FISL Preview: optimization demands across market players and products reveal changing dynamics

Optimization is a current that runs within and between firms seeking better access, returns and execution. Ahead of Finadium’s Investors in Securities Lending conference (FISL), we speak with our panelist experts from Fidelity, GLMX and Scotiabank about how that’s changing dynamics across the securities lending market.

On the borrowing end, prime brokers remain important service providers when it comes to custody, clearing and settlement, leverage, and locating securities for hedge fund customer short sales.

And fund customers continue to demonstrate sophistication in their approach to prime brokerage relationships, particularly with respect to the funding and balance sheet considerations of their providers, said Marc-Andre Wilson, managing director and global head for Prime Services Structuring and Risk at Scotiabank, who will be speaking on the “Managing prime broker balance sheets and client relationships” panel.

“Funds are becoming more conscious of the impact they have,” Wilson said. “They want to have stability, and benefits like funding, pricing, availability of securities for shorting, and the way to maintain that is to make sure there isn’t negative impact by the activity they are doing across all their primes.”

In particular, funds are becoming more cognizant of how their use of leverage impacts each prime broker, he added, noting that “in terms of funding and liquidity, most of the big banks do have capacity but what’s becoming more scarce these days seems to be financial resource metrics: capacity around regulatory capital, liquidity ratios (and) stress tests.”

The combination of internal requirements and external demands are pushing hedge funds to centralize the funding and collateral management function, resulting in the adoption of treasury management systems, something that was traditionally the purview of banks, said Wilson.

Multi-fund managers, explained Wilson, have long employed allocation engines capable of considering pricing and margin to optimize how positions are allocated across providers. Now they are looking to incorporate their provider’s financial resource metrics into the treasury management system, with larger institutional managers requesting periodic reporting on the overall efficiency, profitability, and return of their funds across their providers.

Agency lending

Optimization for beneficial owners is geared towards revenue generation with the need to navigate customization and technological upgrades in support of bespoke lending programs, as well as to identify “missed opportunities”, said Justin Aldridge, head of Agency Lending at Fidelity, who will be speaking on the “Optimizing demand – agent lenders on supporting client needs” panel.

In 2022, Fidelity’s Agency lending’s program generated returns that were up 44% year-over-year (yoy), and in 2023 are up 24% yoy through March 2023.

Overall, the lending markets continue to be healthy despite a depressed IPO and deals backdrop, said Aldridge: “We expect the remainder of this year to be very strong given the volatility in the market, (and) there are a few special situations trades forecasted to play out by year end, which could help boost lending revenue for beneficial owners.”

At the same time, beneficial owners that are registered investment managers with bespoke program parameters, such as ’40 Act Funds, can “get lost” in a larger program as opportunities to lend are time sensitive and manual intervention by agent lenders to highlight missed opportunities in real time is not scalable nor efficient for most agents, and this can hamper clients returns. That’s where automation and technology can play a major role, he added.

Overlapping trends

What’s needed in securities lending is further digitization and automation around lifecycle events, which overlaps with the same trends in repo markets, said Sal Giglio, COO and chief markets officer at GLMX, who will be speaking on the “Building out securities finance technology for long-term success” panel.

“We cut our teeth in repo and that is the biggest part of our business today, but there is a natural intersection between repo and seclending, specifically in the fixed income space,” he noted.

In Q4 last year, GLMX reached $1 trillion in daily balances for the first time, representing the trading activity of some of the largest global financial institutions using the platform to negotiate and execute securities financing transactions. Along with a handful of the top fixed income securities lenders and about 40 broker dealers, the team has recently signed on CalPERS as the first US public pension fund to trade money market instruments, including repo and securities lending transactions.

The buy-side, said Giglio, often looks at technological solutions like a closed box, believing what they see is all they’ll get. But that’s not the case, and infrastructures incorporating new technologies are able to build and customize around workflows.

Real-time trade support in particular has been a major demand in repo, with GLMX seeing a three-fold increase in daily tickets as a result of rerates when central banks move interest rates. He expects that the same automation involved in the processing of those kinds of events will be needed in securities lending.

“We’re seeing more beneficial owners bring their repo and lending activities, or portion of it at least, inhouse and our technology and our ecosystem naturally supports that workflow,” he said. “We still have a bit more work to do from an adoption perspective in the lending space, which is where we’ll be focusing on in 2023.”

Justin, Marc-Andre and Sal will be joined on their panel discussions by colleagues from Citi, eSecLending, EquiLend, Invesco, J.P. Morgan, Natixis, S&P Global Market Intelligence, and State Street for FISL, which takes place in New York City from May 17 to May 18. It is our 7th annual conference bringing together a broad cross-section of the industry to share expert insights and is free for qualified buy-side firms including asset owners, asset managers, insurance firms and hedge funds. Register here.


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