More innovative products and ideas in securities finance

It is no secret that regulatory change brings out innovation (necessity and all that). Lately we’ve been seeing more proof of this in the securities finance space. Besides product launches in counterparty exposure management and ideas on centrally cleared repo, an interesting speech on innovation from a senior custody exec caught our attention. Here’s an update.

On the product side, there is growing competition in providing counterparty and financing dashboards to hedge funds. Last month S3 Partners came out with Blacklight, a dashboard offering a wide range of metrics and statistics on prime broker financing. S3 is reported to have 40 clients and US$300 billion under advisory for its outsourced securities finance desk model – the new product should be marketable to hedge funds that want to keep their securities finance activities in-house but want better reporting and visibility on the process. Enso Financial Management has a similar tool and a recent investment from ICAP. Enso is said to have 50 clients and US$300 billion under advisory. ConceptOne has been doing something along the same lines since 2004, but S3 and Enso are offering new twists that hedge funds appear to be gravitating towards.

We continue to think that Single Treasury Futures are the best option out there for reducing repo exposures while continuing to allow client financing. In fact, we’ll say that any centrally cleared option that allows an investor to get cash out of an asset (cleared total return swaps, for example) are genuinely attractive. We heard about centrally cleared equity repo in the US at our New York repo and secured funding event. We’ve also heard about Repo ETFs, which we aren’t as certain about, but they may fall into the same category. Whatever form funding takes, it is going to focus on CCPs. The next challenge is figuring out the most acceptable product wrapper for the greatest number of market participants.

We are starting to hear some talk about education on the DTCC/Euroclear Margin Transit Utility (MTU) and positive response to go with it. When the JV was formally announced in May, we thought that the MTU was more smoke and mirrors than a real product ready to go out the door. We maintain that the actual MTU won’t be seen in 2014, but we are hearing an interest from the market in the benefits it can provide. This is part of a trend, or even a battle ground, between banks and Central Securities Depositories in what products should be owned individually by banks and what should be shared amongst them with the CSDs providing a commoditized functionality. We are ready to give the MTU more credence as an emerging product for 2015.

BNY Mellon President Karen Peetz had some interesting comments on innovation last month at the Global Funds Conference in Dublin. We agree with her position, especially following the conclusion of our 2014 asset manager survey in securities finance and collateral management. The big question here is if faced with a situation that doesn’t work, why not move forward? As Peetz noted, “To thrive in the decade ahead, I believe our industry needs to follow the lead of some of the most innovative and agile technology companies in the world. We need to take bolder steps to look, act and think more like those groundbreaking companies. We need to empower people to play a more active role in driving innovation and reward them accordingly. We need to apply our strengths to address emerging market opportunities. And we need to look over our shoulders to see where the next challenge is coming from – because it may not be from the usual suspects. The real question is; what are we waiting for?”

Here’s one we almost missed: Simon Lee from eSecLending in a video at CIO Magazine on eSL’s own innovation. Just one thing though – we know Simon and can say for sure that he is not that lady in the freeze frame at the beginning.

For details on more products and companies we find interesting, see our May 2014 research report, “Emerging Technologies in Securities Finance and Collateral Management.”

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