This blog post also appears on Finextra.
In financial markets across the world, the trading benefits of up-to-date information are clear; you can trade at the right price and buy or sell as the market is turning towards or away from you, boosting your profits or curbing your losses. Aged data means you are trading behind your competitors and counterparts, weakening your position.
That seems clear enough for the mainstream markets, but what value can it bring to securities lending practitioners, who are under pressure to make better returns, and regulators, who are seeking to increase transparency and market efficiency while reducing risks for the investor?
One thing is certain: regardless of your market position or industry, the best trades can only be achieved when you have the most accurate, up-to-date data available. Knowing what happened yesterday will not help with liquidity today. But what does that actually mean for all the stakeholders in the securities lending market?
Whether a lender is a custodial agent, third-party specialist or self-lender, the object is to make additional returns for clients within accepted risk and exposure tolerances. The best rates cannot be obtained without the best trading information.
For instance, credit management and risk systems must cater for the counterparts and any limits set them by the beneficial owners, but the requirement to get the best rate for the lent security relies on systems that can provide intraday data and identify new, emerging opportunities for the traders using them. However, this is a tough ask without the necessary data on rates and utilizations and how they are changing throughout the day. In the arms race between supply and demand, it is possible that the lenders are being disadvantaged.
Lending activity around MF Global illustrates this point. As far back as June 2011, the SEC was allegedly looking into the European Government debt exposures that would eventually bring down the derivatives broker. As shown on the graph below, borrowing demand was already on the way up, and it continued well into the third quarter. Borrowing fees remained relatively static at 10bp right up until the news broke more widely. Yet over this same period, balances on loan grew 115%.
By using intraday data to identify increasing demand, lenders could have capitalized on the information available to them by proactively making prices rather than taking them.
But what is the impact of up-to-date data for the rest of the market, especially in light of the latest regulations? A key aspect of the proposed ESMA SSR rules for locating and reserving securities to borrow is the security’s “liquidity.” Logically, if you wish to avoid naked short selling and increase the certainty of settlement, then you have to restrict trading to liquid securities or reserve your supply before taking a short position. This brings up ESMA’s pre-defined “liquid list” of securities.
Whether a security is on ESMA’s “liquid list” or not, it misses the importance of intraday borrowing liquidity, for inclusion on the list does not mean that it will be easy to borrow at all times. The proposed regulations do go some way towards this by demanding that a recorded confirmation of liquidity is obtained before short sales are made, thereby gauging the availability of a security at the point at which supply is sought. Intraday data will be required to make such processes work in the spirit in which the regulations are expected to be written.
Ultimately, the speed at which we produce, share and consume data will continue to rise exponentially. It affects everyone, and managed correctly can bring benefits to all the stakeholders in our industry and from there, the wider financial markets. Intraday data is here and anything older is so yesterday.
While you’re here…
- This blog post was adapted from the 2012 whitepaper “Intraday Data and Its Effects on the Securities Lending Marketplace.” Click here to get the full paper, with additional examples and analysis.
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