There are expectations that securities lending is on an upswing for volumes and balances, albeit with some caveats associated with incoming regulations, some of which are yet to be fully understood. Ahead of our upcoming Finadium Investors in Securities Lending conference, we speak with experts at Fidelity Agency Lending and Provable Markets about market dynamics that participants should be aware of.
With global market volatility driving new short demand, Fidelity Agency Lending is experiencing an increase in financing activity over and above organic growth across the rest of the market, said Jon Whiting, head of Fixed Income and International Equity Trading at Fidelity Agency Lending.
That increasing demand is being directed to high value activities such as scrip dividends, with opportunities in Dutch, French, Spanish, and German markets, he noted. Globally, North America dominates in terms of revenue and balances with significant opportunities in directional and traditional IPO names, as well as corporate events in US and Canadian equities. Asia-Pacific, meanwhile, has seen significant trade volumes and beneficial owners that hold assets in the region have seen an uptick in lending revenues. In Europe, there are enhanced volumes associated with seasonality expected through the summer.
“It’s a time where we see value in all regional equities, as well as the fixed income space, due to the interest rate environment driving some opportunity on the reinvestment and treasuries books of business,” he added. “There (are) opportunities in all asset lines in all the regions at this point in the lending community, so it is an interesting time when vectors of demand are hitting all portions of the book.”
While Fidelity Agency Lending has been developing for some years, Fidelity’s overall experience in the financing space extends over two decades. And over the course of that time, it’s become increasingly the case that not all lenders are created equal and binding constraints at some firms are creating an opportunity for other supply providers, said Whiting.
Moreover, lenders can offer a wider array of asset types and trade structures in an automated fashion, he said: “One of the important factors from a specifically Fidelity (Agency Lending) perspective (is that) continuous cycles of supply and pricing updates throughout the day can create less velocity of borrow, and a more efficient execution level for both lending and borrowing counterparts.”
Overlaying client portfolio characteristics like qualified dividend income and proxy management are going to take automated trading to the next level, he added: “A general ability to service the bespoke needs of various long holders of portfolios is the next step of automated trading.”
Reg Automated Trading Systems
If there’s anything that could blindside firms’ developments associated with automated trading, it may well be some of the incoming changes to Reg ATS, said Matt Cohen, CEO of Provable Markets. Founded in 2020, Provable Markets is applying cryptography and related techniques to financial markets for data encryption and protection along the trade lifecycle. The underlying technology is not blockchain-based, though is complementary to it, he noted.
Provable has signed on Charles Schwab as an anchor lender, inked a deal with FIS Loanet, and is partnering with DTCC on the anticipated SFT CCP service for the launch of their first marketplace on Provable’s ATS, Aurora. Aurora is the only cloud-based ATS that is SEC and FINRA approved for securities lending as well as security-based swaps and options, a process that took over nine months last year.
Market participants should be aware that Reg ATS could bring a number of trading systems into the scope of regulation, for example, hedge funds that build their own OMS systems linked to multiple counterparties, said Cohen. And this is on top of other regulations coming down the wire, like 10c-1, he added: “The Reg ATS proposal is all encompassing, and it creates a pretty muddy picture for the future… the systems that underly, especially secfinance, that operate in this area, this is more of a back office function and I don’t know how the market handles that efficiently without partnerships.”
Jon and Matt will be joining colleagues from across the industry at our upcoming Finadium Investors in Securities Lending conference.