Product innovation: FIS on competition and channeling liquidity

With the approaching launch of FIS’ new tech platform, one of the questions for securities finance and collateral market participants is: how many competitors are enough? Ahead of Finadium’s Product Innovation webinar this week, we speak with David Lewis, senior director for Securities Finance at FIS, about what kind of decisions the industry is facing.

Cost reductions and efficiencies, particularly in the context of automation and technology, have long been a motivating force to modernize legacy infrastructures as well as outsource functions to specialized firms and fintechs, with post-trade being a major area of focus.

That’s because post-trade is where a lot of cost is created – through reporting, rerating and settlement functions, for example. An economic backdrop of rising interest rates and cost of funding will provide a tail wind for teams seeking change and diversification, but they are also weighing budgeting and investment decisions in the “do more with less” strategic mentality as well, noted Lewis.

While comprehensive cost reduction tactics are pervasive in the industry, at the same time, there’s also a need to consider the “quality of the transaction”, he said: “Instead of trying to minimize the cost of post-trade actions, perhaps minimize those post-trade issues in the first place by a better-quality match, and that’s really one of the things that we are trying to put together with the new technology that we’ve built.”

This year, Lewis chalked up three decades in the industry, starting with a graduate program at J.P. Morgan in fixed income repo and following on with a significant bulk of his experience building securities financing and collateral management systems, including early development of what became the Anvil Repo Trading System (ARTS), now one of the products under the ION Group umbrella; Data Explorers, which was ultimately acquired by S&P Global Market Intelligence; and legacy SunGard’s Astec Analytics, leading to his role at FIS.

Competitive entrants into this space can’t ignore the idiosyncrasies of the market. Cash equity and bond markets have instantaneous transactions, but a matched trading platform for securities finance and collateral management will contend with the entire lifecycle of relationships, said Lewis: “There’s room for several players, for lots of different reasons…it’s the risk management (and) it’s also the nuances of the relationships and the services that they provide that make each one an existing commercial realistic proposition.”

Dubbed “Project Atom” and more than two years in the making, Lewis describes FIS’ upcoming new platform as an order management system that taps the firm’s position in the market providing services to over 200 clients globally. It’s launching into a long-standing environment of “conflicting pressures”: one is the huge barrier to entry for competition in the space, requiring a critical mass of participants who “need to be where the liquidity is”, which can create a strong push-pull effect towards one major player, Lewis explained.

But the other is avoiding a single point of failure, he added: “Anyone who’s connected to any market through one connector, or avenue, is going to be losing sleep…Where is your strategy when you are thinking about routes to market?”

In that sense, borrowers need to be thinking about where supply is going to come from and how books are going to be managed over the next five years, while lenders should be asking what the optimum distribution plan is for their strategy and how much automation and transparency is desirable, said Lewis: “More automation is possible, but you might need to trust the machine a lot more and be prepared to disclose more at point of trade.”

David will be joined by colleagues from UBS and Citi on September 13 for Finadium’s webinar series Product Innovation in Securities Finance and Collateral Technology, open to subscribers and invited guests of our sponsors.

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