes. This activity fits with the general trend being seen by market participants, the panel heard.
Jones said: “We all know central banks are holding very large volumes of assets as a result of asset purchases and we know that, with interest rates rising, it is almost inevitable that many people are positioned short. If you look to the US, they are ahead of us by six to 12 months in the interest rate cycle.
“About six months ago, the US market was starting to predict the balance between collateral scarcity and cash scarcity would start to reverse in Q3 and Q4 this year, as interest rates rose and the Federal Reserve began to unwind its asset purchases. The trends in the US are beginning to show that this change is now starting to take place.”
Adenza’s Petit noted that with the new market conditions, and with the application of UMR behind the industry, firms are now looking for more automation, more efficient optimisation of the inventory, as well as new solutions to manage this. He added that for Adenza as a vendor, “it creates opportunities.”
Continuing the discussion, Broadridge's Walker indicated that the market conditions reinforced the need to “get the basics right” in terms of good quality data, timely processes and automation.
“[The industry has] seen with the LDI funds that firms are collateralising interest rate derivatives with bonds, with gilts, and firms are going to get risk on that. People need to get the basics right, supported by the vendors to deal with the market conditions, which are going to get a lot more exciting over the next couple of years,” Walker said.
As market participants recognised the importance of automation, HQLAX’s O’Connell noted that from the LDI experience, a number of firms had realised how constrained they were by manual processes.
O’Connell pinpointed that there was a “huge opportunity” here for vendors. He explained: “These opportunities do not come along very often, but when we see the pain points, which were highlighted by that liquidity crisis especially, it is apparent that scalability and automation need to be invested in to ensure that those firms have the capacity to cope with stress volumes.
“After a few years where firms have been concentrating on regulatory investment, the opportunity to re-focus on scalability and automation is now.”
SFTS: Repo market is crucially important and prone to vulnerabilities
“If the repo market does not work, none of it works,” said International Capital Market Association (ICMA) senior director Andy Hill, when discussing repo as a cornerstone of the financial system at Securities Finance Times’ winter Securities Finance Technology Symposium.
Hill made the comment on the Symposium’s Repo Panel which outlined how the industry can make the market more resilient, beyond regulatory intervention.
The discussion was spearheaded by BondCliq’s head of European Expansion Gabriele Frediani, who moderated the timely Repo panel, which took place amid the backdrop of wider industry concerns surrounding the repo market.
The panel consisted of EMEA head of financing solutions business development at State Street Cassandra Jones, EMEA director of sales at GLMX Andy Turvey, and head of business development straight-through processing (STP) at MarketAxess Camille McKelvey.
Providing an overview of the repo landscape, ICMA’s Hill said: “Repo is a bank-intermediated product, repo trades through the balance sheets of banks.
“It is important that banks are able to trade their match books, to take positions onto their balance sheet and provide two-way liquidity in repo across all different bond classes. This is becoming more difficult.”
The panel raised concern over Basel regulation, indicating that this regulation has made it increasingly expensive for the industry to apply balance sheet, particularly for repo, which is a relatively high volume, low return transaction.
According to ICMA’s Hill, the industry has seen banks improve balance sheet management over time and has witnessed a progressive move to central clearing. However, the industry is still having moments of vulnerability.
He added: “We hear concern from money market funds that are being penalised for being long cash for certain times in the year.
“We hear concerns from pension funds that worry about being able to meet margin calls, because they have to ‘repo out’ their holdings to raise cash. The repo market is crucially important and prone to vulnerabilities.”
To aid the repo market in dealing with such vulnerabilities, the panel discussed the push toward incorporating automation.
MarketAxess’ McKelvey explained: “When it comes to the repo market and the adoption of automation, it has been very slow, and we still have a fairly long way to go. However, in the last two to three years, there has been a real shift and a focus on repo automation and repo workflow from front to back.
“We are starting to see more and more buy-side firms coming onto the post-trade repo platform at MarketAxess. These clients have been instrumental in this growth by working with their sell-side counterparts to move to post-trade automation.”
Market participants expressed the need for change in the repo markets. One panellist said that if regulation does not change, it is imperative that the repo market sees a continued innovation to help give clients and banks optionality to be able to “pull different levers to deal with the regulatory reporting times”.
Whether it be incorporating more peer-to-peer structures, or re-evaluating securities lending and the cost of indemnification, change is needed to allow banks and dealers to provide a more efficient way of offering liquidity, the panellist concluded.
DLT is not a solution for every problem, SFT Technology Symposium panellists warn
Distributed ledger technology (DLT) is not a solution for every problem and banks must find valid use cases that work for them, said panellists at this year’s Securities Finance Technology Symposium.
The statements were made during the Digital Assets in Securities Finance panel, which explored the current state of digital assets in the market and considered possible futures for the industry.
Ted Allen, director of business development, securities finance and collateral at FIS, was quick to remind the audience that the phrase ‘digital assets’ does not refer solely to cryptocurrencies — in fact, these do not come under the purview of the securities finance industry. Instead, banks are looking to tokenise existing assets and bonds, improve the efficiency of their current business and eventually issue digitally native assets.
This process will not be a quick one, Allen warned, calling the transition an ‘evolution’ and a ‘gradual migration’ from traditional to new rails, with both forms coexisting for many years before a digital approach is fully adopted.
The coexistence of old and new may prove challenging for many market participants. Richard Glen, solutions architect at HQLAX, highlighted how HQLAX has established an initial ‘one-sided’ version of their agency securities lending solution to help agent lenders to integrate their loan activities with a digital ledger without impacting their borrowers’ collateral management. This step-by-step approach allows for a steadier integration of workflow, enabling the market to gain confidence in new ways of operating before the full benefits of a delivery-versus-delivery mechanism are realised, he said.
A further concern around digital assets may be the questions around ownership, another panellist suggested. If something goes wrong, it is often unclear where the rights to it lie. With each digital asset having a different answer to this, market participants want to be clear on where they stand.
David Shone, director of market infrastructure and technology at the International Securities Lending Association, stated that market demand is high, with the association’s digital steering group asking how the industry should start to adopt digital assets into their day-to-day business. He emphasised the need for standardisation, legal frameworks and regulation, along with education. Market participants need to see digital assets as just another asset class, he said, with the misconception that the technology is the product, rather than the asset itself, making many cautious to engage.
Trust comes from a product or system working, Allen stated. Regulation may not necessarily be the only solution to the lack of confidence in digital assets — people simply need to see that they are a viable and effective opportunity. Glen added that greater ecosystem engagement will help with this issue, proving that digital assets and the systems around them work and gaining industry trust.
He went on to emphasise the importance of an easy transition for clients, who want to be able to use their current infrastructure to see and process digital assets alongside their traditional counterparts. The importance of infrastructure being able to support all market blockchains was also cited as a priority.
Considering central bank digital currencies (CBDCs), the panel raised the issue of a lack of consistency across jurisdictions, particularly in consideration to tax laws, which may be an impediment to adoption.
Securities finance needs standardisation
Securities finance-as-a-service, golden source transaction records and standardisation are areas of particular interest in the securities finance industry as it looks to the future, panellists at this year’s Securities Finance Technology Symposium agreed.
The topics were discussed at a panel entitled ‘Securities Finance: The Future’, in which speakers discussed their companies’ recent innovations and future plans, along with their own hopes for the future of the industry.
Matthew Barnett, head of operations at Sharegain, explained Sharegain’s recent work on securities finance-as-a-service, developing an end-to-end single-stock solution that covers all lifecycle events. He stated that recent capital market growth was due to retail investor engagement, a sector which does not have access to as much capital as larger market participants. Sharegain’s solution offers a more accessible service, with the ethos that accessibility and education are essential for the industry, Barnett said.
His fellow speakers raised concerns about the practicalities of offering securities finance-as-a-service. Kevin McNulty, head of RegTech Solutions Group at EquiLend, questioned whether retail investors were educated enough to make informed decisions, and Matthew Phillips, chief operating officer and head of delivery at Trading Apps, inquired where the line between regulation and consumer protections would be drawn when it came to the retail market.
To these questions, Barnett emphasised Sharegain’s focus on education and its approach to risk management, something that he said would be made possible through recent technological developments and the availability of real-time information.
McNulty went on to explain the need for a golden source transaction record, which distributed ledger technology (DLT) can now allow for. He recounted EquiLend’s investigation into industry pain points that could be solved with DLT, and the company’s conclusion that reconciliation was a key area where cost and effort could be reduced.
After the successful launch of their proof-of-concept solution, which has been volume tested, McNulty stated that the company will work with clients throughout 2023 to provide a market-viable product.
Shane Martin, global head of securities financing sales at Wematch.live, said that the adoption of tokenised assets was at its ‘infancy stage’ and that further developments would only be prompted by an industry event, such as shortened settlement cycles.
This was disputed by Phillips, who suggested that an adoption of a golden source in one area of the industry would allow further adoption in different areas, with an understanding of the infrastructure catalysing expansion.
McNulty reported that EquiLend has seen a high level of buy-in from many firms with banks willing to spend money in this area. He added that the company was ‘quietly confident’ in industry adoption, despite Phillips’ concerns that the shift to DLT requires a change in mindsets, with trust in technology having to take over from trust in counterparties.
Building on the need for this paradigm shift, the panel’s moderator questioned whether legacy technology would fade out or be replaced all at once. Barnett responded that although moving to new technology is ‘inevitable’, it will not happen in a ‘single jump’. Standards need to be put in place before the industry moves to this golden source, he said, but the change is something that should be driven by the industry, rather than by regulatory pressure.
Michael Brown, senior associate at Clifford Chance, added that technology evolution will be iterative. With companies all vying for the same outcome and targeting the same audience, it is inevitable that different versions of ‘golden sources’ will become obsolete, until there is only one remaining.
The importance of standardisation across the industry was an issue also raised by Phillips, who stated that by using the same methods and ensuring the same output format, the common domain model (CDM) will make it easier for counterparties to communicate in a shared ‘language’. CDM will be “the glue that brings the industry together,” he added.
Martin reported that WeMatch.live has seen shortened trade times and regulatory progress in total return swaps, with an industry focus on bringing liquidity to the market. With primes looking for better ways to manage their balance sheets, portfolios and assets, there has been a rise in the number of synthetics coming to market, he said.
Concluding the panel, the speakers shared their wishes for the near and mid-future of the securities finance industry. Barnett hoped to see broader market participation and improved capital markets infrastructure, with McNulty and Brown affirming this sentiment. Martin anticipated better resource allocation and market competition, while Phillips looked forward to the standardisation of risk assessments and contractual negotiations, which he considered significant barriers to market entry.
