FISL Europe: deploying technology for global markets harmonization

At our upcoming Finadium Investors in Securities Lending Conference in Paris on 24 September, Bloomberg, Broadridge, MarketAxess and Pirum will be discussing what’s important for securities finance technology right now, and signpost some of what might be ahead.

And while at the moment these conversations persistently lead back to the Securities Financing Transactions Regulation (SFTR), it is only one of many technologically-demanding regulations that aim at standardization and harmonization coming into force against a political backdrop characterized by the forces of disintegration.

Regulatory harmonization

Bloomberg’s goal has always been to tackle new regulations, SFTR included, but the mandate is to also cover existing swap data reporting regulations, explained Alejandro Perez, global head of Post-Trade Solutions at Bloomberg.

That means expanding the use of Bloomberg’s regulatory reporting hub for its clients beyond MiFID (Markets in Financial Instruments Directive) into SFTR, but also the European Market Infrastructure Regulation; regulations from the Monetary Authority of Singapore and the Hong Kong Monetary Authority; Dodd-Frank — all of the current swap data regulatory requirements.

The bulk of adoption for Bloomberg’s reporting hub comes from Europe and Asia, as well as clients in the Americas impacted by European transactions, while with the RegTek acquisition, the firm has fully expanded to support multiple global reporting jurisdictions. One global trend that Perez has noted is that clients are increasingly choosing to send transactions in from their own internal systems or from another order management system to consolidate their regulatory reporting oversight.

Bloomberg’s reporting hub and RegTek are run by rules-based engines, with the goal of full end-to-end automation of the entire reporting workflow. This means having tech that is able to capture all the transactions, whether sent in by the client or captured from Bloomberg’s own internal systems, and, based on transaction features, identify if the trade is eligible for reporting, and if so, where?

Data integration

Data integration is the next technological capability that kicks in, and Bloomberg has a vast security master across all asset classes, he added, which means transactions can be enriched with security, entity or personal reference data. From there, a validation engine determines whether the data is in a compliant format, after which it can be reported to trade repositories or regulators directly.

“We have a fairly vast entity reference data master as well, given all the clients we have in the Bloomberg ecosystem,” explained Perez. The point is that clients want to consolidate their reporting to one place given the explosion in regulatory requirements the industry is tackling. And it’s becoming increasingly clear that it’s too much for humans to do on their own as automation is becoming a necessity, while advanced technologies are making inroads.

At Bloomberg, machine learning comes into play when it comes to exceptions management, for example. In other words, how clients sort exceptions with their own clients managing multiple problems.

“We have technology now that basically prioritizes those problems in the dashboard so that the most critical ones, according to what they (clients) deem most critical, are prioritized and upfront for them,” explained Perez. Bloomberg’s starting to apply some of these technologies to start assessing trends, though it’s early days yet and time is needed to build up some history.

“The idea is you can start looking at the errors across a period of time and really understand what is causing these symptoms: what is the root cause of this problem? So the client can address the root cause and minimize exceptions once and for all,” he said.

Traders and machines

While advanced tech like machine learning is becoming well-entrenched in the regulatory reporting world, when it comes to trading, there’s yet a great deal of cynicism.

The major reason that regulators are uncomfortable with it is because results aren’t always reproducible, explained Mike Lambert, product director for Securities Lending within the Securities Finance and Collateral Management business at Broadridge Financial Solutions: “The technology is still very young, and people need to have more hands-on experience..but at the moment it’s a black box,” he said.

So, how does this manifest in securities finance? One example is in setting rates, which requires explanations when it doesn’t match the market rate, said Lambert: it’s one thing when traders set the rates, and quite another when a machine does. “A trader can explain his actions, because it is a corporate action for example, but the machine, you have to dig in and the variables used worked out,” said Lambert. “It’s doable, but it’s a bit more complicated.”

It’s also an area of technology that is bound for growth, he noted: “There will be a lot of opportunities for that in the future…helping people to understand and interpret AI and ML.”

Flexibility and connectivity

There are two major challenges facing the global market when it comes to technology adoption, said Bloomberg’s Perez: continuing to standardize data across asset classes, which requires multiple systems to have a common language; and interconnectivity, whether that’s in the execution, confirmation, settlement, or collateral management.

“Trying to move everybody to a front to back system is going to be a challenge, and it’s really not fair to the market. So, the ability for firms like ours to interconnect, even with some of our competitors, is going to be very critical,” he said.

A big theme for a number of years is that firms are not necessarily looking to do more business, rather to do it smarter within balance sheet constraints, and it’s worth noting that this year was the first time that asset managers recommended a focus on technology as helpful for all areas of program management in a regular Finadium survey.

For the buy-side, that might mean becoming a more attractive lender by having collateral flexibility, a strategy that will require technological solutions to ensure doing so would maintain the firm’s risk profile: processing data to identify appropriate credit ratings; tri-party agents being able to support it; and the use of many collateral venues, which requires connectivity.

Connectivity, not just to multiple trading venues, but also to triparty agents and CCPs, is underpinned by APIs (application programming interfaces) — a swiftly advancing tech in the markets, which also raises concerns over cybersecurity in order to keep a balance between security and flexibility.

The more flexible firms become, the more control and visibility they will want. A firm may be using a tri-party agent, a CCP, and conducting bilateral trades while sitting on a lot of cash: how does the buy-side see all of the data, which also changes dynamically, in one place?

Visualization and data analysis are some of the areas Broadridge is improving amid a gap in the market, noted Broadridge’s Lambert. In securities finance, he noted, the technologies that are “in vogue” are a long-term reality, with artificial intelligence and machine learning somewhat closer to fruition, and blockchain further.

Yet, the near-term existing technologies that are changing the market should be in the spotlight, specifically, the emergence of all-to-all/peer-to-peer platforms, for example: “I see more of the use of existing technologies, opening doors to more participants in the market, rather than brand new technologies coming in being more important in the short-term,” he said.

Pirum, MarketAxess, Broadridge and Bloomberg will be leading our panel on technology at the Finadium Investors in Securities Lending Conference in Paris on 24 September 2019. The programme is free for asset managers and asset owners, and delivers best in class education and peer discussions for optimising securities lending programs. We look forward to welcoming you!

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