Securities finance markets across the Americas are imposing greater demands on technology as they seek to move beyond automation into process improvement. Paul Golden reports.

In a recent article on the bank’s website, Michael Saunders, head of securities lending, Americas, and Kevin Stahl, head of business development for market and financing services, securities services North America at BNP Paribas, described technology as the critical competitive element in the business. However, they also acknowledged that technology innovation is a difficult task to master and that a bank can rarely be sure that a technology at first look will be reliable, secure and fit for purpose.

When asked to what extent advances in technology tools and platforms are driving efficiencies and growth in securities finance markets across North America, Central America, South America and the Caribbean, Philip Morgan, COO and head of sales at Pirum Systems, observes that more than ever, market participants are looking to utilise technology solutions for all aspects of trade lifecycle automation.

“Along with meeting regulatory and capital requirements, this is driven by the need to create efficiencies and manage risk,” he explains. “In the past, technology was viewed as purely a way to do things faster and with more efficiency as volumes increased. Whilst in some cases this remains the case, participants are now looking for technology to change more fundamental elements of their operating model.”

In this scenario, improvements in human efficiency are mirrored by improvements in financial resource management, allowing firms to do more with less capital and balance sheet whilst increasing control.

Technology also assists in bringing real time data to decision makers and improving - and in some cases executing – decisions, whether that is suggesting the best execution venue, more efficient use of collateral, or identifying a failing trade that is creating a significant P&L impact.

Connectivity and interoperability

According to Martin Seagroatt, marketing director for securities finance and collateral management at Broadridge, technology solutions are driving efficiencies in a number of ways.

“Firstly, connectivity between electronic trading platforms, market infrastructure and firm level systems increases the potential for straight through processing across the trade lifecycle,” he says. “Increasing electronification of trading also opens up opportunities for automation of parts of the trading process, particularly for high-volume, low-touch transactions. Greater automation and operational efficiency allow firms to scale their business and process higher transaction volumes, while minimising the costs of adapting to regulatory change.”

As critical market infrastructure, exchanges must ensure that any new technologies can cope with the high volume and velocity of trading activities. There is also a need for a clear regulatory framework and common regulatory standards, along with system interoperability.

In an ever-changing ecosystem that is becoming more complex and fragmented, connectivity is more important than ever and the industry is looking for low-touch, easy-to-integrate solutions. However, changing behaviour continues to be an issue that industry needs to be cognisant of and future-proofing solutions should be a focus.

That is the view of Morgan, who says software as a service or SaaS-based platforms are becoming increasingly popular with clients as they are easier to integrate without the need to install, upgrade and maintain a software asset.

“Service providers that are agile and evolving will be able to support the constantly changing industry landscape,” he suggests. “There is widespread appreciation of the benefits of adopting new technologies, so education is not necessary - what is challenging for firms is understanding how best to utilise and implement solutions to ensure the intended benefits are achieved.”

Exploring emerging technologies

Some exchanges in the Americas have committed to using blockchain in their securities lending systems, while others are looking to deliver digital asset capabilities.

In April 2019, for example, the Jamaica Stock Exchange announced the execution of a master agreement with Canadian fintech Blockstation that will see it become one of the first stock exchanges in the world to enable live trading of digital assets and security tokens in a regulated and secured environment.

The master agreement was completed following a successful live trading pilot, which included participation from Jamaica Stock Exchange’s broker-dealer members and the Jamaica Central Securities Depository (JCSD).

The agreement will provide international SMEs with a streamlined and simple process for raising capital in a compliant and transparent manner through security token offerings. The exchange also hopes it will demonstrate market leadership by showing the financial community that digital assets and cryptocurrencies can be traded safely through trusted broker members like any other security, in full compliance with regulations.

Other objectives include creating an inclusive, regulated market that is more accessible to institutions - as well as non-accredited investors who would otherwise be excluded from opportunities in the digital asset space – and streamlining the public disclosure process for SMEs, making it easier and more cost effective to list shares and other assets.

Elsewhere in the Americas, securities lending was the first service provided by Chile’s Santiago Exchange to use blockchain technology, as part of a strategic partnership established by the exchange and IBM in May 2017 that will over time incorporate the technology into other operational processes. The blockchain application for securities lending launched in June 2018.

Morgan accepts that blockchain and other emerging technologies are grabbing the headlines at present and that for certain use cases there is a strong argument for exploring the use of these technologies.

“However, adoption and how these technologies are rolled out requires careful consideration, as does the common domain model that is to be used to define them,” he adds. “Despite the promise of these technologies, their use within the financial industry needs to be viewed on a case-by-case basis and for the market to ask itself whether a revolution is necessary or would evolution suffice.”

Blockchain has the potential to benefit the industry in the long run by speeding-up transaction times, improving transparency, streamlining business processes and reducing costs, says Seagroatt.

“There are possibilities to reduce trade fails and operational risk while increasing speed and accuracy, particularly around areas such as collateral mobilisation and substitution,” he continues. “However, there are still many challenges and concerns that need to be ironed out before we will see widespread adoption and commercialisation of the technology.”

Artificial intelligence is another emerging trend, one that is referenced by Saunders and Stahl who suggested that it has the potential to be impactful in areas from improving the scalability of resources to providing greater visibility and auditability of transactions.

Seagroatt agrees that artificial intelligence has a huge number of potential use cases, from applying intelligent automation to parts of the trade lifecycle through to predictive analytics and machine learning around areas such as trade pricing and collateral optimisation.

“However, financial services is a heavily regulated industry and regulators are paying increasing attention to the technology,” he adds. “Auditability and ‘explainability’ around how a machine learning solution arrived at a particular conclusion are thus becoming more critical and this could hold back some potential use cases in future.”

Enhancing efficiency

Over the last few years in particular, technology has enabled higher efficiencies at a time when existing service providers have not made any radical changes to their business models. There has also been a focus on making better use of tools that are already available, whether that is in the pre-trade space – such as auto-borrowing of securities – or in the general collateral space.

That is the view of Armeet Sandhu, chief executive officer at Stonewain, who refers to a similar trend post-trade where the focus is on increasing efficiency in the back office.

“The overall objective is to reduce the cost of the desks,” he explains. “I understand companies have achieved very high levels of automation, especially in the equities space where the large primes and tech-savvy companies are moving to a model where their desks are focused on finding those hard-to-borrow securities.”

Sandhu says there has been a realisation that investment is required in order to make the most of services such as NGT (EquiLend’s trading platform) and this increased level of investment has enabled the end user to achieve more effective outcomes. There has also been increased focus on developing algorithms or processes that can enable users to create automation.

Earlier this year, Stonewain announced that it was partnering with EquiLend to offer securities finance market participants the ability to manage their book of business on a single, comprehensive and integrated platform.

“Blockchain has a role to play in enabling the rapid dissemination of information, which would be a major benefit to the end of day post-trade services cycle,” says Sandhu. “There are some with more ambitious objectives for the technology which I am not completely convinced of as yet, but a ledger that has the same version of truth for all parties has obvious appeal.”

The difficulty with implementing this type of technology lies in the standard network effect. Having two parties on the blockchain is of limited value - it requires wider participation, which is a challenge in terms of creating consensus across the industry.

“If we look at the experience of ALD (Agent Lender Disclosure), despite having a regulatory mandate it still took the industry a while to come together to build a solution,” concludes Sandhu.

This article features in the Americas Securities Finance Guide 2019. Read the full guide here.