THE GLOBAL EVOLUTION OF SECURITIES FINANCE

Over the past few decades, we’ve seen the global securities finance industry grow and evolve in many ways. When I started out in this business it was relatively small, and at the time we were seeing a dramatic expansion of the securities lending market. It always was, and still is, very much a people business, and the interesting thing is that many of the folks who were around 20+ years ago are still around somewhere in the industry today.

From the beginning we always saw very different approaches to securities finance from the U.S. markets and international (non-North American) markets; the U.S. was a more highly regulated and standardized environment, resulting in more vanilla, but high-volume, trades. The international players were jumping in from the perspective of seeking high-value “specials” and leveraging cross-border arbitrage opportunities, such as the famous “dividend trade.” At that time, the international securities finance markets were growing rapidly.

In my experience helping customers to solve various problems over the years, I’ve been fortunate enough to see the industry mature firsthand. I have had a front row seat to watch the securities finance markets tackle new challenges, develop new approaches and adapt to changes in the global finance industry. From my own experience, and through asking a few of my esteemed colleagues, a few examples of how things have changed come to mind:

• “The ‘Big Bang’ in 1986 opened up the UK market to banks and brokers from the U.S., Europe and Asia-Pacific, which ultimately led to an increased globalization of the whole securities financing market. The stock market crash in the following year resulted in many more consolidations within the established market and helped to facilitate the emergence of new markets, making this a very exciting time to be providing software for securities finance.”

• “When many new players were jumping into the securities finance business, they needed to get up and running very quickly, with as much out-of-the box functionality as possible… I think our record for getting a new player live was two weeks. The server often used to literally sit under the desk; you would never find that now!”

• “In the early days, decades ago, the desks were small, manned by dedicated specialists who needed to be multi-functional. These specialists also had to have a system to support the broad spectrum of needs around securities lending in different markets. Now there is a tendency to have specialist areas for each function in the securities finance lifecycle.”

• “Over the years, the number of transaction types supported has increased, and stock lending desks (predominantly in the equities side of the business) expanded into doing some repo and buy/sell back business. In more recent years this also extended into more synthetic transactions, particularly in emerging markets.”

• “It has been exciting to be involved as emerging markets have come (and gone) in the securities finance space. Countries such as Malaysia, Thailand, Taiwan, and India gained traction in the 1990s, but lost it again following currency exchange challenges and the introduction of tougher regulations. Today we are seeing increased activity in some of these countries as well as within new regions such as Brazil, Russia, China and the Middle East.”

• “In time, operational standards have emerged, through the auspices of ISLA and its hard-working sub-committee members who have led the world in developing best practices for a number of the trade lifecycle activities. As a result, there is now more automation of some processes, but there is still a long way to go.”

• “After the global financial crisis of 2008, there is now more focus on risk in the securities finance area than ever before.  Years ago, securities finance transactions were considered ‘risk-free.’ Nowadays you are actually likely to find a dedicated risk professional on the securities finance desk.”

Clearly, the securities finance space has changed and evolved quite a bit, but I believe that innovation is happening faster now than ever before. In the next few years, I expect to see:

• More automation of trading and lifecycle processes; electronic marketplaces have struggled in our environment, however, cost pressures are likely to result in increased traction in this area.

• Even greater consolidation of processes; in these times where “cost is king,” all ways of streamlining processes are being considered. For example, collateral management used to sit in silos but this is changing as firms are creating centralized groups to increase efficiency, improve transparencies and enable optimized collateral usage.

• A move towards CCPs; without being mandated, uptake to date has been slow, however the beneficial capital treatment of trading versus a CCP is likely to mean that central counterparties will prevail over time.

• Further automation of corporate actions processing; this area has always had the capability to make or break the profitability on a trade – the need for tighter controls in this area are now getting focus.

Across the globe, securities finance has come a long way in the past few decades, but we still see room to grow. It has always been an exciting, people-focused business, and I look forward to seeing what the coming years have in store. What key milestones in the securities finance industry stand out to you? Where do you see securities finance in five years? Leave us a comment to join the conversation.

Note: A special thanks to my colleagues, especially Carol Kemm, for adding your insight to this article.