The ability to interconnect trading platforms and to drive centralisation of trade input data, execution and post-trade management is a must, says Mike Norwood, director, global trading product owner, EquiLend
The long-term vision for securities finance is of a sector equipped with centralised systems which support firms in making, managing, and settling collateral, and the trades which they underpin, efficiently and cost-effectively. Weighty regulation has both aided this vision and, in the short term, slowed the forward march of progress, but the future is closer than firms can imagine.
Monumental change
Outside of securities finance the decade got off to a turbulent start, but within the sector waves were also being made with the introduction of the Securities Financing Transactions Regulation (SFTR) and the impending, much delayed, Central Securities Depositories Regulation (CSDR). Uncleared Margin Rules (UMR) under the European Market Infrastructure Regulation (EMIR), while initially aimed at regulating the derivative space, also placed pressure on the buy-side in securities lending. The requirement to post specific classes of collateral has liquidity, resource and funding implications for firms. The swathe of such regulations aims to unify the sector and foster collaboration and centralisation of resources for greater efficiency.
The vision of dual macro and micro reporting made real by SFTR presents data collection and interpretation challenges for regulators. Staff at impacted firms are acutely aware of the importance of day-to-day reporting and are doubly aware of the largely manual management of new and existing trades which has traditionally come with that. Requirements such as those of back-loading trades to fulfil regulatory back reporting while day-to-day trade activity is ongoing creates a polarising scenario. Fulfilling one requirement pulls necessary focus from the other, contributing to point-of-trade fails and further backlogs in reporting. STP technology works to mitigate inaccuracy and subsequent latency at point of trade, additionally facilitating post-trade management.
UMR adds an additional pressure across securities lending desks not only in the increased volume of margin calls but where High Quality Liquid Assets (HQLA) are required to fulfil margin calls, yet inventory information may be unavailable quickly. In the new regime, under-reporting of collateral has been noted for a number of reasons, not limited to illiquid collateral types, reuse of collateral and long-tail settlement dates impacting delivery of collateral and its reporting. Greater matching at point of trade through readily available technology can offer a real-time resolution.
Wholesale regulation seeks to simplify processes and timelines for efficiency and transparency. For firms, this means getting ahead of change to avoid penalties, latency and the potential for demoralised staff, overwhelmed by the weight of new workload brought by systematic change. The weight of such significant legislation for market participants will in time change behaviours and, for most firms, such benefits can be achieved through simple upgrades to existing software to immediately deliver benefit.
Centralisation and transparency
Centralisation of trade input data, execution and post-trade management offers many benefits and can mitigate compound latency at several stages in the trade lifecycle. In facing down the challenges of creating greater industry transparency, interconnectedness of trading platforms is a must. EquiLend’s proprietary trading tool, NGT, has long offered platform interoperability for clients in seamlessly making, placing, and executing trades, no matter their internal technology capabilities.
Central to the EquiLend vision throughout our 20-year history, products such as EquiLend NGT provide a base from which clients may further enhance their trading capabilities in line with technological advancements newly built into familiar platforms. Recent enhancements to our EquiLend Exposure and Collateral Trading tools further support centralisation and greater control for each market participant.
EquiLend Collateral Trading (CLT) offers a centralised way for funding and financing desks to execute and manage termed trade structures with their counterparties. Each may advertise intent and manage the process of collateral management from negotiation to allocation, centrally. The true benefit of this is realised for firms impacted by UMR, where a centralised view of collateral type and value will benefit a number of business areas. The price discovery screen, True Market View, is a key feature of CLT and uniquely enables clients to access a transparent view of the global basket trading. This facilitates greater price discovery and, when paired with the broad range of basket types available to view, offers a truly transparent view of liquidity, demand, and execution on the platform.
With centralised communication across multiple counterparties also a feature of CLT, parties in a transaction can have a clear view of inventory on both sides of the trade. STP messaging through Shared Trade Tickets now connects NGT trades and each client’s collateral activity. This facilitates centralisation and market transparency, moving each counterpart a step toward faster collateralisation of a pending trade.
Where EquiLend Collateral Trading offers a broad view of bilateral trades, EquiLend Exposure plays a vital role in highlighting intraday exposure risk through a centralised platform. Enabling connectivity to triparty agents and aiding transparency with ongoing trades, real-time reconciliation reduces settlement latency while increasing the accuracy of the transactional data.
With EquiLend Exposure, on-screen visibility of intraday settlement activity offers clients a sure way to ensure accurate, up-to-date collateral requirement calculations. EquiLend Exposure additionally supports the effectiveness of EquiLend Collateral Trading with real-time receipt of collateral allocations from triparty agents, enhancing the ability to prioritise collateral allocation for seamless settlement.
Each of these tools interconnects seamlessly with the other services in the EquiLend ecosystem, each dealing with the market need they address in the most efficient way. True efficiency is not only found in solving the problem but in delivering the solution in the most accessible way.
The future is now
Firms have long had a requirement to simplify trading processes in the pursuit of more efficient trading. They now have a duty to deliver this while additionally generating greater transparency. With trades made every second of the day, preparing for and subsequently adhering to regulation has, and will continue to be, an incredible task for the securities finance industry.
Gaining ground on the granularity of trade data and capitalising on efficiencies through greater centralisation from execution to post trade must be the focus. While regulation has most recently driven these efficiencies, it is now time for firms to enjoy the benefits of the technology. Further adoption of this technology will be the true driver for change.
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