Stock loan tech spend set to surge
Securities lending tech vendors look set to pick-up a healthy amount of business in the coming years as regulation takes effect and demands for front-to-back office solutions grow.
Analysts at Aite Group reckon lenders and borrowers currently spend close to $500 million annually on stock loan systems - split virtually equally between in-house and external solutions.
However, the market for commercial vendor solutions alone is predicted to rise to $307 million in 2020, up from the current $252 million.
“The key drivers behind this growth in external technology spend are a desire for aggregated front-to-back solutions, increasing regulatory focus, and the goal of reducing expenditures on in-house and third-party custom development in the securities lending division,” Aite Group’s Bill Butterfield wrote in the group’s latest report.
Around 20 executives spread across broker-dealers, custody banks, agent lenders and asset managers were polled as part of the study, entitled Securities Lending: Technology Overview.
It found that no single approach dominates the landscape among large firms in terms of in-house-built versus vendor-built technology.
Those that do have proprietary systems cite the total control over development and timing of that development as key factors in keeping things in-house.
Multiple respondents also shared that they have bolted vendor applications on top of their proprietary applications to fill gaps in functionality more quickly than they could themselves.
Large firms rarely take vendor solutions off the shelf; the vendor ends up customizing the build for many clients.
Firms that stick to a vendor-only approach often stitch together multiple vendor applications from front to back—either sourced from a single vendor or from multiple vendors.
The head of operations or chief operations officer (COO) is the most targeted decision-maker, followed closely by the head of collateral management.
The head of risk and head of treasury management/finance are also often targeted.
Vendor consolidation on the horizon
Meanwhile, given the easy-to-integrate functionalities and the propensity of some market participants to use multiple vendor solutions in conjunction with one another, Aite Group's experts believe future vendor consolidation is likely.
Recent examples include Broadridge’s acquisition of 4Sight Financial, the purchase of SunGard by FIS and the IHS merger with Markit.
"The landscape has been molded by a series of mergers and acquisitions over the years, signaling that more deals are likely, especially given firms’ desire for a multicapability solution covering securities lending, repo, and collateral management," wrote Aite Group's Virginie O’Shea.
"Partnerships are also common in this segment and might become the method to increase market share."
Convergence
In addition, once separate areas of operations, risk management, and technology, the securities lending, repo, and collateral management functions are morphing into a combination called securities finance.
"The silos are breaking down in terms of firm-wide risk exposure; a consolidated view of real-time positions is the new normal post-crisis," O'She added.
"A recent spate of vendor consolidation has been driven by the demand for multicapability systems that can handle securities lending, repo, and collateral management and optimization in a single solution."
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