BUILDING PIPES HQLAX is now backed by some of the biggest names on Wall Street. COO Nick Short explains why connectivity is the key to its success ...
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The primary source of global securities finance news and analysis Issue 269 19 January 2021
BUILDING PIPES
HQLAX is now backed by some of the biggest names on Wall Street.
COO Nick Short explains why connectivity is the key to its success
Automating Swaps Work Flow
© 2020 EquiLend Holdings LLC.
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Lead Story
3
ISLA lays out 2021 road map, prices may vary
The International Securities Lending to outline its aspirations for the year ahead and ISLA’s 15 buy-side members were charged
Association (ISLA) has laid out an ambitious explain how the increasing demands on its £750 for an annual membership in 2020. For
action plan for 2021 including a focus resources had coincided with the loss of revenue 2021 fees are £1,500. Comparatively, tier-one
on developing environmental, social and from its primary European industry event. members were charged £20,000 for the year.
governance (ESG) best practices, the further
development of the common domain model As a result, the association told members, it When asked about the increase, ISLA told
(CDM) and the digital clause library for the was necessary to increase its membership SFT that, as of this year, new beneficial
global master securities lending agreement fees across the board “in order to support the owners joining the association will benefit
(GMSLA), among several other projects. day-to-day running of the association”. from a 50 per cent discount for their first
year of membership, meaning they will be
However, the membership fee hike for 2021 to The not-for-profit association uses a tiered charged £750.
fund these initiatives has raised concerns that approach to fees for its 176-strong member
smaller market participants, including buy-side base that places the majority of the financial The new first-year discount is understood to
members that are most in need of support, burden on the larger agent lenders, broker be available indefinitely, subject to review by
may be excluded. dealers and principal borrowers. This scales the subcommittee.
down to the lowest rung which is reserved for
ISLA contacted members in November 2020 buy-side members. continued on page 6
www.securitiesfinancetimes.com
Inside this issue
Latest News
10 Denmark charges two UK traders
for $1.5bn tax fraud
Treasury Functions
Actionable analytics for margin
18 2020 brought the risk of margin volatility into sharp relief.
State Street reviews how to mitigate future upheaval
Change Ahead Lead Feature
A new era in collateral Building pipes
Collateral management has been on a decade-long HQLAX is now backed by some of the biggest names on Wall Street.
20 journey that is nearly over with UMR. AcadiaSoft
explores what happened and what’s next 14 COO Nick Short lays out why connectivity is the key to success and
what’s next for the DLT platform provider
Publisher: Justin Lawson
Lowering Costs Justinlawson@securitiesfinancetimes.com
Trading and technology +44 (0) 208 075 0929
The RMA’s Fran Garritt interviews Charles Schwab’s Eric
Editor: Drew Nicol
24 Lytle and OCC’s Matt Wolfe about how institutions can
ease the adoption of new platforms
Drewnicol@securitiesfinancetimes.com
+44 (0) 208 075 0928
Reporter: Natalie Turner
Guest Feature Natalieturner@securitiesfinancetimes.com
+44 (0) 208 075 0926
Red flags for SBL and ESG?
Roy Zimmerhansl reviews why DWS pulled an ESG ETF’s Reporter: Maddie Saghir
28 securities lending programmes in December and examines Maddiesaghir@blackknightmedialtd.com
+44 (0) 208 075 0925
whether there are lessons to be learned
Office manager: Chelsea Bowles
+44 (0) 208 075 0930
Data Analysis
December securities finance revenue Marketing director: Steven Lafferty
IHS Markit’s Sam Pierson crunches the numbers for the design@securitiesfinancetimes.com
32 final act of 2020 and explores whether securities lending
markets can maintain the positivity seen in December
Published by Black Knight Media Ltd
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1
Global Investor ISF Survey 2020 – Securities Finance Agency Lending named Most Innovative Lender
News Round-Up
6
ISLA lays out 2021 road that ISLA’s agenda is driven by members, while lending programme more appealing to smaller
map, prices may vary the fees are decided by a subcommittee of the pension funds and asset managers than would
continued from page 3 board, which includes members from banks, previously be viable, it is important not to risk
broker-dealers and beneficial owners from a putting off those newcomers with even modest
Membership costs for vendors and law firms, diverse geographical area. barriers to entry, a source who did not wish to
typically categorised as associate members, be named tells SFT.
are also understood to have increased by However, market observers warn that a
several thousand pounds each. persistent lack of buy-side voices in working Meanwhile, Dyson says: “I would encourage
groups, roundtable discussions and on any buy-side member thinking of joining us to
Additionally, fees for access to ISLA’s legal panels throughout the industry will lead to a do it for a year and let us prove our value”,
opinions, which were updated last year, situation where the needs of beneficial owners adding that as a member, firms have a chance
increased to £20,000 for tier-one members are interpreted by agents and vendors and to proactively shape the industry through its
and £15,000 for members and associates. then dictated back to their clients without a working groups in key growth areas.
meaningful dialogue.
Previously, membership fees only increased He affirms that the value proposition for buy-
by a few hundred pounds at a time, which last As new, global trends such as ESG continue to side members is still significant even with the
occurred in 2018. develop, market participants are emphasising increase, especially this year given that a large
the need for trade bodies and other entities amount of the work planned, such as around
Responding to industry concerns around the to foster a broad-church approach when ESG, will directly benefit beneficial owners
higher-than-normal fee increase, ISLA CEO developing universally viable solutions. more than any other market constituent.
Andrew Dyson notes that the scale of the challenge
posed by the digital agenda and CDM projects are The securities lending industry has always According to Dyson, the increase also
more far-reaching than in previous years and the struggled with gaining active engagement from reflects the fact that ISLA was unable to draw
payoff will be slower but more meaningful. He adds beneficial owners who often see their lending revenues from its flagship industry event in
that the eventual cost savings from the improved programmes as second-order activities that 2020. He has also not budgeted to receive
market efficiency that the modernisation initiatives may only be reviewed closely a few times a earnings from a physical event this year
will bring could more than offset ISLA’s fees. year when analysing their agent’s performance either, given the ongoing challenges of the
against the market average. COVID-19 pandemic.
Dyson acknowledges that the annual fee increase
is more than that seen in previous years but says As modern technology makes opening a Dyson emphasises that revenues from events
QPA_CurvatureSecurities.indd 1 14/04/2020 09:25:02
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News Round-Up
8
are not integral to ISLA’s financial stability and reporting issues from earlier phases. Huete adds that the UK’s divergence from
all profits are reinvested into the association. the EU’s SFTR means the main focus for this
According to Susana Huete, a final phase will be to get the correct reporting
As well as new initiatives, Dyson explains senior consultant at Margin Reform, depending on jurisdiction, as there will be no
that on-going issues such as monitoring the these include data quality, reporting inter TR reconciliation between UK and EU.
Securities Financing Transactions Regulation, delegation, collateral bulk rejection
along with other incoming EU regulations and from trade repositories (TR) and This means that some firms will need to
the new post-Brexit market environment, will pairing challenges. report to both an EU and UK TR.
all require resources to effectively navigate
and add value to members.
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UK NFCs are no longer required to report
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October 2020.
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News Round-Up
10
IHS Markit to acquire Deutsche Bank conducts first Denmark charges two UK
Cappitech stock loan via QFII scheme traders for $1.5bn tax fraud
IHS Markit has acquired compliance technology Deutsche Bank has facilitated a margin The Danish State Prosecutor for Serious
provider Cappitech to expand its suite of trading and securities lending transaction Economic and International Crime has
global, multi-asset class transaction regulatory under China’s expanded Qualified Foreign charged two British nationals with using a
reporting offerings to the financial industry. Institutional Investors (QFII) and RMB Qualified cum-ex tax fraud scheme to pocket more
Foreign Institutional Investors (RQII) schemes. than $1.4 billion in dividend tax refunds due
Cappitech’s cloud-based platform is to the Danish Treasury.
relied on by more than 200 global banks, A QFII licence allows international investors
brokers, asset managers, hedge funds to participate in mainland China’s stock Dividend arbitrage, commonly known as
and corporations. exchanges. As of November 2020, the abilities cum-ex transactions, requires securities to
of licenced investors expanded to include be borrowed over the dividend date and then
In 2019, IHS Markit selected Cappitech’s securities financing and short selling activities. returned in a trade structure requiring three
platform as a key component of its Securities participants that enables a tax refund to be
Financing Transactions Regulation solution, The new rules have also lowered entry claimed by two entities on the same asset.
which is now used by some of the largest requirements and simplified procedures under
financial institutions. the combined quota-free QFII and RQFII. The practice is understood to have been
widespread across Europe over a decade
Of the deal, IHS Markit says: “Capitalising Deutsche Bank China confirmed it ago before laws were tightened but not
on the established relationship and existing supported a qualified foreign investor as its before tax authorities in Germany, Denmark
integration, this latest move will deliver unified China onshore custodian bank on the first and elsewhere were deprived of an
solutions to the market and solidify IHS Markit’s day of trading under the new rules. estimated tens of billions of euro in revenue.
continued commitment to providing industry-
leading regulatory reporting solutions.” According to Deutsche Bank, it offered a full The Danish state prosecutor describes the
suite of custody services including account affair as one of the largest fraud cases in
The details of the financial terms of the deal opening, asset custody, cash transfer the country’s history.
and a timeline for its completion were not and regulatory reporting, and helped in
disclosed. The make-up of the management completing a smooth transaction on the first Of the two men charged, one is a British
structure for the combined entity is also not trading day of margin trading and securities national who is resident in Dubai, and one
currently available. borrowing under the new rule. is a British national still in the UK.
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Securities Finance TimesNews Round-Up
11
The maximum penalty is usually imprisonment They are suspected of fraud of a particularly The investigation against other suspects in
for eight years. But, due to the severity of the aggravated nature in contravention of several other tracks of the dividend reclaim
case, the size of the amount, the length of the section 279, read with section 286(2), of the case continues.
period in which the crimes were committed, Danish Criminal Code, for just shy of $1.5
and the organised nature of the fraud, the billion and attempted fraud of a particularly “In one of the tracks, we have now raised
state prosecutor is seeking to apply a special aggravated nature for $90 million. formal charges against the two British
section of the criminal code under which the nationals for fraud worth more than $1.4
maximum penalty may be increased to 12 Per Fiig, who is acting state prosecutor at billion. In this track, there are still a
years in particularly serious cases. the office of the state prosecutor for Serious number of other suspects. We still need to
Economic and International Crime, believes complete a few interviews and investigative
The state prosecutor believes that – on that this involves a setup of 24 Malaysian measures, and we expect to decide whether
behalf of a number of investors and companies and 224 US pension plans. we will be raising formal charges against
companies – the two men used a “well- the other persons within a few months,”
designed and organised fraud scheme” More than 70 companies incorporated says Fiig.
to submit more than 3,000 applications to in places like the British Virgin Islands,
unlawfully receive dividend tax refunds from Cayman Islands, the United Arab Emirates “In addition, we have several other tracks
the Danish treasury. and the UK participated in the transactions. in which we are investigating a number
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www.securitiesfinancetimes.comNews Round-Up
12
of different networks of people for the The dividend reclaim case involves fraud this end, LSEG inked a preliminary deal
remaining part of the fraud totalling more worth a total of $2 billion. with Euronext in October last year to sell
than $1.9 billion,” he adds. “It will take a the stake.
while longer before our investigations EC approves LSEG
show whether there are grounds for raising acquisition of Refinitiv Although several regulatory hurdles still
formal charges.” stand between Euronext and completing its
European Commission has approved deal, the confirmation by the commission
Due to the size and complexity of the the London Stock Exchange Group’s that LSEG must sell to acquire Refinitiv
reclaim case, the investigation has been (LSEG) proposed acquisition of data significantly improves Euronext’s chances
an international collaboration under the analytics firm Refinitiv, while underscoring of success.
European Union Agency for Criminal mandatory pre-conditions to avoid harming
Justice Cooperation since 2016 including market competition. Euronext already has approval to acquire
Denmark, the UK, Germany and Belgium; the G7 stock exchange from the German
with Denmark heading the team. Chief among these conditions is that Federal Cartel Office, its shareholders, and
LSEG must divest 99 per cent of its stake the Italian Council of Ministers. Despite
Moreover, Europol has been involved, and in the Borsa Italiana group, which includes these hurdles, Euronext predicts the deal will
the US authorities participated as observers. MTS, LSEG’s trading venue for EGBs. To be complete in the first half of the year.
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Securities Finance TimesNews In-Brief
13
More repo news More derivatives news More Regulation news
Eurex Repo reports 2020 CFTC-ESMA sign derivatives EMIR reporting to TR
volume boost clearinghouse MOU KDPW triples
Eurex Repo chalked-up double-digit per- The Commodity Futures Trading Com- KDPW, the Polish central securities depos-
centage growth in 2020 trading volumes mission and the European Securities and itory and trade repository, has reported a
compared to the year before, despite a Markets Authority are building on their spike reports under EMIR.
significant volume drop-off in December. cooperation regarding the exchange of
information with registered US deriva- The increase is driven by the acquisition of
Overall, the Deutsche Boerse-owned mar- tives clearinghouses. new international clients and an increase of
ketplace for secured funding and financing, derivatives turnover in Europe.
saw term-adjusted volumes jump by 10 The regulators recently signed a new
per cent year-on-year in 2020. GC Pooling memorandum of understanding to facilitate EMIR includes obligation to report all
volumes increased significantly at the onset cross-border supervision of US central derivatives and defines the trade repository
of the COVID-19-related turbulence. counterparties licenced under EMIR. operating framework.
Read full article online Read full article online Read full article online
More Industry news More repo news More derivatives news
Euronext reports Q4 cash Tradeweb sees strong OCC achieves record
market trading volume surge December repo trading breaking 2020
Euronext reported that its total number of Tradeweb Markets, a global operator of Options Clearing Corporation’s (OCC) secu-
cash market transactions was 56.6 million electronic marketplaces, has reported rities lending clearing business closed 2020
for December, a 58.3 per cent year-on-year strong growth in its money market trading on a high, marking a 21.2 per cent increase in
(YoY) increase. volumes for December 2020. activity for December compared to the same
period in 2019. The average daily loan value in
December’s total transaction number repre- Repo average daily volume was $304.5 the final month of the year was $100.8 billion.
sented a 24 per cent dropoff from November billion, up 50.4 per cent for December 2020,
2020. Full-year figures reveal the total cash compared to the same period in 2019. The central counterparty activity in new
market transaction value to be €2.5 trillion, Overall, global repo activity continued to loans also increased by 22.8 percent
with an ADV of €9.7 billion, up 20.3 per cent grow, driven in part by the addition of new year-on-year for December, with 126,355
and and 19.3 percent, respectively YoY. dealers and participants on Tradeweb’s transactions last month
global institutional repo platform.
Read full article online Read full article online Read full article online
www.securitiesfinancetimes.comDistributed Ledger
14
Securities Finance TimesDistributed Ledger
15
Building pipes
HQLAX is now backed by some of the biggest names on Wall Street.
Drew Nicol COO Nick Short lays out why connectivity is the key to success and
reports what’s next for the DLT platform provider
HQLAX recently revealed it has secured This is in addition to Clearstream, Euroclear and J.P. Morgan, all
fresh funding from multiple international of which are all already connected to the HQLAᵡ platform as
banks who will also be directly connecting triparty agents.
to the DLT platform in various capacities.
What does this mean for your growth? The adoption of DLT solutions within
securities finance has come a long way
Beyond the substantial financial backing we’ve received from BNY from conversations of theoretical use
Mellon, Goldman Sachs, BNP Paribas Securities Services and cases. Could 2021 be a pivotal year
Citigroup, as well as our existing strategic partner in Deutsche for DLT?
Boerse, the most important thing is it allows us to continue our focus
on collaborating with key industry partners to further enhance the It’s clear that infrastructure providers and market participants are
platform functionality and meet the needs of our clients. taking DLT seriously and this is another example of that.
Beyond the core securities finance market, we also have a long- There are other examples, such as with J.P. Morgan’s intraday
standing relationship with R3 who provide the technology — Corda repo transaction which used an in-house blockchain platform back
Enterprise — for our distributed ledger technology (DLT) platform. in December. It all adds further validation that DLT can provide
efficiency benefits for not only securities finance and collateral
For our newest partners, BNY Mellon will connect as both a triparty management markets but also the wider financial industry.
agent and agent lender, Goldman Sachs as principal, BNP Paribas
Securities Services as a triparty agent, and Citibank as a custodian. HQLAX had a busy 2020 and now you’ve
had a positive start to 2021. How are you
What’s key here is that these big name firms are committing publicly looking to grow from here?
to our platform, which is very important for us. Having BNY Mellon
and BNP Paribas as triparty agents goes a long way to enhancing The platform today supports collateral swaps. Primarily, we enable
the ‘network effect’ of our platform by adding the collateral pools they simultaneous exchange of ownership for baskets of securities
manage. Citibank as a custodian also brings another collateral pool. without settlement movement between custodians or triparty agents.
Moreover, having BNY Mellon also operating as an agent lender will In the near term, meaning this year and next, we are looking to
increase the supply of upgrade transactions on our platform, while connect additional triparty agents and custodians, as well as
Goldman Sachs as a principal should help drive overall volumes. additional clients.
www.securitiesfinancetimes.comDistributed Ledger
16
In terms of products, we are working on specific flows for agency Last year saw demand for high-quality
securities lending and others such as one-sided title transfer. Our collateral and overall trading volumes
aim is to address ‘specific pain points’ for our clients and spike. How did the COVID-19 pandemic
for the broader benefit of the securities lending and collateral affect your business and your clients?
management market.
During the Spring volatility last year we heard from our clients that
The reality is that there are many things we could focus on, so we’re some of the products we’ve laid out in our future roadmap, such
careful about developing the ideas that will provide the most benefit as pledges, would have helped them navigate the period if they
to our clients. For the solutions that reach the top of the priority list, were available.
we run regular client roundtable meetings to help focus everyone on
designing the solution, validating it, and to then get the solution up We’ve been exploring creative ways to use the HQLAᵡ platform to
and running on the HQLAᵡ platform. help clients satisfy pledge requirements. These could be to offset
“During the Spring volatility last year we heard from our
clients that some of the products we’ve laid out in our future
roadmap, such as pledges, would have helped them navigate
the period if they were available”
In terms of technical connectivity, we’ve put considerable effort into counterparty credit exposures to a central counterparty or a bilateral
defining flows in order to plug into existing infrastructure providers, counterparty for over-the-counter derivatives, or to help source
and we’ve continued to streamline our technical connectivity to intraday cash liquidity with a clearing bank or central bank.
clients to facilitate their onboarding to HQLAᵡ.
Roughly the past decade has been dedicated to meeting new
For example, we’ve worked with the Deutsche Boerse Trusted regulatory requirements. Now there is a sense that houses can
Third Party to deliver a solution to make the Securities Financing pause for a breath and look at their core processes and see which
Transactions Regulation reporting of HQLAᵡ collateral swap could be automated or made more efficient. Optimising collateral
transactions as easy as possible for our clients. across multiple uses, in particular, is being driven by the regulations
such as the Uncleared Margin Rules as well as internally.
Another example of innovating on top of our initial product, is that
we’re working with a leading agency securities lender to enable their HQLAX is a European platform, but
bank borrowers and beneficial owners to benefit from exchanging do you have a vision of entering
ownership of collateral and principal legs simultaneously via the other regions?
HQLAᵡ platform.
We see a lot of requests from other regions but we are staying
For borrowers, this will help avoid the capital costs that exist today focused on Europe to begin with. Our aim is to add real value to our
because of intraday credit exposures and operational risk caused by European clients first and foremost but it is a global marketplace and
the collateral and principal legs moving at different times. many of our clients operate globally.
Securities Finance TimesTreasury Functions
18
Actionable analytics and tools to optimise
margin requirements
The events of 2020 brought the risk of margin volatility into sharp relief. Ingvar Sigurjonsson
Managing director, funding and collateral solutions team, State Street Global Markets reviews
what happened and what can be done to mitigate future upheaval
Large margin calls, sparked by the COVID-19 pandemic in the first volatility; margin requirements can increase quickly and substantially,
half of last year, have sent many market participants into a scramble as recently seen. To further complicate matters, increased marks
for cash and collateral. Some were not able to deliver on their to market and stressed risk factors can put pressure on risk limits
obligations, causing counterparties to close out their positions with across counterparties and clearing brokers.
longer-term consequences.
Tools that comprehensively cover your trading portfolio across
Continuous optimisation of margin requirements using pre- and CCPs and clearing brokers can help you make rapid, well-informed
post-trade tools can help buy-side investors start from the best decisions. This can include CCP switches, porting across clearing
position possible in a bout of volatility. These tools can also help brokers, or unwinding trades to reduce margin obligations, thus
you proactively manage the situation as it is happening. Central helping you stay under risk limits with the least possible disruption to
clearing counterparty (CCP) margins, in particular, are sensitive to your portfolio’s return and strategic objectives.
Securities Finance TimesTreasury Functions
19
Increased demands on treasury functions collateral into eligible non-cash collateral through trade upgrades.
Equally important is the ability to deploy excess cash and high-quality
More broadly, recent volatility underscores the need to consider securities in reverse repos or collateral downgrades to enhance
collateral, funding and liquidity holistically. In the traditional model, the a fund’s performance. Reliable access to these markets is best
front office executes a trade that generates a collateral requirement, achieved by securing multiple avenues to trade. Exploring benefits
the back office pledges required collateral, and the treasury function of diverse sources of liquidity whether through traditional financing/
funds it. Without pre-trade tools, the front office will not know whether lending markets or evolving peer to peer marketplaces can benefit
its trades are generating the lowest possible funding cost. Without managers. You want as much of your portfolio to work as possible.
collateral optimisation, the back office will not know if it is selecting A security holding can be put to work by:
the most efficient securities to pledge. And, without insight into the • Pledging the security to satisfy a margin requirement
process and access to tools of its own, the treasury function cannot • Upgrading the security to cash or higher quality, non-cash collateral
manage funding and liquidity as efficiently as possible. • Lending the security out for a fee
Collateral optimisation will routinely suggest the optimal securities from
As clearing has become more prevalent among buy-side market your holdings to meet a margin requirement. The more sophisticated
participants, the need for cash to meet variation margin requirements models will also take funding and transformation costs into account,
has increased demands on funds’ treasury functions. This is and suggest trade upgrades as appropriate. But securities lending is
particularly true for pension funds. Those who used to be able to often left out because it is seen as a separate process from collateral
meet bilateral margin requirements by pledging from their expansive optimisation. This can lead to inefficiencies that negatively affect a
bond portfolios now need to produce cash to fulfill obligations the fund’s performance. A security that the fund holds may have inherent
same day and in the right currency. This challenges treasury demand in the market, or is trading ‘special’, which can produce a
functions to set capital aside in either cash or high-quality bonds that healthy income or cheap funding for the fund if put on loan. If that
can readily be turned into cash to meet margin calls. If not done security is encumbered as collateral, a manager loses an opportunity
right, this can be costly for the firm. Buffers that are too large create to improve the bottom line. A holistic collateral optimisation process
a drag on performance; buffers that are too small can have serious should integrate seamlessly with securities finance analytics and
consequences in times of volatility. incorporate funding costs, transformation costs and lending rates.
Collateral optimisation and securities lending both seek to get the most
It’s in the treasury’s best interest to ensure the front and back out of a portfolio’s holdings: one aims to minimise costs while the other
office have the tools they need to optimise and proactively manage aims to maximise income. They should be considered as two inter-
liquidity. To size and manage buffers appropriately, a treasurer needs connected components in the enhancement of a fund’s net income.
to be able to predict potential outflows and understand what levers to
pull to reduce outflows when needed. Margin forecasting capabilities A holistic approach to collateral, funding
and post-trade optimisation analytics that quantify opportunities to and liquidity
lower margin are both essential components of a treasurer’s liquidity
management toolbox. In the best of times, a fragmented approach to managing collateral,
funding and liquidity will unnecessarily increase a fund’s costs. In
Securities finance and collateral the worst of times, it can lead to acute funding pressures, asset fire
management – two sides of the same coin sales or missed margin calls. While interacting across departments
in a fast-paced environment may seem daunting, timely and accurate
Expensive cash buffers can be reduced further if securities held by data — along with quantitative tools to parse data into actionable
a fund can be put to work to generate needed liquidity. Access to analytics — puts decision-makers in a better position to succeed. The
funding markets is thus another crucial part of liquidity management difference between success and failure in this space has become all
— whether it’s to generate cash through repos or transform ineligible the more apparent in the recent times of market volatility.
www.securitiesfinancetimes.comChange Ahead
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Securities Finance TimesChange Ahead
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A new era in collateral management
Collateral management in the derivatives space has been on a decade long journey that is
nearly at its end with the final two phases on UMR on the horizon. AcadiaSoft’s head of
community development Mark Demo, explores what happened and outlines what’s to come
The next few years will be a game-changer for the non- The shift began more than a decade ago when the G20
cleared derivatives industry as collateral management shifts countries convened in Pittsburgh, Pennsylvania and agreed
towards an automated, risk-based process. The shift has to reform their financial markets in response to the global
been years in the making, the culmination of actions by global credit crisis. In the derivatives space, among other things,
regulators, industry trade associations, market participants they agreed to create a central repository for trade reporting,
and vendors since events were first set in motion in 2009. incentivise central clearing and disincentivise bilateral
Now, firms have access to increasing amounts of data, and derivatives trading.
many are making significant investments in technology,
setting the stage for a rapid shift towards automation after However, when local regulators in many of these G20
years of slow and steady progress. countries proposed new, conflicting rules, industry trade
associations and market participants pushed back. The
Collateral management – Basel Committee on Banking Supervision (BCBS) stepped
a brief history in to create a global rule framework that was to be phased in
www.securitiesfinancetimes.comChange Ahead
22
over a multi-year timeline, which we now know as the Uncleared It also spurs additional questions, such as how a firm aligns cash
Margin Rules (UMR). flows and swap obligations to generate capital savings. Regardless
of the promise of potential capital savings generated by Settle to
As firms began working to implement the rules, AcadiaSoft, then Market (STM), full-on margin and collateral automation frees up
a small start-up, had already been piloting our own electronic the firm to better explore:
margin messaging platform called Margin Manager (formerly • Is my firm moving collateral assets quickly enough for same
MarginSphere) between large broker dealers. The first automated day settlement? If not, how do we get there?
margin call was completed between HSBC and Credit Suisse in • Should digital assets be a part of my firms’ future construct?
2009. As the broker dealer community got a glimpse of what the • Are we full on with the trade booking process and the
future held from a margin call volume perspective, it became clear final collateral requirement of the trade or does noise or
that the existing manual processes had to change. inefficiencies in the process cause change during the initial
settlement of the trade and subsequent collateral movements?
Collateral management today
However, automation doesn’t just free up firms to explore more
Now, with four phases of UMR successfully implemented and options. It also facilitates many new and creative opportunities
the final phases set to come into scope in September 2021 and for analytics and reporting. Deep STP analysis of each step
September 2022, firms have undergone massive changes to their in the workflow process can reveal whether a firm is truly
margin process. maximising the accuracy and timeliness opportunities afforded
by electronic capture. At the same time, electronic capture also
The traditional way that firms carried out their margin process makes possible peer comparisons (on a blind basis) to enable
– calculating exposure, calculating a margin call, sending or each firm to understand how it stacks up to competitors. This
responding to a margin call via email, manually chasing if no new insight capability provides firms with targeted intelligence
response is received, then manually updating call status in to maximise technology investment budgets for maximum
downstream exposure and payment systems – has nearly vanished. competitive impact.
In its place, a much more automated process that seamlessly The shift towards a risk-based platform
combines data and client interaction in an integrated electronic
workflow between counterparties has emerged. The result is a Over the past decade, AcadiaSoft has been nudging collateral
margin process that requires much less time and human interaction management towards a transformation from a day-to-day risk
– a margin process that instantly scales to meet both expected and mitigation process to a more continuous, real-time risk-based
unexpected demand with a much higher degree of accuracy and platform. Until now, the focus has been primarily on preparation,
control. This new automated end-to-end workflow enables firms to but we are on the brink of a data-driven sea change for collateral
focus on the exceptions to the process rather than the standard management and, ultimately, risk management. We believe this
successful use case. shift will only accelerate as firms have access to more data than
ever before and have already made significant investments in
Automation will spur innovation automation. AcadiaSoft will help the industry stay ahead of the
curve by setting the standard for near perfect data that will be
Firms that have automated their collateral management processes widely available over a common operating model.
can now focus on next level optimisation of operations, systems,
approach to risk mitigation and vendor management by combining As we look ahead to 2021 and the coming decade, data
data from multiple systems to make smarter financial decisions. standardisation and centralisation will usher in a new era of
For example, firms can now more closely evaluate how a CSA operational efficiency and effectiveness across the entire trade life
factors into the pricing of a swap or the cost of collateral to carry cycle. Now, more than ever before, access to quality, near perfect
and liquidity across asset classes. data will be paramount.
Securities Finance TimesWe’re not just providing agency securities lending services. We’re generating yield and liquidity for institutional investors. #PositiveImpact For more information, email: asl.global@db.com Investments are subject to investment risk, including market fluctuations, regulatory change, counterparty risk, possible delays in repayment and loss of income and principal invested. This advertisement has been approved and/or communicated by Deutsche Bank AG or by its subsidiaries and/ or affiliates (“DB”) and appears as a matter of record only. Without limitation, this advertisement does not constitute an offer or a recommendation to enter into any transaction. The offer of any services in any jurisdiction by Deutsche Bank AG or by its subsidiaries and/or affiliates will be made in accordance with appropriate local legislation and regulation. Enhanced yield is not guaranteed, and agency securities lending services are not suitable for all investors. Deutsche Bank AG is authorised under German Banking Law (competent authority: European Central Bank) and, in the United Kingdom, by the Prudential Regulation Authority and in the United States by the Federal Reserve Bank. It is subject to supervision by the European Central Bank and by BaFin, Germany’s Federal Financial Supervisory Authority, and is subject to limited regulation in the United Kingdom by the Prudential Regulation Authority and Financial Conduct Authority. Deutsche Bank AG is a joint stock corporation with limited liability incorporated in the Federal Republic of Germany, Local Court of Frankfurt am Main, HRB No. 30 000; Branch Registration in England and Wales BR000005 and Registered Address: Winchester House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank AG, London Branch is a member of the London Stock Exchange. (Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority are available on request or from https://www.db.com/legal-resources under the heading “Corporate and Regulatory Disclosures”). Securities and investment banking activities in the United States are performed by Deutsche Bank Securities Inc., member NYSE, NASD and SIPC, and its broker-dealer affiliates. Lending and other commercial banking activities in the United States are performed by Deutsche Bank AG, and its banking affiliates. Copyright© 2018 Deutsche Bank.
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Trading and technology
Fran Garritt, the RMA’s director of global markets risk and securities lending, interviews Charles
Schwab’s Eric Lytle and OCC’s Matt Wolfe about how institutions can ease the adoption of new
platforms and products and achieve a downward sloping cost curve for the securities lending industry
As head of trading in Charles Schwab’s securities lending adopt had its own unique connection protocol. It is like rebuilding
group, Eric Lytle sees every day how rapid advances in the wheel every time you start the adoption process. This had
data and technology, new vendor entrants, and products are and still has several negative effects on each individual firm
shaping trading and securities finance. As the Options Clearing and the industry: increased development time and cost, and
Corporation’s vice president of securities finance, Matt Wolfe increased complexity for your internal technology teams to
has been involved for many years in the continual improvement monitor and maintain the unique connections. Considering these
and innovation of the world’s largest clearinghouse for equity factors, it creates a mechanical barrier to entry for new vendors,
derivatives and securities lending. limits pathways to market participants and venues (CCPs), and
reduces price discovery options. At the end of the day you have
Can you talk about the history of a lack of operational efficiency and increased operating costs.
how market participants connect to Generally speaking, I would say there has been a lack of industry
various platforms, vendors, and central focus on standardisation.
clearing counterparties (CCPs) within
securities lending? Matt Wolfe: I agree that there has not been an industry focus
on standardisation. I have worked on standardisation efforts with
Eric Lytle: It’s an easy one word answer, ‘bespoke’. I run the market participants and global CCPs for clearing options and
securities lending trading desk now and before that I managed futures. The benefits are clear in those markets. For context, the
the 15c3-3 portfolio. Every vendor and market that I wanted to Options Clearing Corporation (OCC) clears for 16 US options
Securities Finance TimesLowering Costs
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exchanges and approximately 100 clearing members. As a in the marketplace brings out the best in all the participants
result of standardisation, the process to introduce a new options and benefits investors. Increasing the diversity of exchanges
exchange is a relatively small project that the options industry improves overall market robustness, stability, and innovation,
has done about once or twice a year over the last few years. That which will ultimately result in improved operational transparency
has enabled great innovation and a diversity of market models and reduced fixed costs.” In other words, competition will benefit
designed for different strategies to ensure deep liquidity and best all securities lending market stakeholders by driving innovation
execution for investors. We are continually looking for ways to and transparency in the industry and driving down operating
apply that success to the securities lending industry.. costs. That is something we can all get behind.
What are the high-level benefits of What are some common standard
message standardisation? communication protocols that would
work best for securities lending?
Lytle: I try and think about this from every stakeholder’s
perspective and believe the advantages outweigh the Wolfe: There are several messaging protocols that can
disadvantages. Let’s look at this from the perspective of the market be considered, but three stand out from the rest: FIX, ISO,
participants (the lenders and borrowers) and the vendors (pre-trade and CDM.
data vendors, trade execution platforms, and post-trade platforms
and CCPs) and then extend that view out to their constituents FIX was developed about 30 years ago to support electronic
(beneficial owners, hedge funds and regulators). Standardised trading. The first asset class to adopt FIX was the equities market
messaging will allow market participants to develop the necessary and it has since seen wide-scale adoption in the exchange-traded
messages (on loan balances, availability, trading, and post-trade) derivatives markets. It is the de-facto standard to connecting to
once and then utilise those same messages multiple times with exchanges and CCPs around the world. FIX is a community
multiple vendors. This will make the implementation process much led standard and continues to evolve according to the needs
quicker and thus less expensive. If this is true then the barrier to of the financial markets. FIX has a flexible tag = value format
entry for new vendors is lower, making for a true win-win scenario (e.g., Qty=”100”) that is easy to understand and flexible to use.
for the market participant and the vendor. There is a robust set of supporting tools for validating, parsing,
viewing, and creating FIX messages. The broad adoption for
My argument goes one step further regarding the benefits to the trading equities and the fact that most securities lending market
industry if we are able to lower the barrier to entry for vendors. participants already use FIX makes it an obvious choice.
It is founded on a theory that competition in the industry is
good for all stakeholders. Since I can’t say it any better, I will ISO is another widely used messaging standard that could be a
steal a quote from the new members exchange: “Competition good fit for securities lending. ISO is used primarily within the
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custody, payments, and settlement space — another area closely-related In the pre-trade analytics space, we have all become familiar with the big
to securities lending. ISO messaging standards are registered with and three data providers (Markit-DataExplorer, Astec Analytics-Lending Pit,
supported by SWIFT, the global payments network. ISO messages are more and DataLend), but we want more. We want option implied borrow rates
structured than FIX messages, with greater specificity on the format of data and swap rates side-by-side in an easy-to-compare fashion, exchange
elements that are required in different messages. Most securities lending data on short interest, expiry lockup dates, dividend dates, balance and
participants already use ISO for communicating with depositories and availability day-over-day changes, utilisation, etc.
banks, so ISO is another good standard that the industry could rally around.
In the trade execution space, as I mentioned the industry has become
A third protocol is a relatively new standard called the common familiar with trade automation via NGT, but we want more. We want
domain model (CDM). FIX and ISO have defined record layouts for competition in the execution space and we want to see the analytics
expressing different events, such as a trade. Those record layouts on the same screen we use for executions, cost differences based on
include mandatory, optional, and conditionally required data elements; collateral types and mark parameters, two-sided market with depth of
the meaning of those elements; and the format of those elements (e.g., market in real-time, and real industry-wide locates that decrement as
text, currency code, integer, etc.). The FIX and ISO standards also have new shorts are executed.
suggested workflows for how interactions should occur — for example,
what message the recipient of a request for quote message should In the post-trade space, we have overnight batch processing on main
respond with. CDM does all these things and goes one step further: It frames but we want more. We want real-time comparison, perhaps
includes embedded logic and code for performing certain actions. This utilising distributed ledger and competition in the space that arguably is
allows both parties to a transaction to perform the same calculations, the last area within securities lending to adopt new technologies to drive
which helps reduce discrepancies. CDM is supported by the International efficiency higher and costs lower.
Swaps and Derivatives Association, and has been adopted by much of
the derivatives markets. CDM has not yet been extended to support Generally speaking, the industry is ready to do the work necessary
securities lending, but it certainly could be. to make efficiency a priority, with the intended goal of improving our
trade decisions and driving our cost structure lower.
Why is now the time to talk about message
standardisation? What are the next steps towards the message
standardisation for the SL industry and how
Lytle: This has been such a tumultuous and volatile year for all of is it going?
us, I can’t help but think about how we further risk-proof and grow our
industry and grow our respective businesses, all while working from Wolfe: We worked with the FIX trading community to form a stock loan
home. My brain tells me, don’t fight the tape, the market will not slow working group to expand the FIX standard to better support securities
down for you nor accommodate the status quo. The Securities Financing lending. With the support of the RMA FinTech and Automation Committee,
Transactions Regulation is here, DTCC and the OCC are developing we have been collaborating with market participants, vendors, and other
their CCP offerings for the securities lending industry, and there are a CCPs to define a set of messages for communicating loans; contracts
multitude of really interesting new vendors looking to compete in the with marks; and other life cycle events such as rerates, recalls, returns,
US market. It really feels to me that the industry is ready for the next buy-ins, and corporate actions. These messages will work nicely with
big step forward. the already established reference data and other messages in the FIX
standard. FIX is community-led and anyone is welcome to contribute.
In my opinion, EquiLend’s Next Generation Trading (NGT), a multi-asset Collaboration by the entire industry helps ensure that the messages
class trading platform accessed through a web-based user interface or support all our use cases and are developed using the collective wisdom
via full automation using EquiLend’s proprietary messaging protocol, of the industry. Having an industry-backed and developed standard will
opened the industry’s eyes as to what could be accomplished with trade help ensure wide-scale adoption and help to realise the benefits of lower
automation. So then the industry’s question becomes, what is next and costs, greater automation, innovation, improved efficiency, and higher
who is next? quality data.
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