Nick Stafford | published on 14th August 2017
The future state of securities financing: evolution or revolution
“The secret of change is to focus all of your energy, not on fighting for the old, but building the new” – Socrates
Most of us don’t like change change, particularly within the securities industry, most will try to actively avoid it. Consequently, market practices evolve at a glacial pace, all too often ignoring the opportunity to improve profitability. Change is generally forced upon us by seismic regulatory changes only rarely is it actively sought.
In a regulatory driven environment, market practitioners are unable to control the pace, depth and breadth of change. New requirements mean constant adjustments to how practitioners execute their business.
Some of the key change drivers include for the securities financing industry include;
- LCR and NSFR have drastically changed how a liquidity book is structured
- T2S has and will continue to challenge recall periods
- SFTR requirements will alter what data is required to execute transactions
- Distributed ledgers, such as Blockchain will provide for industry wide books and records to be collectively updated
These are just some of the challenges facing the market, individually they are substantial, collectively they reflect massive bodies of work required to be compliant. Change brings the challenge of conforming correctly but for the brave it also brings an ability to exploit new opportunities. In addition, those that embrace change first can often set the narritve for the rest of the industry to follow, playing to their strengths and potentially their advantage.
How will these changes alter the way in which the Securities Finance market operates? How should firms adapt their offering? The following highlight some of the key questions the market need to address:
- Should Prime Brokers offer the full suite of services or is a PB light model a more viable product going forward?
- Should Agent Lenders offer dynamic lending buckets?
- What value is there in being the first market practitioners to be SFTR compliant?
- How will CCP’s change the supply chain?
- Will a collateral “pledge” model be an industry standard?
- Will Hedge Funds want DMA?
- What are the ramifications of a T zero settlement market?
- Will the demand for 1 year + term change market behaviour?
At The Field Effect we believe that every change should be seen as an opportunity. Whether regulatory or value driven change programmes do not need to be painful processes to achieve a tactical, expensive regulatory compliant solution. Taking a strategic and structured approach towards change can help you realise value where others cannot. We believe over the next 3 to 5 years the barometers product offering the industry uses to define the best borrower, lender, and prime broker will materially change. Changes in client demand and behaviours, use of innovative technology, increased capital costs and reduced settlement date periods will force the industry to revolutionise its operating model. This provides the ability for market share and P&L growth to be gained or lost dependent upon now well a firm aligns their operating model to the future state needs of the industry.