Commentary on market turbulence and secfinance automation

Recent market conditions have raised the importance of moving away from manual processes for repo and sec lending, say experts.

In an emailed statement, Nerin Demir, head of Repo and Collateral Management at SIX, said: “It is a challenging situation when financial institutions do not have adequate availability of cash or cash equivalent assets, sourced through sec lending markets. Banks find it hard to meet their financing obligations, whether for funding trades or posting collateral.

“With the ECB set to increase interest rates further in the remainder of the year, the pressures on securities finance activity will remain with repo and sec lending markets continuing to be a key source of funding and collateral. Not only for larger banks but new smaller and medium sized participants. The challenge is that these types of institutions are not as well-versed with securities finance operations for which there are high barriers to entry, thanks to relatively manual and outdated operational procedures.”

Neil Taylor, director for Repo Business Development at OSTTRA, said in an emailed statement: “While post-trade processing in repo has improved in corners of the market, manual people-led operations remains the norm. Following the latest periods of market stress, operations teams will have been reminded once again by the almost unmanageable impact of high volume in repo markets and the required post-trade processing.

“This increase in activity reinforces the importance of moving towards an industry-wide network that connects firms, standardizes data exchange, and facilitates communication for the key components of the repo lifecycle. Putting functions like trade confirmation, portfolio reconciliation, and settlement on a central network removes complexity from the repo market. It also standardizes processes to reduce operational risk and mutualizes cost across the industry at a time of liquidity constraints.”

Alex Knight, head of EMEA at Baton Systems, said in an emailed statement: “Over the past few weeks, comparisons with 2008 have not [been] a million miles off, but thankfully banks are much better capitalized and central banks acted quickly to ensure the situation is not severe. At the same time liquidity in funding markets is still constrained, as evidenced by the extension of dollar swap lines from the Fed, which poses financial and operational headwinds for banks.

“When thinking about how to navigate these conditions, use of technology must be at the heart of the solution. A big difference today versus 2008 is the advancements in technology and the use cases for managing exposures across the multiple desks in order to meet funding requirements. In conditions we have seen in the last few weeks banks need real-time visibility and control over the quality and quantity of collateral available.

“DLT-based solutions provide access to real time, aggregated data and detailed information on asset eligibility that makes this a reality. Additionally, the movements of assets can be accelerated with full transparency. The current episode should accelerate the deployment and uptake of DLT solutions to ensure that in similar market conditions banks are in a position to better manage their collateral.”

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