Food for Fort
19 February 2019
Panels on key market drivers, regulation, CCPs, technology and more provided IMN鈥檚 conference delegates in Fort Lauderdale with food for thought
Image: Shutterstock
Near the sunny shore of Fort Lauderdale Beach, Florida, IMN hosted their Beneficial Owners鈥� International Securities 麻豆影视传媒 and Collateral Management conference, where an array of topics were discussed, providing delegates with food for thought. Panel sessions included topics on key market drivers, regulation, central counterparties (CCPs), technology, collateral flexibility and optimisation strategies, to name a few.
Kicking off the conference, chairperson, Jeffrey Kidwell, repo and securities lending veteran, said: 鈥淚t has been quite a year [2018] for the securities lending industry. We saw the highest annual revenue for securities lending since the financial crisis in 2008.鈥�
鈥淭his was driven primarily by emerging markets, global credit uncertainty, and central bank tightening. We overcame trade wars and US political systems problems, which obviously haven鈥檛 yet ended. Securities Financing Transaction Regulation (SFTR) also remains a major topic especially in Europe.鈥�
鈥淯ncertainty was the key [theme] for last year鈥�, Kidwell said, and alluding to the conference days ahead, he added: 鈥淲e are going to discuss these themes a lot deeper in panels...I think you鈥檒l find the content has changed dramatically this year.鈥�
Discussing data in more detail, one speaker noted that global revenue came in just shy of $10 billion last year. This was made up from $4.65 billion in the Americas, $3.09 billion in Europe, the Middle East and Africa, and $2.22 billion in the Asia Pacific.
Nancy Allen, global product owner at DataLend, commented: 鈥淲e saw volumes increase pretty much across the board, although the Americas suffered in the second half of the year.鈥�
Highlighting the importance of benchmarking and effective use of data, Tim D鈥檃rcy, senior vice president, FIS Astec Analytics, advised beneficial owners to be active in managing their programmes so that they are quicker to notice market changes.
In terms of beneficial owner collateral acceptance last year, it was noted that 56 percent of US beneficial owners used cash only, 43 percent used mixed collateral and 1 percent used non-cash only collateral. This compares to 1 percent of non-US beneficial owners who used cash only, 42 percent who used mixed collateral and 57 percent used non-cash only. One panellist noted that if you can expand your collateral flexibility to include non-cash collateral then you should.
Melissa Gow, executive director, IHS Markit, explained that US equities loan balance against non-cash collateral rose through 2018, continuing the trend from 2010. Predicting expectations for this year, Gow said that there is an expectation of a continued strong performance due to the legalisation of derivatives online retail availability, and US state legalisation. She added: 鈥淸This year] market expectations see market volatility drive demand, leading to increased fees and revenues.鈥�
In a separate panel on the outlook of securities finance, speakers also made some predictions of what they expect to see for the year ahead. In terms of disruptors, one panellist predicted that regulation will be the biggest disruptor this year, replacing technology and macroeconomics.
The panellist explained: 鈥淩egulation is the biggest disruptor because it feeds the technology. The regulatory environment has really helped people 鈥榮harpen their pencils鈥� on all of the costs associated with transacting in the securities lending space.鈥�
One panellist said they are excited for the future of securities lending. The speaker commented: 鈥淚 think we will see a few new markets open up, for example in Saudi Arabia, and when new markets open up there will be a different type of activity. We are seeing new entries into the market, and this is all very positive for the industry, however, we are seeing securities lending demand remain somewhat stagnant.鈥�
The panel also discussed market volatility and the moderator asked panellists how it has changed securities lending.
One speaker replied: 鈥淗edge funds generally thrive in market volatility and for the first three quarters of 2018 we saw that strength, and we have talked a lot about the record returns that beneficial owners experienced. As we headed into Q4, due to political pressures鈥攆or example, the US and China trade wars and concerns around Brexit鈥攖here was a creation of a lot of unprecedented market volatility and with that came subdued securities lending volumes and fees.鈥�
Another panel at the conference saw speakers provide delegates with an update on CCPs and their role in the securities finance ecosystem. The moderator, Jennifer Whitcomb, managing director, State Street Global Markets, asked panellists what the future holds for clearing in securities financing transactions.
In response, panellist Matt Wolfe, vice president, product development, OCC, commented: 鈥淎t OCC we are investing heavily in creating a next-generation clearing platform for all products that we clear for and that has given us an opportunity to think creatively about what the future looks like. It is forward-looking and data-driven and it is also intuitive to use and aims to look forward into the future of what our clients need.鈥�
In terms of trends, Wolfe said: 鈥淭here is a trend for data focus and data-based decision making. Ensuring that the platform is real-time, fully automated, has robust data, is important but also the user experience is equally important as automation.鈥�
鈥淲e are applying human-centric design principal to make sure that the experience of clearing and using our systems is a pleasure and enables participants to focus on what matters most.鈥�
James Hraska, managing director, DTCC, said: 鈥淲e are trying to build products that are user-friendly, and we are continuing to look at different avenues and we are happy to hear feedback.鈥�
Whitcomb echoed this: 鈥淚 would like to encourage that cycle of feedback and find out what it is that peers are looking for. We have been working collaboratively on these efforts so I would encourage participants to seek feedback and reach out to their service providers. Then you can move forward in a way that is helpful for everyone in the industry.鈥�
Arianne Collette, executive director, Morgan Stanley, added: 鈥淎sk questions about the programmes so that you know what is going on in the marketplace and so that you can provide feedback. It is also important to ask for price points and understand what the pricing looks like.鈥�
Meanwhile, a panel on technology looked at the hype and reality for blockchain, distributed ledger technology (DLT) and other emerging technologies. Talking about blockchain, Christopher Ferris, engineer and CTO of open technology at IBM, observed: 鈥淏lockchain is a team sport, it only works when everybody is willing to participate.鈥�
Armeet Sandhu, CEO, Stonewain Systems, remarked: 鈥淏lockchain and hype around this technology has been around for a while. I see the efficiencies that technology brings in from all of the post-trade services, and the value of that efficiency is one big benefit for the providers. What value are the beneficial owners going to reap if the providers implement blockchain? Transparency could be one, this is a big plus and it allows participants to be better informed by listening to this shared ledger.鈥�
It was noted that blockchain is often referred to as a solution looking for a problem, and so the question was asked: 鈥淚f blockchain is the solution, what鈥檚 the problem in securities finance?鈥�
Some of the problems listed included SFTR, pledge structures and collateral optimisation, and cash collateral pools. Ed Blount, executive director, centre for the Study of Financial Market Evolution, commented: 鈥淪FTR is a big issue facing our industry and we need to assess to which degree that might change agent lender disclosure and how blockchain might be a solution for that.鈥�
Discussing technology more broadly, Ferris cited: 鈥淭echnology is evolving rapidly and as people try out new use cases they are finding out one of two things. They are either finding that they have a nice optimisation but the expense of implementing the solution into the enterprise is going to be greater than the benefit that they might reap from. Second, there are the solutions which are transformative, where essentially a problem is being solved which hadn鈥檛 previously been solved from technologies such as blockchain and DLT.鈥�
On day two of the conference, there was a panel entitled 鈥楶rogressive Approaches to Lending and Cash Management Programmes in Today鈥檚 Market鈥�, which saw panellists delve into the future environment for the securities finance industry. Panellists noted that the industry could be heading to a non-cash environment.
Patrick Morrissey, head of product, strategy, and implementation, securities lending at Vanguard Group, cited: 鈥淭he environment that we are moving into is seeing participants move into the non-cash space.鈥�
The moderator, Peter Bassler of eSecLending, asked panellists: 鈥淓veryone [at the conference] wants to pledge non-cash on the borrower鈥檚 side. The interesting thing for me is that the cash markets are giving you a great deal, you can make 20 to 30 basis points with your cash, but the borrowers want to give you non cash鈥攕o how do you balance that and what are you doing today in your programmes with the cash/non cash dynamic?鈥�
Dan Kiefer, investment manager, opportunistic credit, CalPERS, affirmed: 鈥淵ou have to do something with cash when you have a lot of it and sometimes yields aren鈥檛 good. We run an intrinsic only programme so we weren鈥檛 searching for cash yield and our balances would run between $20 to $24 million.鈥�
鈥淲hen we moved to non-cash it鈥檚 about finding that table for a smaller cash balance, which gives you a lot more flexibility. The other thing we noticed when we were bidding off our portfolios was that we weren鈥檛 getting cash bids because it has become non-economic for a lot of bidders to give us cash bids.鈥�
Bassler then asked the panel: 鈥淲hat are the biggest challenges of getting the treasury management function?鈥�
One panellist observed: 鈥淭he idea of securities lending, while they understand risk and rewards, is not necessarily something that they understand on a deeper level, and so it鈥檚 about getting their attention on what the opportunity set looks like.鈥�
鈥淎 lot of this peer to peer action has been incredibly helpful. Once they understand what we鈥檙e talking about, the economics story will be easier to tell.鈥�
Kicking off the conference, chairperson, Jeffrey Kidwell, repo and securities lending veteran, said: 鈥淚t has been quite a year [2018] for the securities lending industry. We saw the highest annual revenue for securities lending since the financial crisis in 2008.鈥�
鈥淭his was driven primarily by emerging markets, global credit uncertainty, and central bank tightening. We overcame trade wars and US political systems problems, which obviously haven鈥檛 yet ended. Securities Financing Transaction Regulation (SFTR) also remains a major topic especially in Europe.鈥�
鈥淯ncertainty was the key [theme] for last year鈥�, Kidwell said, and alluding to the conference days ahead, he added: 鈥淲e are going to discuss these themes a lot deeper in panels...I think you鈥檒l find the content has changed dramatically this year.鈥�
Discussing data in more detail, one speaker noted that global revenue came in just shy of $10 billion last year. This was made up from $4.65 billion in the Americas, $3.09 billion in Europe, the Middle East and Africa, and $2.22 billion in the Asia Pacific.
Nancy Allen, global product owner at DataLend, commented: 鈥淲e saw volumes increase pretty much across the board, although the Americas suffered in the second half of the year.鈥�
Highlighting the importance of benchmarking and effective use of data, Tim D鈥檃rcy, senior vice president, FIS Astec Analytics, advised beneficial owners to be active in managing their programmes so that they are quicker to notice market changes.
In terms of beneficial owner collateral acceptance last year, it was noted that 56 percent of US beneficial owners used cash only, 43 percent used mixed collateral and 1 percent used non-cash only collateral. This compares to 1 percent of non-US beneficial owners who used cash only, 42 percent who used mixed collateral and 57 percent used non-cash only. One panellist noted that if you can expand your collateral flexibility to include non-cash collateral then you should.
Melissa Gow, executive director, IHS Markit, explained that US equities loan balance against non-cash collateral rose through 2018, continuing the trend from 2010. Predicting expectations for this year, Gow said that there is an expectation of a continued strong performance due to the legalisation of derivatives online retail availability, and US state legalisation. She added: 鈥淸This year] market expectations see market volatility drive demand, leading to increased fees and revenues.鈥�
In a separate panel on the outlook of securities finance, speakers also made some predictions of what they expect to see for the year ahead. In terms of disruptors, one panellist predicted that regulation will be the biggest disruptor this year, replacing technology and macroeconomics.
The panellist explained: 鈥淩egulation is the biggest disruptor because it feeds the technology. The regulatory environment has really helped people 鈥榮harpen their pencils鈥� on all of the costs associated with transacting in the securities lending space.鈥�
One panellist said they are excited for the future of securities lending. The speaker commented: 鈥淚 think we will see a few new markets open up, for example in Saudi Arabia, and when new markets open up there will be a different type of activity. We are seeing new entries into the market, and this is all very positive for the industry, however, we are seeing securities lending demand remain somewhat stagnant.鈥�
The panel also discussed market volatility and the moderator asked panellists how it has changed securities lending.
One speaker replied: 鈥淗edge funds generally thrive in market volatility and for the first three quarters of 2018 we saw that strength, and we have talked a lot about the record returns that beneficial owners experienced. As we headed into Q4, due to political pressures鈥攆or example, the US and China trade wars and concerns around Brexit鈥攖here was a creation of a lot of unprecedented market volatility and with that came subdued securities lending volumes and fees.鈥�
Another panel at the conference saw speakers provide delegates with an update on CCPs and their role in the securities finance ecosystem. The moderator, Jennifer Whitcomb, managing director, State Street Global Markets, asked panellists what the future holds for clearing in securities financing transactions.
In response, panellist Matt Wolfe, vice president, product development, OCC, commented: 鈥淎t OCC we are investing heavily in creating a next-generation clearing platform for all products that we clear for and that has given us an opportunity to think creatively about what the future looks like. It is forward-looking and data-driven and it is also intuitive to use and aims to look forward into the future of what our clients need.鈥�
In terms of trends, Wolfe said: 鈥淭here is a trend for data focus and data-based decision making. Ensuring that the platform is real-time, fully automated, has robust data, is important but also the user experience is equally important as automation.鈥�
鈥淲e are applying human-centric design principal to make sure that the experience of clearing and using our systems is a pleasure and enables participants to focus on what matters most.鈥�
James Hraska, managing director, DTCC, said: 鈥淲e are trying to build products that are user-friendly, and we are continuing to look at different avenues and we are happy to hear feedback.鈥�
Whitcomb echoed this: 鈥淚 would like to encourage that cycle of feedback and find out what it is that peers are looking for. We have been working collaboratively on these efforts so I would encourage participants to seek feedback and reach out to their service providers. Then you can move forward in a way that is helpful for everyone in the industry.鈥�
Arianne Collette, executive director, Morgan Stanley, added: 鈥淎sk questions about the programmes so that you know what is going on in the marketplace and so that you can provide feedback. It is also important to ask for price points and understand what the pricing looks like.鈥�
Meanwhile, a panel on technology looked at the hype and reality for blockchain, distributed ledger technology (DLT) and other emerging technologies. Talking about blockchain, Christopher Ferris, engineer and CTO of open technology at IBM, observed: 鈥淏lockchain is a team sport, it only works when everybody is willing to participate.鈥�
Armeet Sandhu, CEO, Stonewain Systems, remarked: 鈥淏lockchain and hype around this technology has been around for a while. I see the efficiencies that technology brings in from all of the post-trade services, and the value of that efficiency is one big benefit for the providers. What value are the beneficial owners going to reap if the providers implement blockchain? Transparency could be one, this is a big plus and it allows participants to be better informed by listening to this shared ledger.鈥�
It was noted that blockchain is often referred to as a solution looking for a problem, and so the question was asked: 鈥淚f blockchain is the solution, what鈥檚 the problem in securities finance?鈥�
Some of the problems listed included SFTR, pledge structures and collateral optimisation, and cash collateral pools. Ed Blount, executive director, centre for the Study of Financial Market Evolution, commented: 鈥淪FTR is a big issue facing our industry and we need to assess to which degree that might change agent lender disclosure and how blockchain might be a solution for that.鈥�
Discussing technology more broadly, Ferris cited: 鈥淭echnology is evolving rapidly and as people try out new use cases they are finding out one of two things. They are either finding that they have a nice optimisation but the expense of implementing the solution into the enterprise is going to be greater than the benefit that they might reap from. Second, there are the solutions which are transformative, where essentially a problem is being solved which hadn鈥檛 previously been solved from technologies such as blockchain and DLT.鈥�
On day two of the conference, there was a panel entitled 鈥楶rogressive Approaches to Lending and Cash Management Programmes in Today鈥檚 Market鈥�, which saw panellists delve into the future environment for the securities finance industry. Panellists noted that the industry could be heading to a non-cash environment.
Patrick Morrissey, head of product, strategy, and implementation, securities lending at Vanguard Group, cited: 鈥淭he environment that we are moving into is seeing participants move into the non-cash space.鈥�
The moderator, Peter Bassler of eSecLending, asked panellists: 鈥淓veryone [at the conference] wants to pledge non-cash on the borrower鈥檚 side. The interesting thing for me is that the cash markets are giving you a great deal, you can make 20 to 30 basis points with your cash, but the borrowers want to give you non cash鈥攕o how do you balance that and what are you doing today in your programmes with the cash/non cash dynamic?鈥�
Dan Kiefer, investment manager, opportunistic credit, CalPERS, affirmed: 鈥淵ou have to do something with cash when you have a lot of it and sometimes yields aren鈥檛 good. We run an intrinsic only programme so we weren鈥檛 searching for cash yield and our balances would run between $20 to $24 million.鈥�
鈥淲hen we moved to non-cash it鈥檚 about finding that table for a smaller cash balance, which gives you a lot more flexibility. The other thing we noticed when we were bidding off our portfolios was that we weren鈥檛 getting cash bids because it has become non-economic for a lot of bidders to give us cash bids.鈥�
Bassler then asked the panel: 鈥淲hat are the biggest challenges of getting the treasury management function?鈥�
One panellist observed: 鈥淭he idea of securities lending, while they understand risk and rewards, is not necessarily something that they understand on a deeper level, and so it鈥檚 about getting their attention on what the opportunity set looks like.鈥�
鈥淎 lot of this peer to peer action has been incredibly helpful. Once they understand what we鈥檙e talking about, the economics story will be easier to tell.鈥�
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