FISL Preview: the most effective securities lending innovations benefit all players

In the last of our preview articles ahead of the Finadium in Securities Lending conference (FISL), we highlight what our panelist experts from BNY Mellon, EquiLend and GLMX expect everyone will want to dig into in greater detail as the markets innovate to meet the demands of rapidly evolving dynamics.

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According to Nehal Udeshi, head of Securities Finance at BNY Mellon, securities lending is moving into an uncertain environment for the remainder of 2024, with far less specials in the sovereign debt markets on the back of central bank activity and mixed conviction from hedge funds on shorting equity markets.

That means financing trades will be at the forefront, with market participants across the board tackling different constraints, which include capital (RWA) and indemnification, and bank counterparts and clients asking about ways to generate liquidity for leverage. Udeshi will be discussing the challenges on the panel, “Navigating a new landscape – agent lender leaders

“What’s important as we think about the growth is how we can partner with the borrowers and end clients around solutions for those things, and that could be CCPs, it could be thinking about structures that help mitigate capital (or) it can be digital tokenized solutions to create growth,” she explained, also stressing that digital optimization is not to be confused with the overall crypto universe.

Udeshi also noted that understanding US Treasury Mandatory Clearing requirements will remain a focus for 2024, while geopolitical considerations continue to create uncertainty as US elections loom.

On the beneficial owner side, issues fall into three categories: regulatory impact (e.g. Basel 3 Endgame), structural (e.g. T+1), and maximizing portfolio returns. Udeshi says a subset of clients are reviewing the risk-reward balance in the cost of capital for indemnification versus the market risk.

Technology remains a strong focus across the market, with automation, reviewing new offerings with existing partners, and weighing new providers all presenting critical aspects of strategic planning, she added: “Partnerships and new ideas of innovation (are) at the forefront, (and) the most effective innovations in this market are the ones that can benefit all parties.”

Table stakes

Working closely with market technology is not just a preference, rather has become table stakes to engage with clients, said Sal Giglio, president and chief revenue officer at GLMX, who will be speaking on the “Routes to market: how should securities loans be traded and settled?” panel.

He describes a market with large inventories in the $30 to $40 trillion range available for loan with some 50k to 100k tickets getting booked every day that participants route through a bottleneck in early morning windows and at tight timeframes.

“The best way to get that volume done in a short period of time is with technology, ideally with trading platforms to bridge both the borrowers’ and lenders’ internal technology to make the process as automated as possible,” Giglio said, adding that while figures outside the US might be different, the situation remains the same.

Leverage in the market has swelled to today’s levels in part due to technology enabling sourcing of liquidity, but also because technology makes it possible to do so in a safe manner by tapping automation, such as straight-through processing for example, he said: “People fear that platforms are going to take (their) job (but) the market’s gone the other way. I have never seen so much demand for talent out there and people leaving to go to new firms.”

The question of how many trading platforms is enough remains debatable, and Giglio said that while that’s difficult to put a specific number on it, what is a certainty is that there needs to be more than one, for reasons related to risk management and competition. It’s also uncertain what the market will bear, and he pointed to the introduction of mandatory clearing in the swaps market as a bell weather, which saw a proliferation of dozens of venues ultimately dwindling down to only a few with any significant volumes.

Competition versus fragmentation

The last decade of changes in the industry means that the right way to get to market is electronically, be that for regulatory, latency, or accuracy reasons, said Mike Norwood, director and head of Trading Solutions at EquiLend, who is joining GLMX’s Giglio on the Routes panel.

“No matter how many bodies you throw at that problem, you are still going to absorb some risk,” he said. “With the best intentions, with the best controls, sometimes people are going to hit the wrong key.”

For beneficial owners, the benefits should be well understood, he noted: the ability to get more loans out to the street, pick up market share, trade more efficiently, focus human capital on value additive activities such as book management and improving processes, and, ultimately, building better infrastructure.

In 2024, diversification across multiple platforms is a key theme and does solve some problems, but it also comes with significant challenges, which can be put under the category of fragmentation of liquidity, he noted, and will require answers for how to manage split inventory and matching the right buyers and sellers.

“We’ve invested heavily in cyber, (which) has become more of a focus and our disaster recovery will certainly be one of the strongest in the entire industry as a result,” he said. “[Platform disruption] is a tail risk, but you’ve also got to be conscious about your investment if you are going to absorb connectivity fees, if you are going to absorb transaction fees and technology costs to implement multiple platforms.”

EquiLend’s NGT platform, now 20 years in operation, represents some 2/3 of the industry’s trading volumes, with about 135 clients connected and trading and, as such, a critical mass of liquidity. At the same time, the team is considering how to expand for a network effect.

“We’re a resource for the industry as much as we are provider to the industry, we want to help you get your solutions right (and) access the market efficiently,” he said. “If you implement technology correctly and if you have the right footprint, then barriers to entry are reduced for everyone, and as many folks as can have access to the market, should have access to the market.”

Mike, Nehal and Sal will be joining colleagues from Fidelity Agency Lending, Goldman Sachs, J.P. Morgan, Northern Trust, the Options Clearing Corporation, Provable Markets, S&P Global and State Street at FISL, which takes place in New York from May 8 to May 9. It is our 8th annual conference bringing together a broad cross-section of the industry to share expert insights on the latest and most important developments in securities lending. Registration is free for qualified buy-side firms including asset owners, asset managers, insurance firms and hedge funds. 

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