Securities Finance Americas Guide 2023

EDITORIAL

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Taking stock

A review of the main factors behind the growth of securities finance revenues in North America in the second half of 2022 - a period during which the main US indices lost more value than at any time since the 2008 financial crisis.

S&P Global’s securities finance snapshot for May 2023 shows that across Canada, revenues increased 4% year-on-year to $32.8mn (£25.6mn). This represents a decline from April ($39.4mn), making May the second lowest revenue generating month of the year for the country.

Revenues were driven lower by a fall in balances over the month (-$12bn) as average fees remained close to those of April.

Revenues from specials decreased 15% to $9.2 from $10.8mn in May 2022 and specials balances were approximately 1.7% of all on loan positions. Specials activity in Canada has generated $50.5mn so far this year, a 31% increase on the same period in 2022.

S&P Global Market Intelligence’s securities finance Q1 2023 snapshot notes that the Bank of Canada increased rates once over the period - by 25bps - but communicated that it would be pausing for breath after this most recent hike. Tech stocks saw the greatest gains over the quarter with mega cap stocks experiencing the strongest returns.

Average fees in Canada over the period were 69bps, which represents a 17% increase over Q1 2022. Final Q1 revenues for the quarter were $107.6mn and March was the best month for Canadian revenues with $40.4mn generated. An impressive average fee of 72bps (+15.8% year-on-year) helped push revenues higher.

Ross Bowman, global head of agency lending client management, securities services at BNP Paribas observes that 2022 was the worst performing year for the US S&P 500 index since 2008 and the fourth worst since 1957.

Equity valuations

Markets were panicked by high levels of inflation and increasing interest rates, and with equity valuations trading on multiples of future earnings, value stocks soon began to outperform growth (more speculative) stocks.

By the end of last year, the NASDAQ had posted a 32% year-on-year-decline, the S&P 500 an 18% decline and the Russell 3000 Growth a 29% decline. However, with the exception of the NASDAQ, the final quarter of the year did see all the main US indices posting increased returns quarter-on-quarter on the potential positive note that inflationalthough still high - may have peaked around year-end. However, this tumultuous period ended with benchmark interest rates in the US at a 15 year high.

“In terms of securities lending activity, the dramatic increase in interest rates has meant that market investors that have historically sought yield through growth stocks and riskier investments can now benefit from reasonable yields on risk-free and much less risky assets, such as government and agency bonds, which has driven down values and hit corporate earnings,” says Bowman.

These downward moves in cash equity values have increased the level of directional short activity in the US securities lending market. Even the big tech growth stocks of Meta, Amazon, Apple, Netflix and Google lost a collective 43% in value over 2022, with Tesla printing a 65% loss in value.

“With these heavyweight constituents taking large valuation losses, many other

stocks have followed which has created volatility in the markets and therefore opportunity in the securities lending market,” says Bowman. “According to DataLend, this increase in activity and revenue has resulted in the North American equities markets outperforming all other regions over the year, with an 11% increase in fees.”

Top specials

The top five earnings security specials of

With these heavyweight constituents taking large valuation losses, many other stocks have followed which has created volatility in the markets and therefore opportunity in the securities lending market

Ross Bowman, BNP Paribas

2022 were all in the US market, generating $769mn in revenues for lenders, $356mn higher than the top five specials of the previous 12 months. Overall, specials volumes increased in the US as monetary policy has driven the downward trajectory of cash equity market valuations throughout the year, explains Bowman.

“Increasing global inflation and benchmark interest rates have hit the pockets of consumers as wages have struggled to keep pace,” he says. “These macro factors have not only created volatility in the financial markets - increasing specials activity - but consumers have also become less able/more hesitant in their spending on large ticket items such

as automobiles, right down to smaller items such as renewed subscription services and tech upgrades.”

On average over 2022, fees for government bonds increased year-on-year, although overall utilisation was lower than in 2021. Borrowing demand for US government securities was directly driven by increasing US inflation and the Fed’s interest rate increases to try and control it.

“Outside of the usual demand for the cheapest to deliver (CTD) and benchmark issues, the greatest borrowing demand remained concentrated in shorter dated issues, as these are more sensitive to rate increases,” says Bowman. “Furthermore, the looming spectre of the US debt ceiling continued the demand for shorter date US T-bills.”

DataLend’s Q1 2023 market review notes that regionally, the bulk of the revenue increase came from bonds issued by North American corporations, generating $124mn in lending revenue, equivalent to a 96% increase compared to the same period in 2022.

This impressive performance was primarily driven by a 92% increase in fees year-on-year. On the other hand, falling bond prices were counterbalanced by a 13% increase in the onloan quantity of corporate bonds, resulting in balances remaining flat.

Revenue drivers

The largest revenue generating corporates in the region were SIX FLAGS 5.5% 15/04/2027, MPH A LLC 5.75% 01/11/28, and MICRO

0.125% 15/11/24 with a combined revenue of $8.9mn.

Most notably, SIX FLAGS 5.5% 15/04/2027 revenue was up over 6200% compared to Q1 2022, with fees and on loan balances up 2,777% and 121% respectively. At an issuer level, SIX FLAGS was the number two revenue generating company, although there

One of the main contributors to revenue growth was the shift in the interest rate environment

Betsy Coyne, eSecLending

US meme stocks, Lucid Group (LCID), video game retailer

GameStop Corporation (GME), and food producer Beyond Meat Inc (BYND) were the top three revenue generators in 2022. Together these three securities produced over $570mn in gross revenue, twice the revenue generated by the top three in 2021

Nancy Allen, Equilend

may be a short play on the one issuance maturing in 2027 as all other issuances traded GC and the common stock (SIX) has seen low demand for an extended period.

3M COMPANY issuances took the top spot, with combined revenue of $5.7mn spread out across four issuances all earning more than $500,000.

Nancy Allen, head of data & analytics at EquiLend observes that 2022 was another banner revenue year for the securities lending community as the market generated nearly $10bn in gross revenue for beneficial owners. Regionally, North America experienced a 10% year-on-year revenue increase due to strong fixed income performance and an uptick in equity revenue of 7% on the back of higher fees.

“US meme stocks, Lucid Group (LCID), video game retailer GameStop Corporation (GME), and food producer Beyond Meat Inc (BYND) were the top three revenue generators in 2022,” she says. “Together these three securities produced over $570mn in gross revenue, twice the revenue generated by the top three in 2021.”

Allen adds that US interest rate hikes helped to drive corporate debt performance in the lending market - from a revenue perspective, the top ten corporate bonds demanded fees 54% higher than the 2021 average, driving US corporate debt revenue to double year-over-year.

Growth factors

When asked to outline the main factors behind the growth of securities finance revenues in North America in the second half of 2022 - a period during which the main US indices lost more value than at any time since the 2008 financial crisis - Betsy Coyne, senior vice president client relationship management at eSecLending observes that volatility resulting from inflationary concerns, geopolitical issues, a reduction in hedge fund net leverage, and an active economic environment led to more short selling and directional activity in the latter half of last year.

“One of the main contributors to revenue growth was the shift in the interest rate environment,” she explains. “We saw robust reinvestment opportunities for those lenders with guidelines that allow them to take advantage of the favourable conditions. Also, US treasury ‘specials’ came back into the market after a very muted 2021.”

On the equity side, eSecLending’s on-loan balances hit a five year high and average fees moved favourably from 50 bps to 60 bps on average at the end of 2022. Another positive sign was that specials were more broadbased. The risk-on environment and notable disparity among market participants in terms of where the economy was headed provided for lending and financing opportunities.

Valuations of everything growth-related or

speculative in nature came under pressure given the rising rate environment says Coyne.

“Specials activity in 2022 was largely attributed to US equities and the meme stocks such as GameStop, Beyond Meat, and Sirius XM Holdings. Also contributing to the specials activity were sector plays such as the EV space (for example, Lucid Group) and crypto related names such as MicroStrategy. We also saw incremental revenue in the US high yield ETFs space as well as names like AMC Entertainment.”

ETF activity

US ETFs dominated lending activity last year and were popular among investors. ETFs were borrowed for directional plays largely because they are easier to short than the full index and provide broader market exposure.

“We saw heavy shorting of ETF names earlier this year but that has cooled a bit,” says Coyne. “Although fees are off compared to last year, ETFS are still generating good returns, particularly sector or index specific ETFs.”

Monetary policy has impacted demand for US government bonds in a variety of ways. In general, rising rates have given repo investors (mainly money funds) an upward sloping yield curve and a place to park idle cash, with money market fund AUMs reaching historic highs in the post-pandemic environment.

“As repo balances increase, we are seeing demand for GC collateral as many borrowers are running a match book - bidding in collateral at one price and offering collateral at another - and clipping the spread (bid/ ask) on these trades,” says Coyne. “GC lending of government bonds has increased as rates have increased because lenders are more willing to pay a rebate to raise cash when there are good spending opportunities on the reinvestment side. As rates have increased, we have seen more of these opportunities arise.”

Although demand remains strong for collateral, the continued increase in rates is weighing on the overall rebates that are being paid to lend USTs and borrow dollars.

“The cost of the 2% haircut in securities lending trades is more punitive to borrowers in a rising rate environment and we are starting to see this cost increase passed through to our bids,” adds Coyne.

“The rising interest rate environment has aided the demand in the specials market because, as rates increase (and prices decrease), we have seen the short base in the on the run issues increase. As the Fed’s quantitative tightening programme continues we are seeing less securities held in the SOMA (Fed portfolio) account, and hence less available outlets for borrowers to source supply.”

GC lending of government bonds has increased as rates have increased because lenders are more willing to pay a rebate to raise cash when there are good spending opportunities on the reinvestment side. As rates have increased, we have seen more of these opportunities arise

Betsy Coyne, eSecLending

Environmental concerns

An update on how ESG considerations are affecting securities lenders and borrowers across the Americas.

In March 2023 the Global Alliance of Securities Lending Associations (GASLA) released an update to the global framework for ESG and securities lending.

The new framework updates the first version, which was released by the Pan Asia Securities Lending Association (PASLA) and Risk Management Association (RMA) in May 2021 with the support of the International Securities Lending Association (ISLA) and provided the first practical guidance on how

securities lending market participants could approach ESG issues in their businesses. It provides insight into key considerations across the five main touchpoints between securities finance and ESG:

• Voting rights

• Collateral

• Lending over record dates

• Facilitating participation in the short side of the market

• Transparency in the lending chain

The framework also offers commentary on the legal and regulatory context for each touchpoint as well as practical guidance for lenders.

“CASLA firmly believes in the collective ambition set out through the framework,” said Mary Jane Schuessler, president of the Canadian Securities Lending Association (CASLA). “Following extensive dialogue with our fellow industry participants, it presents a unified and global framework for industry stakeholders when considering the integration of ESG policies into well-functioning securities lending programmes.”

Fran Garritt, director of securities lending, market risk and credit risk at RMA noted that the revised framework incorporates global considerations and best practices that have evolved since the initial release in 2021.

“In a fast-moving environment, the framework is an important resource for participants in the securities lending market as they seek to integrate ESG considerations into their activities effectively,” he added.

Subjective interpretation

In the absence of explicit regulation covering the application of ESG tenets when entering into securities financing transactions, the interpretation and application of ESG tenets into a securities lending programme can often become subjective observes Ross Bowman, global head of agency lending client management, securities services at BNP Paribas.

The global framework for ESG issued by GASLA provides clear guidance to all securities lending market participants and covers the key elements of a securities lending transaction that lenders should consider when applying a wider internal ESG investment policy to their securities lending programme.

“The framework is designed to be reviewed and, where needed, incorporated into decisions taken to commence or continue securities lending activity and represents a clear and positive step forward to aid the decision making process of securities lenders,” says Bowman.

He adds that securities lenders have long been able to tailor and customise their lending programmes in a variety of ways.

“Most of the customisation though has been related to credit limits, counterparty exposures and asset classes or market restrictions,” says Bowman. “As such, the implementation of restricted securities lists

As rates have increased,

- both on assets being made available to lend, and those being received as collateral - together with targeted measures to ensure stock is recalled in time for specific voting situations, have always been available to lenders and often put in place across many securities lending programmes.”

ESG focus

These latter restrictions fall under the more recent investor focus on ESG tenets and how they can be applied to a lending programme. In the US, the predominant form of collateral is cash, so as market regulation develops the use of securities as collateral is set to increase, and therefore the focus on applying ESG related restrictions on the collateral taken could also increase.

According to Bowman, this is already a key talking point with securities lending clients in Europe, where collateral is predominantly in the form of securities.

“Additionally, where borrowers are often looking for supply from ‘RWA-friendly’ lenders, lenders may also begin to look at the ESG and sustainability credentials of the borrower, through the application of ESG scoring data that is currently in its infancy across the market, but set to grow.”

On the question of whether there are sufficient resources available to clients to enable them to determine whether their agency securities lending programmes are

complying with their sustainability goals, Bowman notes that there is a variety of data available in the market that will help lenders obtain key information to assist them in complying with and monitoring activity in relation to their sustainability goals.

“However, the current challenge is how to consolidate the data and which data sets should be used, as not all will return the same results, as the inputs are different,” he says. “Data accumulation is also expensive and the costs need to be weighed against the objectives and the anticipated information obtained. While ESG market data continues to evolve, the GALSA framework serves as a high level guidance to all lenders as a key starting point for the implementation of any ESG considerations to a lending programme.”

Important guidance

Dimitri Arlando, head of EquiLend data & analytics EMEA describes the framework as clear, concise and informative with important guidance on best practise.

“At EquiLend, we strive to provide our clients with the tools they need to manage their programmes whether they have an ESG component or not,” he says. “Our ESG tools can help with some of the best practice guidance that GASLA has outlined and we would welcome a conversation with any interested participants to provide more detail.”

Last September, BNY Mellon announced

GC lending of government bonds has increased as rates have increased because lenders are more willing to pay a rebate to raise cash when there are good spending opportunities on the reinvestment side.

we have seen more of these opportunities arise

Betsy Coyne, eSecLending

new enhancements to its securities finance platform to help clients analyse their agency securities lending programme alongside their sustainability goals, driven by growing stakeholder demands for increased transparency in connection with ESG investing.

Clients can apply ESG scores based on thirdparty data across their lendable portfolio, collateral and cash investments.

“Transparency is critical to the evolution of the ESG investing landscape, as well as the management of ESG risks and regulatory compliance,” said Ina Budh-Raja, EMEA head of securities finance product & strategy and global head of markets ESG at BNY Mellon.

“For most market participants, GASLA’s update to the global framework for ESG is a reiteration of many key tenets of their existing activities and we don’t anticipate material change to their participation or programme structures,” says Betsy Coyne, senior vice president client relationship management at eSecLending.

Valuable direction

For those institutions that have not yet incorporated ESG considerations into their securities lending activities, the framework can provide valuable direction as they work through this with their service providers.

There are many North American lenders who have integrated ESG into their lending programmes. However, the majority of these lenders are more focused on proxy voting/ recalls and less so on the collateral they accept, partly due to the US regulatory requirements around non- cash collateral (where US mutual funds are restricted from accepting equity collateral).

According to Coyne, there are some pension plans with broader non-cash collateral guidelines that have elected to apply their ESG profile to the non-cash collateral they

accept, although this is more of an exception than the rule among North American lenders.

“We make a comprehensive suite of resources available to our clients to ensure their securities lending activities comply with their sustainability goals,” she says. “We recognise that every client has different requirements in this regard and that a ‘one-size-fits-all’ approach is sub-optimal, hence our provision of fully segregated, individualised securities lending programmes ideally positions us to support our clients in this evolving field.”

With these heavyweight constituents taking large valuation losses, many other stocks have followed which has created volatility in the markets and therefore opportunity in the securities lending market

Dimitri Arlando, EquiLend

Settling down

In February 2023 the Securities and Exchange Commission adopted rule changes to shorten the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date (T+2) to one (T+1).

The final rule is designed to benefit investors and reduce the credit, market, and liquidity risks in securities transactions faced by market participants.

“I support this rulemaking because it will reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets,” said SEC chair Gary Gensler.

“Today’s adoption addresses one of the four areas the staff recommended the SEC address in response to the meme stock events of 2021. Taken together, these amendments will make our market plumbing more resilient, timely, orderly, and efficient.”

In addition to shortening the standard settlement cycle, the final rules will improve the processing of institutional trades. Specifically, the final rules will require a broker-dealer to either enter into written agreements or establish, maintain, and enforce written policies and procedures reasonably designed to ensure the

An overview of developments relating to T+1, including market participant preparedness and some of the challenges implementation will pose.

completion of allocations, confirmations, and affirmations as soon as technologically practicable and no later than the end of trade date.

The final rules also require registered investment advisers to make and keep records of the allocations, confirmations, and affirmations for certain securities transactions.

Further, the final rules add a new requirement to facilitate straight-through processing, which applies to certain types of clearing agencies that provide central matching services.

New policies

They will require central matching service providers to establish, implement, maintain, and enforce new policies and procedures reasonably designed to facilitate straightthrough processing and require them to submit an annual report to the SEC that describes and quantifies progress with respect to straight-through processing.

The amendments also halve the settlement cycle for trades relating to initial public offerings, from T+4 to T+2. Halving these settlement cycles will reduce the amount of margin that counterparties need to place with the clearing house, lowering risk in the system and freeing up liquidity elsewhere in the market.

According to Tom Veneziano, head of product, Americas at Pirum Systems, the level of preparation and readiness for T+1 is something of a mixed bag.

Today’s adoption addresses one of the four areas the staff recommended the SEC address in response to the meme stock events of 2021. Taken together, these amendments will make our market plumbing more resilient, timely, orderly, and efficient

Gary Gensler, SEC

I support this rulemaking because it will reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets

Gary Gensler, SEC

“In the US we have been looking at it for an extended period of time,” he says. “Some individuals are ready for the overall changes on the beneficial owner side, however the stock loan borrow side is still looking for efficiencies which is where our recalls manager comes into play, because you need that level of automation and real time processing.”

He suggests Canada and Mexico are a little bit further behind the curve. “Although we do have a year to get there, that is pretty advanced timing at this point if you are just starting to get into it. So, I think there is going to be a lot of need for automation and high demand for problem solving and gap closing for operational efficiencies, which is where vendors such as ourselves come into play, where we operate in a real time technology stack.”

Pirum is designing a recalls manager that will provide a full view and communications tool between counterparties from initiation and issue of the recall straight through to settlement and satisfaction.

Key development

“That is going to be a key development for our stock loan borrow community,” says Veneziano. “Then you look at other areas that could be affected by T+1, such as the changing of record dates and the changing of dividend dates that are going to come about in the corporate action space. In this context the idea of being able to also get some automation around events, instructions and elections is extremely valuable.” Pirum is looking to launch a voluntary corporate action module in Q3/4 this year. With any transition there will be firms who leave it till the last minute and then almost panic at the end to try and get in ahead of the deadline. However, Veneziano reckons there is a general acknowledgment that this

is a positive move.

“The industry is going to see a more marked difference between the acceleration of the settlement cycle from T+2 to T+1 than there was when we went from T+3 to T+2,” he suggests. “Although they feel it is a good thing to accelerate the settlement cycle and eventually (potentially) get to T+0 from an efficiency perspective, there is a little bit of fear because of where the compression is going to impact different services and processes. We have to acknowledge that it not going to be as seamless or as easy as it was in the previous settlement cycle.”

In terms of the implementation process, clearly there are a lot of moving parts. From the perspective of a vendor in the stock loan borrow space, Bob Zekraus, COO and head of Americas at Pirum Systems observes that the biggest challenge is recalls.

“There is a large amount of risk when there is settlement failure in the form of punitive damages from a buy-in perspective or from a failed claims cost,” he explains. “In our space, firms used to have 24 or 48 hours to satisfy that recall, whereas we are now looking at potentially having a valid recall all the way up to midnight on the trade date.”

Shortened cycle

This shortened settlement cycle impacts not just regular recalls for sales scenarios but also regulatory constraints, which leads to an even more specific buy in execution on the types of sales firms are dealing with.

“When you get into those scenarios and look at items where you have a hard to borrow stock, you are going to have a much shorter compression time in order to cover those and get that recall satisfied before you get a regulatory buy in,” adds Veneziano.

From the beneficial owner side or buy side where they are doing proprietary transactions, the main concern is going to

be in the lack of time to reconcile trade affirmations and net settlements. Where beneficial owners used to have 24 or even 48 hours to resubmit trades and still be able to net down in the settlements and have those affirmation processes completed, they are now going to have to have those trades done, reconciled and prepared for affirmation and submission on the trade date.

“That is going to be difficult, especially when you think about cross-border scenarios where you might potentially have APAC clients or European clients that are lending or borrowing or buying or purchasing within the US marketplace, because now there is a timing differential as well as a compression to the settlement cycle,” says Veneziano.

The obvious question to ask once the move to T+1 has been completed is when T+0 might happen. However, Pirum’s COO and head of Americas acknowledges that there is plenty of work to do on T+1 before the industry can fully focus on real time settlement.

Industry disconnect

“When you look at all the industry group meetings we have been on and the panels we have spoken at, there are a lot of different situations where borrowers and lenders have a bit of a disconnect in terms of understanding what best practices are going to be,” says Zekraus

“The regulators and industry will naturally let T+1 settle down before it starts with T+0

just to make sure all kinks have been ironed. But any firm that is looking at its processes now should be considering whether they are scalable for T+0 so when that change happens they are not trying to do another secondary lift or change all of their processes.”

Larry Albaugh, global head of operations and middle office at eSecLending also acknowledges that T+1 readiness various from entity to entity.

“There is a high level of engagement in industry discussions and focus groups from the major industry participants,” he says. “We are in very good shape a year out, and our observation is that all major participants will be ready in advance of the implementation date.”

Benefits acknowledged

He also believes that most market participants acknowledge the benefits of faster settlement as the move toward shortened settlement cycles continues across the globe and that most are taking this opportunity to evaluate, refine, and improve settlement processes holistically.

“The major challenge lenders and borrowers face in moving from T+2 is consuming sell notifications in a timely and efficient manner to achieve what essentially will be same day recalls,” says Albaugh. “Depending on the model (custodian, third party, etc.), firms have different levels of challenges to overcome. For example, a custodial

When you get into those scenarios and look at items where you have a hard to borrow stock, you are going to have a much shorter compression time in order to cover those and get that recall satisfied before you get a regulatory buy in

Tom Veneziano, Pirum Systems

programme likely has a larger lift as the process is embedded within core processing. As a third party provider, our process circumvents our lenders custodian process and therefore will require optimisation and not a major change in technology.”

According to EquiLend clients, conversations are taking place both internally and with external vendors observes head of post trade EMEA, Gabi Mantle.

“Looking at this through a purely securities finance lens, the settlement cycle is not changing as we operate on a T+0 basis,” she says. “However, securities finance’s reaction to sales needs to be slicker and right first time as there is far less margin for error once sale settlement cycles are squeezed.”

“The business certainly appreciates the notion that market volatility risks will reduce. Additionally, the adoption of technology solutions will improve operational efficiency and reduce manual touch points. But operational teams may not share such a positive view as they are faced with significantly less time to action lifecycle events and/or correct errors.”

Faster processes

One of the consequences of the change is that lenders are faced with recalling shares out on loan from borrowers in time to satisfy their client’s sale. With one day less to re-deliver the shares, their notification and operational processes need to be swift, streamlined and correct first time.

Borrowers need to take significantly faster action all the way through the trade lifecycle - shorts need to be covered faster, collateral needs to move earlier, and exceptions need to be managed more effectively (and even eliminated). Borrowers also need to be positioned to act on recalls in a shortened cycle and in some instances up until 23.59pm EST.

Collateral constraints will also play a part, adds Mantle. “All activity needs to be funded whether the collateral is on the way in or out. How will both borrowers and lenders manage funding processes in a shortened timeframe? Will borrowers be able to position the collateral fast enough to pre-pay their borrows? All of this leads to the need for transparency, visibility and automation.”

As for whether there is general acceptance that the timeframe for this change is realistic, Mantle says she is not hearing any noise on this subject. “My observation is that all the clients we are speaking to are working towards the deadline, rather than challenging it.”

Today’s adoption addresses one of the four areas the staff recommended the SEC address in response to the meme stock events of 2021

Gary Gensler, SEC

Keeping up with the tech

The most important developments across the securities lending market from a technology perspective over the last 12 months.

Technology developments in the securities lending market can be broken down into three categories; pre-trade, trade, and post-trade.

Many of the tech developments and enhancements over the past 12 months have been those launched by vendors in the trade space, where systemic integration of trading platforms has sought to increase automated trading functionality, explains Ross Bowman, global head of agency lending client management, securities services at BNP Paribas.

“However, no matter how quick and automated trading can occur, without similar developments to the pre- and post-trade space - such as onboarding, trade matching and settlement, and lifecycle event managementefficiencies remain limited,” he says.

Bowman says the challenges of pre-trade, ALD and onboarding of new business into the lending market are being met in the form of

tools and developments from market leading vendors that, with a wider adoption by the industry, will increase the speed-to-market of new business.

“Additionally, our industry trade associations, through the push towards a common domain model and new regulation in 2022 in the form of CSDR have also increased the focus of industry participants on the efficiencies needed in the post-trade and lifecycle event management process,” he says.

Varied pace

When asked to what extent technology will play a key role in the move to faster settlement by automating manual processes, Bowman observes technology developments have tended to move at a varied pace as each market participant often adopts and develops enhancements bespoke to their own infrastructure.

Ross Bowman, BNP

“What is needed is a greater and wider adoption of common practices and standards, specifically in the pre- and posttrade environment across the market,” he adds. “This will then ultimately remove the inefficiencies widespread in the market today.”

Joseph Seroussi, CEO & founder of Wematch, raises the current technology trend in the securities lending market of DLT settlements. Banks are investing in that space and Wematch is backing the movement that will facilitate moving from T+2 to T+1 and potentially T+0.

“The industry is still trying to find the best working model with so many different models being used - centralised, decentralised, public blockchain, and private blockchain,” he says. “The cross-ledger initiative is really interesting, mostly in relation to equities but still very interesting.”

He adds that there are benefits both from an ops perspective and also from a trading perspective - with the higher interest rate environment, any fails on repo trades are becoming massive amounts of cash which used to be very small amounts, and that affects the P&L desk.

“We are seeing a trend towards private ledger rather than public with bank-owned ledgers or consortium-backed ventures being the cradle for these initiatives,” says Seroussi. “But we are still in the early days in terms of what is going to be the main format with multiple banks each owning their own ledger and creating multiple solutions.”

New solutions

Depending on the investments that have been made over the last few years he expects to see banks popping up with new solutions or enlarging the scope of what they offer.

“Will we see banks using other people’s blockchain? I think that will happen as well. So, even if you have your own ledger, you may want to use one of your peers,” he says.

The big unknown for Ed Hochstadter, head of securities-based lending sales for North America at Wematch, is whether the banks will drive the change or the buy-side will be required to get into the picture to get the exchange moving faster.

“Whatever great technology is out there won’t sell itself,” he adds. “It needs to be properly marketed and presented to encourage adoption. We are working to level the playing field regarding access to technology by having a very open and collaborative model where we offer the same technology to everyone.”

Both the sell-side and the buy-side know that digitisation is imperative. Manual workflows represent substantial operational and reputational risks as errors slow down operations and in the worst cases lead to settlement failures. The race is on to find more reliable and effective approaches to interests matching, workflow automation, and collaboration to unlock efficiencies and productivity.

Collateral location

According to Hochstadter, dynamic, automated collateral management is all going

The industry is still trying to find the best working model with so many different models being used - centralised, decentralised, public blockchain, and private blockchain

Paribas

to be about locating where the collateral is and moving it as fast as possible, regardless of blockchain.

“Blockchain will obviously help that movement massively even though we still have challenges on how to reuse the tokenised assets,” he says. “There are still some challenges from a legal standpoint on the tokenisation of assets, such as where they sit, how you handle them, and how you reutilise them which are pending in terms of a clear view of where the market is going.”

Then there are technical issues such as key management and security. On a private ledger, the security of the digital assets is much less of a concern because the assets will stay on the same blockchain and be handled by large institutions that have no problem managing these kinds of issues.

When asked about the extent to which technology will play a role in facilitating faster settlement by automating previously manual processes, Tom Veneziano, head of product, Americas at Pirum Systems observes that getting to real time processing is going to be a key factor for a lot of settlement changes that are coming through.

“From an investment perspective, firms are looking at their expense line more acutely to ensure they are getting value for the services they adopt,” says Bob Zekraus, COO and head of Americas at Pirum Systems. “There are a lot of solutions out there but some are only suitable for specific use cases.”

He adds that most clients understand the network impact that a firm like Pirum delivers. In other words, when a client adopts a service, how does that not only benefit their firm but also make their counterparties better?

Investment appetite

“There is appetite for investment, it is just that it is becoming more scrutinised and measured,” says Zekraus. “I also think it is aligned to where

people see future value for developments that bring value to the wider industry.”

While there are opportunities for improvement and differentiation, automation is expected and present in most processes. That is the view of Betsy Coyne, senior vice president client relationship management at eSecLending, who adds that technology will play a major role in the move to T+1.

“Much of that will come from industry utilities (Pirum, Equilend, Loanet, etc.) who are developing new platforms that improve workflow management and increase transparency,” she says. “The use of industry utilities that offer a standardised hub of information is a valuable tool and will help to alleviate challenges that exist when using bilateral or one-off technology solutions that aren’t scalable.”

From an investment perspective, firms are looking at their expense line more acutely to ensure they are getting value for the services they adopt

Bob Zekraus, Pirum Systems

Stronger together

What have been the most significant developments within the securities finance industry from your perspective over the last year?

Christel Carroll (CC) - Regulation and investment in technology are two key themes in securities finance currently. It is an exciting time in our industry. There are a number of regulations impacting securities finance, either directly or indirectly – the move to T+1 settlement cycle in US and Canada, SEC proposal 10c-1 aimed at improving transparency in securities lending, Basel III ‘end game’, and money market reform to name a few.

While regulatory changes require firm resources to digest and build for compliance, regulation can also spur innovation as firms look to improve efficiency, increase revenues and/or reduce costs. A number of the alternative structures that have emerged in

our industry in recent years were a result of regulatory pressures.

I think we will see a new cycle of innovation in our industry over the next 3-5 years as a result of regulations. Firms are already exploring how emerging technologies such as tokenisation and distributed ledger technology can benefit industry participants.

Nancy Allen (NA) – As a result of advancements in technology and regulatory requirements, the securities finance industry is focused more than ever on obtaining real time information. Whether that be real time trade data to help determine pricing and liquidity, more timely matching intelligence to identify settlement breaks, or greater transparency through potential regulation (SEC 10c-1 proposal), the market requires information to be readily available.

From a fintech perspective, a number of our new initiatives are focused on connectivity

Representatives of the New York, Boston and Chicago chapters of the Women in Securities Finance (WISF) group offer an update on developments over the last 12 months.

Nancy Allen, EquiLend

Christel Carroll, Goldman Sachs Agency Lending

Lori Paris, Northern Trust

across all our products from trading to posttrade, books and records and data in order to help our clients take actions using real time information.

Do the changes to work practices introduced in response to the Covid pandemic continue to impact women working in securities finance?

NA – The evolution of remote work practices which accelerated during Covid has had an impact on all employees, not just women. While I am very supportive of the flexibility, I do believe it brings its own challenges and that it is important that we all make an effort to focus on connectivity with our colleagues and to maintain a presence in the physical office.

I am lucky in that EquiLend has introduced a hybrid policy that combines in-office collaboration with remote work flexibility. We have 100 remote days we can use at our discretion and as a team, we generally try to coordinate our office days to ensure optimal in-person collaboration.

CC - I think many recognise that the flexibility in work schedules and locations as a result of the pandemic has improved the ability to manage work-life balance. I have been fortunate enough to work at a company and for managers that have always been very supportive of my needs as a working mother, but the ease at which we all can now work from home and stay connected has made it that much easier.

While we often talk about flexible work arrangements in the context of women, it is equally as important that the same flexibility be extended to all and that the onus of work/ home balance is not left exclusively with women. For example, we are seeing more and more companies offer men parental leave equal or comparable to women’s leave – and

just as importantly you are seeing men utilise an extended parental leave.

Another area where the impact of Covid and remote working is still felt is with new hires within our organisations. There are many new hires coming into the workplace that have spent the majority, or in some cases, their entire career working remotely and are now learning to navigate the office environment and build out their professional network.

I think it is important that we recognise this and offer support for career development. WISF programming has focused heavily on networking and mentorship opportunities this year as a way to connect members of the securities finance industry.

Do you feel there is significant recognition of the fact that diversity is about more than just gender?

Lori Paris (LP) - Yes, I do think there is an awareness and focus on diversity beyond gender. From the start, one of WISF’s primary missions has been to foster community within the securities finance industry - our events are always open to all and we are mindful in our programming to explore diversity issues through a broad lens.

One example is the courageous conversation series of the Perspectives by Women in Securities Finance podcast which has covered race and sexual orientation in the workplace.

NA – Absolutely. Diversity is about bringing together people with different perspectives. When you are able to create an environment that is inclusive, and respects and values different ideas and points of view, you will create a more powerful environment which will help to drive success and the bottom line. I think most people recognise this to be true, but what we need to work on is putting it into action.

What is on the agenda for WISF over the next 12 months?

NA - Professional development to build future leaders has been the key theme for WISF this year. One area of focus for the group has been expanding the reach of WISF and growing our chapter footprint. Recently I was appointed as a New York chapter Lead to help grow the chapter and provide a more formal structure in the New York market.

The first official New York event was a networking golf clinic focused on the benefits of the sport from a professional development perspective. With over 70 members of the securities finance community in attendance, the group heard from Becky McDaid, the 2002 US Women’s Amateur Champion turned teaching pro about her experience as an elite athlete and how she has seen first-hand the role golf can play in a professional’s career growth. The group then hit the simulators to fine-tune their swings!

Our next event will centre around philanthropy, being a community outreach event, where chapter members volunteer at God’s Love we Deliver, a non-profit organisation that cooks and home-delivers nutritious, medically tailored meals for people too sick to shop or cook for themselves.

With a growth mindset to continue to build the community, we held an in-person event on the west coast earlier this year in partnership with Blackrock and Charles Schwab. It was a well-attended event with lots of networking and connections happening.

CC - Another area of focus for us has been networking and mentorship opportunities. In addition to informal networking events that we are holding across all of our chapters, the London and Boston chapters have rolled out the Grow Your Network programme in each respective chapter.

The Grow Your Network programme helps members expand their professional network through one-to-one connections across the WISF community. The London chapter is now on its second round of Grow Your Network while the Boston chapter launched its inaugural round in the spring of 2023. Feedback from the initial rounds of Grow Your Network has been extremely positive and we plan to hold additional rounds in both London and Boston as well as expand the programme to other chapters in the near future.

LP - We have also joined forces with the 100K Mentor Challenge, powered by ProMazo, with the goal of helping 100,000 underrepresented students secure their first job. I am partnered with a college sophomore at DePaul University in Chicago who dreams of being an equity trader and she will be meeting with several Northern Trust equity partners and learning about the internship program for future years. We have also partnered with the Women in Business student group at University of Wisconsin to do a virtual DE&I presentation and plan future sessions with Midwest universities.

Christel

Lori

(Left to right): Nancy Allen (New York chapter leader) is head of data and analytics at EquiLend

Carroll (Boston chapter leader) is a vice president and co-head of client service and relationship management at Goldman Sachs Agency Lending

Paris (Chicago chapter leader) is senior vice president, head of client management NA, securities finance at Northern Trust

All Your Securities Finance Needs

When traditional investment returns come under pressure, the ability to generate supplemental revenue from your existing portfolio can help maintain performance. We provide tools to source liquidity, borrow securities (as needed) and lend securities to help enhance portfolio returns.

Our solutions include: Agency Securities Lending, Principal Lending, Sponsored Member Program, Secured Loans and Agency Investment Product.

To learn more about all of our Securities Finance Services, scan the QR code.

Looking at liquidity

What are the available routes for raising and deploying liquidity?

There is no shortage of routes available for a client to access liquidity – but not all are easy to access. At BNY Mellon, we have been focused on, and successful at finding solutions. For clients seeking to deploy cash liquidity, our market-leading LiquidityDirect platform provides access to a range of options, including deposits, money market funds, cleared repo, commercial paper, and certain securities. Clients seeking to earn incremental returns on securities they own can participate in our lending programs with BNY Mellon acting in either an agency or a principal capacity. Our clients who use these services can focus on the key investment considerations that they have – yield, duration, capacity, and alignment to their risk guidelines – rather than on routes to execution. When raising liquidity, clients consider fundamentally the same factors. They balance rate, duration, size, operating model,

and collateral guidelines as key factors and, again, simplicity of execution when looking to the repo, securities lending, synthetic, and credit markets for liquidity.

How do you assess the risks associated with liquidity routes, especially in challenging market conditions?

While seeking expanded routes to market, it is important to be conscious that each route has its own set of risks. The key to managing those risks is to have a consistent framework allowing for the monitoring of business, market, counterparty, operations and collateral/ investment risks. By having a consistent approach, clients are well-prepared to analyse the many options available to them, and select the ones that are best aligned to their needs. Most clients find that the best time to analyse these risks are in stable markets, rather than in times of high volatility. However, a key part of any analysis is the ability to retain access to liquidity in all markets.

How have clients utilised different liquidity routes during challenging market conditions? Can you provide examples of successful strategies?

Clients who have consistent success in raising/ deploying liquidity in challenging markets have multiple routes to market, allowing

Interview on liquidity with John Templeton, Managing Director and Global Head of Securities Finance Sales and Relationship Management, BNY Mellon Markets.

Clients seeking to earn incremental returns on securities they own can participate in our lending programs with BNY Mellon acting in either an agency or a principal capacity.

them to access the solutions that match their investment, risk, and return guidelines. For example, a client may be invested into an asset where the fundamental value is dislocated temporarily from the market price. In that case, the client can still access liquidity from the asset by:

• Repoing out the securities, to raise cash

• Taking out a loan and using the securities as collateral

• Lending the securities and receiving cash collateral

• Exchanging the securities for another form of securities

• Posting the securities as collateral in an unrelated transaction

All of these routes to market effectively address the same underlying issue in different ways, and each requires resources in order to access it. While the routes to market are the same across our client base, each client has a distinct balance sheet, investment portfolio, and risk standards. All of these factors inform the decision for the client in which routes to pursue. The decision point for most clients is how liquidity aligns to their overall goals, and whether they are solving for a tactical need (where speed to market is of the highest priority) vs. a strategic need (where having broader access is key to being able to navigate through disparate market conditions).

Have you noticed any trends or changes in the utilisation of specific liquidity routes?

Can you name any?

The major change that we’ve seen is that clients are reacting to the increased volatility caused by recent macro events adopting wider sets of routes to market, and ensuring that they can deploy and raise liquidity as needed, regardless of the environment. In the past four years, we have had three events disrupt markets significantly in the first quarter (COVID in 2020,

the war in Ukraine in 2022, and the US regional bank crisis in 2023). Clients who had multiple routes available to them were able to invest with less disruption than clients who relied on specific, more limited, routes to market.

Another key change that we have seen from clients is an increased focus on optimisation of the assets used to raise liquidity. Many of our clients have the same asset pool for securities lending activity, meeting margin requirements for derivative trades, and raising cash in the repo market. By working with BNY Mellon, clients are able to make sure that their assets with intrinsic lending value go out on loan, rather than being posted as collateral. Further, our technology examines their long assets and their collateral obligations, selecting the assets that best balance the clients’ goals of minimising the amount of collateral posted and accounting for the cost of carry of those assets, while meeting all of their obligations.

John Templeton is a Managing Director and was named Global Head of Securities Finance Sales and Relationship Management

for BNY Mellon Markets

in January 2022. John joined BNY Mellon in 2000 and, prior to assuming his current responsibilities, held a number of business development positions within BNY Mellon’s Markets, Global Collateral Services, Broker/ Dealer Services, Global Client Management, and Securities Industry Banking divisions.

Many of our clients have the same asset pool for securities lending activity, meeting margin requirements for derivative trades, and raising cash in the repo market

Addressing securities lending market inefficiencies

Can you explain the current inefficiencies in the securities lending market and how BNP Paribas is addressing them?

To frame the conversation around efficiency, I think it is important to understand some of the main drivers of securities lending for the participants of a transaction. Beneficial owners and agent lenders want to generate incremental revenues on top of their main investment strategies via an ancillary, low risk, product. Prime brokers (borrowers) want to facilitate flows for their clients and internal needs for a multitude of reasons, but rely on having access to a wide scope of stable inventory to support these critical functions.

For these goals to be achieved, the efficient settlement of loans, returns and sales is a key contributor to the smooth performance of the market. Currently, the rate of fails is too high across the market and this has negative ramifications on all participants. Regulators are pushing for improvement in this field in the form of implementing regulations (e.g. CSDR) and market participants are stimulating improvements by being more selective on the counterparties they trade with.

At BNP Paribas, we have invested in the latest

technologies and process improvements to enhance the efficiency of our programme. We see the key to efficiency being a simpler model to work with, reducing touch points where things can potentially go wrong, and ensuring as many things as possible are automated STP. Over the next 18 months, we are set to enhance our model to ensure we are well placed to adapt to any future developments that may come to the market.

What factors contribute to the persistence of inefficiencies in securities lending, and how does BNP Paribas tackle these challenges? A few elements have led to inefficiencies remaining despite the motivation to reduce or remove these entirely. One is the sheer volume of transactions, this has grown exponentially and the processes in place have not been able to keep up with the volumes. A second element is the lack of investment into the less attractive parts of the business. Over the years there has been a great deal of investment into the front-office automated trading platforms but less investment into the back-office functions, which is partly the cause of where the market is today. We are rectifying this by

Global Investor interviewed Andrew Geggus, Global Head of Agency Lending at BNP Paribas on the prevailing inefficiencies in the securities lending market and the effective strategies to tackle these challenges head-on.

investing in a simpler, more efficient model, and utilising advanced technologies that can help us to automate as much as possible. The key for our platform is to ensure we have a robust foundation yet remain agile enough so that we can react to new developments and remain market leading in our offering.

How does BNP Paribas collaborate to improve securities lending efficiency and transparency? What operational process optimisations have been implemented?

At BNP Paribas, we contribute to working groups across multiple industry bodies and organisations, and are happy to help push the market forward in the right direction for the benefit of all. We also want to help the fintech companies to continue to develop their offerings and enhance the products available to market participants. We are clear in our support for the offerings technology providers are developing, however we want to see more collaboration across the whole market.

One key area we would like to see more of is interoperability. For the market to truly be efficient, technology providers need to be able to work together, ensuring silos are not built or broken.

A further area to which BNP Paribas contributes to, is the development of the Common Domain Model (CDM). This initiative being driven forward by ISLA and ICMA, amongst others, will help to standardise data points and references to build a blueprint of processes and operational procedures. This could truly help improve efficiency across the market.

dedicated to the improvement of this system. It allows for a great deal of automation and on top of the improved operating framework, this system will allow for seamless interactions with the borrowing community while also offering an improved client experience for our beneficial owners. We believe a one-stop-shop where clients can manage their programme, see near to real time performance data, as well as robust risk and control monitoring, will help clients to truly optimise their agency lending programmes.

For the borrowing community, we are aware that the internal demands are ever-increasing and that the amount of point of trade data required continues to grow. The development of the platform will allow for more flexibility for our borrowers, so that they can see the information they want to see and we can set up any automated trading flows they require, including through external platforms or directly depending on what is required.

Andrew Geggus is the Global Head of Agency Lending at BNP Paribas, based in London. He has responsibility for the growth and strategic direction of the global agency lending business with a presence in EMEA, APAC and the US. Andrew is part of the Markets and Financing Executive Committee.

How does BNP Paribas use technology to mitigate risks and enhance efficiency in securities lending? Any specific platforms or solutions developed for this purpose?

BNP Paribas has a proprietary built system and part of the aforementioned investment is

Andrew joined from Northern Trust where he was most recently Head of Trading for the Asia Pacific region since 2017, in addition to being on the board of the Pan Asia Securities Lending Association. Prior to this Andrew held multiple trading roles across EMEA and APAC, having joined Northern Trust in 2014.

Prior to joining Northern Trust Andrew spent time in finance and research roles for a hedge fund and law firm in the city of London.

Andrew holds a BSc in Management and Economics from Loughborough University.

TO ACCELERATE CHANGE, WE CONNECT YOU TO EXPERTS AROUND THE WORLD.

Are We Ready for the Future Now? Going Beyond T+1

The securities finance landscape is currently one of shifting sands, but this storm of change has been blowing for many years. There is little that hasn’t been subject to adaptation with the advancement of regulation, the demand for standardisation, and requirements for interoperability, each of which impacts the dayto-day business of creating liquidity for financial markets.

Regulators are taking the long view, with efficient markets the end goal. To get there, both iterative and big bang changes will be necessary.

EquiLend has been in the business of change for improvement – over change for the sake of change – for a long time, which gives us confidence in the power of the revolution being ushered in with the latest regulatory storm.

Requirements for the future

The SEC’s vision for US markets has created a runway of advancement as trade settlement cycles have been gradually reduced, most recently with the move from T+3 to T+2 in 2017. The latest SEC initiatives impacting the securities lending markets are the 10c-1 proposal, which would require reporting trade status within 15 minutes after the securities loan is effected or the terms of the loan are modified, and T+1, which further reduces the settlement

cycle from two days to one, both of which suppose a speed of execution which is only possible with automation.

A clear view of exactly the current status of the trade, all day, every day, on both sides of the trade, is possible with the right investment in automated technology combined with real-time data capabilities to support firms in contributing to efficient markets and be compliant with regulation.

Efficient technology delivers on T+1, and even T+0 – something EquiLend is already in a position to support. Automation at the point of trade removes the significant risk of human error and reduces the weight on managing exceptions in post-trade; furthermore, automation throughout the loan lifecycle (specifically returns, recalls, collateral management, SSIs and prematching) all help to reduce the operational burden of manual processing or fixing exceptions.

Let’s face it, there simply won’t be time to waste on manual processing, correcting errors or validating data points; it is the adoption of automated solutions which will make or break T+1 – or the perhaps foregone conclusion of an eventual T+0 settlement cycle.

Every forward step on the path to T+1 is a leap into the future of the sector. Every element of a transaction must move more quickly and more

Gabi Mantle, head of post-trade solutions, EquiLend shares her view on the evolving landscape of securities lending.

accurately to comply, from research to execution to the subsequent operational activities of a trade. Market colour as up-to-the-minute as possible—such as real-time data available through DataLend—becomes essential.

Manually negotiated and hand-keyed transactions eat up precious time in a one-day settlement cycle and heighten the risk of human error, rendering the old way of chats and emails counterproductive at best and ineffectual at worst.

A majority of the market benefits from automated execution on NGT, of course, with Competitive Bid, Equilend’s latest trading innovation, enabling automation of warms and specials coupled with real-time market data, NGT transaction information and post-trade data points all in one place to ensure a clarity of view and an efficiency of process unprecedented in the industry.

Once executed, all transactions pass through post-trade lifecycle events - once manual to process, cumbersome to navigate and prone to error - all of which now can be seamlessly managed via EquiLend’s robust suite of post-trade solutions.

The reality of large-scale change will always have some casualties, regardless of the preparation. Taking some learnings from CSDR, where we saw returns volumes increase by 35% in the three months post-enforcement, it is fair to assume there will be additional pressure on posttrade mechanisms as firms get comfortable with the tighter framework for trade settlement.

Going beyond T+1

The move to T+1 has already been made by India, moving trades to the new timeline incrementally – loading the least-traded stocks onto the new protocol and adding new trades weekly to minimise impact.

The US and Canada, which intends to switch to T+1 one day before the US, will go for the big bang, committing virtually all trades to the T+1 settlement cycle from 27 May 2024 and 28 May 2024 respectively.

The near-time learnings from India’s adoption of T+1, such as a short-term increase in settlement failure and misalignment of cut-off times generating higher margin calls, has had some impact for adjacent markets in APAC. These factors will be important to note for North America’s 2024 switch and integral to a move by European markets to T+1, which is certainly on the horizon. EU T+1 taskforce meetings are already in place, and the final report is expected by the end of 2023, so it’s now a case of when and not if.

T+1 ushers in a new era, pushing the envelope of change. Those first-adopter firms who have embraced on-platform execution and embedded, automated post-trade processes are already well prepared for T+1.

The human nature of caution in the face of extraordinary change will have to be overcome given the brief timeline given for compliance with the shortened cycle. Yet the infrastructure is available today for immediate compliance. Even T+0 will be a soft-sell proposition when fully supported by DeFi tech such as EquiLend 1Source.

Underpinned by distributed ledger technology, EquiLend 1Source brings lifecycle information on a centralised chain, keeping both sides of a transaction in sync at all times and eliminating the need for reconciliations altogether. This is the type of future-proofing innovative firms are doing today.

Ultimately, the technology required for a perfect day one for T+1 entails efficient, on-platform trading, automated post-trade processes and clean data viewable across multiple touchpoints throughout the trade lifecycle, further enhanced by real-time data.

This is not a pipe dream, but an ecosystem available now with EquiLend. The firms that have their sights set on a day - perhaps not far off - where T+0 is the norm are best positioned for the shift coming less than a year from now.

Wematch.live: Insights on Growth, Expansion, and its new borrowing and lending (SBL) use-case

Insights from Joseph Seroussi, Chief Executive and Co-Founder of Wematch.live and Ed Hochstadter Jr., the Head of Securities-Based Lending Sales and Coverage for North America, as they share their views on the firm’s growth and expansion, revealing they will soon introduce a new SBL use-case.

Can you provide more information about Wematch’s growth in the North American market?

Wematch has been experiencing significant growth in the North American market, and we are excited to share more about our expansion. Over the years, our customers have expressed their expectations for us to extend the benefits of Wematch workflows to other regions. We have been working towards this goal, and our New York team is now becoming a well-established unit rather than simply operating out of London and other locations. In New York, we have built dedicated teams for product, tech, and support functions. This expansion is an ongoing process, and we

expect all the different verticals of our firm to be fully present by the end of the year. This evolution signifies our transformation from a subsidiary or branch office to a fully-fledged business entity in North America. We have invested substantial resources to ensure our customers have the complete “Wematch experience.” This experience entails having professionals who understand the market, actively listen to client’s needs, have first hand experience in the client’s seat, and can translate those requirements into product specifications. Wematch then delivers these demands through production environments, allowing clients to benefit from our offerings. Our primary aim is to assist clients in their

In New York, we have built dedicated teams for product, tech, and support functions. This expansion is an ongoing process, and we expect all the different verticals of our firm to be fully present by the end of the year

day-to-day operations, and we are committed to delivering on the promise we have made to them as we solidify our presence in the North American market.

How is Wematch’s team expanding, and are there plans to enter other markets? The expansion of our team at Wematch is a carefully considered process. While we have observed some banks downsizing their workforce recently, the securities financing sector has performed well overall. Customers are satisfied with the industry’s results across various banks, and they contribute significant value to their employers. Currently, our hiring focus is primarily on technology and product roles since we are a technology company at the core. Our top priority is to provide the best possible product, and most of our investments are directed toward achieving this goal. The industry’s growth will revolve around streamlining and automating lowvalue-added tasks, as neglecting these tasks can result in substantial costs. Therefore, we mainly focus on addressing workflow pain points and expanding further into post-trade operations with cash flow management solutions. Additionally, we are developing risk management tools, building contribution products, and addressing legal aspects to facilitate the industry’s shift towards more standardised electronic term sheets. We aim to support our customers comprehensively across all aspects of their business, not just matching, by concentrating on workflows and

addressing post-trade, legal, and financial dimensions. Wematch strives to become the go-to “one-stop shop” or software ecosystem for the TRS (Total Return Swap) community globally while also bringing the benefits of our working model to stock loan services. We recognise the need for innovation in the stock loan sector and aim to replicate the positive experiences our users have had with TRS. We are working rapidly to build and deliver these solutions to meet the demands and requirements of our customers. Exciting times lie ahead as we continue to progress in these endeavours.

Global Investor has mentioned that Wematch will soon introduce a new SBL (Securities Borrowing and Lending) use case. Could you provide more details about it?

Indeed, Wematch expanded into the European market in 2021, focusing on securities lending, particularly hardto-borrow securities. We have recently broadened our product scope in Europe to include credit lending solutions, which have garnered considerable interest from industry participants. Building upon these developments, we plan to launch the hardto-borrow in the US. Our goal is to have the entire setup ready and operational by the end of the year, with users actively utilising the platform.

Currently, we are engaging with a select group of counterparties who are testing the product in UAT (User Acceptance Testing) mode. We strive to listen to their feedback and incorporate essential workflow components that will drive future liquidity in the market. At Wematch, we firmly believe that workflow plays a pivotal role in generating liquidity. Traders face numerous challenges and responsibilities, even in an increasingly electronic market. Thus,

We are working rapidly to build and deliver these solutions to meet the demands and requirements of our customers. Exciting times lie ahead as we continue to progress in these endeavours.

Dealing workflows. Digitized.

Wematch aims to automate processes and provide traders with the necessary support to scale their businesses effectively. We are thrilled about the prospects of our growing community and the opportunity to develop new products that address their evolving needs and aspirations.

Considering the future market volatility in the Securities Lending market, what steps is Wematch taking to cater to this challenge? Over the past 12 months, Wematch has been working closely with our customers, particularly during challenging market conditions. We are proud to report a closeto-zero churn rate, indicating that we have served our customers exceptionally well. Our trading volumes have reached all-time highs, and our technology has consistently proven its ability to deliver in demanding market conditions. Looking ahead, we envision a future driven by increased automation and service enhancements throughout the trade lifecycle and workflow events. By positioning ourselves at the centre of our client’s day-to-day activities, we can offer even greater support. The more our

customers use Wematch, the more they discover its value, as they share their pain points and help us refine and develop the platform further. Our collaborative model ensures that solutions or functionalities we develop for one client are made available to everyone, fostering an environment of shared innovation. This approach allows us to adapt swiftly to regulatory changes, such as T+1 settlement and market conditions characterised by varying levels of volatility. Additionally, we are actively working on a blockchain settlement solution, which will introduce future technology to the industry. By supporting our growing community and adapting to market conditions, we aim to drive the future of the Securities Lending market.

Joseph Seroussi, the CEO and Co-founder at Wematch.live, is a seasoned professional in the financial industry. With a strong passion for trading and technology, he co-launched Wematch.live in 2016 to address key challenges faced by financial institutions. Based in New York, Joseph has a distinguished background in equity derivatives, having held various roles at Aurel-Leven (now BGC), Link, Cube Financial, REFCO, GFI, and Spring Hill.

Ed Hochstadter Jr., the Head of SecuritiesBased Lending Sales and Coverage for North America at Wematch. live has over 25 years of experience at toptier financial firms, including J.P. Morgan and Bear Stearns: he brings extensive expertise in securities lending, collateral management, and balance sheet optimisation. Based in New York, he’s driving the development of US securities lending coverage, onboard new business partners, and spearhead product development at Wematch.live.

The more our customers use Wematch, the more they discover its value, as they share their pain points and help us refine and develop the platform further

T+1: Total Recall…

While you are no doubt thinking of Arnie rather than settlement cycles, there is a link to the 1990s classic and the impending change to the US and Canadian markets in May 2024

With all impending challenges driven by regulatory change, and like Douglas Quaid in the movie, there will be companies selling you ‘fake memories of ideal vacations.’ Your job, as always, is to decide if you are Douglas Quaid or Harry.

Let us examine the changes and look at how securities finance participants can navigate these challenges.

What is changing?

On February 15, 2023, the Securities and Exchange Commission (the “Commission”) adopted the SEC Exchange Act Rule 15c61 amendment to accelerate the standard settlement cycle for securities trades from two business days after the trade date to one business day after the trade date (or from “T+2” to “T+1” in common parlance). The final rules will become effective 60 days following the date of publication of the adopting release in the Federal Register, but the compliance date for the rule change will be May 28, 2024.

The amendment is one way in which the Commission is seeking to create a more

efficient and resilient market while hopefully addressing episodes of market volatility which include the “meme stock” events of 2021 and the COVID-19 pandemic. Furthermore, compressing settlements by one day will improve investor protection and reduce credit, market and liquidity risks arising from unsettled securities trades. This shortened period will enable investors to access the proceeds from securities transactions sooner than they are able in the current T+2 environment and the compression should reduce the number of failed transactions overall, the period of exposure to those trades that do not settle, and potential price movements on the underlying securities. However if settlement efficiency is not achieved and failures increase instead, unintended consequences may arise, and it would not be inconceivable for the regulators to implement a recall fail regime and/or penalties akin to TPMG claims or CSDR penalties.

In addition, the shorter settlement cycle is aimed at improving the efficiency of capital for market participants. Like in both purchase

An article by Scott Brown, EMEA Head of Origination and Thomas Veneziano, Product Director, Head of NAM Products at Pirum.

and sale transactions, market participants will be able to wrap up the transaction a day earlier. If a trader has financing to buy the shares, they will be able to save one day’s interest which in a rising interest rate environment becomes less costly. Over the years, stock market transactions have been streamlined due to the emergence of technology. Unlike a decade ago, more than 99% of the existing shares have been converted into dematerialised form. Additionally, banking payment and settlement systems have evolved significantly with fewer errors. Given that the market infrastructure can now support shorter settlement cycles, it is the right time to change. The changes are no doubt a path to T+0 or instantaneous settlement in the future.

For securities finance participants this change makes daily life a little more of a challenge. As many of our clients will attest to, decision making is often the easy bit. It is having the tools to allow those decisions to be processed quickly and efficiently that is critical to achieving a good outcome.

Once T+1 is implemented, there is the potential for supply shocks, borrow volatility, and increased costs, passed on to borrowers, if best practices are not followed. Furthermore, the borrowers of securities may need to collateralise with a lender (ex: non-cash) the same day the transaction is executed for instructions to be released on time with the change compressing the time to check SSI’s, collateral etc.

If you are the lender, your focus might

be recall related. SIFMA best practice recommendation for cut off is 11:59 P.M. EST making the lenders, the protagonist of the movie (Vilos Cohaagen) and the borrowers the citizens of Venusville. If you will forgive the extension of the metaphor, the sharing of the turbinium ore is the only way to resolve this disconnect. In real-world parlance, technology is critical to achieving best practice, and this is where Pirum offers a securities lending solution.

Pirum’s real-time processing abilities and our Recalls Manager product (the latest iteration of our Front Office Services offering) supports recalls being processed in real-time reducing time to market, manual effort, and overall risk of failure. Let us not forget that the T+1 change will affect the protection period on corporate actions as well, which Pirum will cater for in the Voluntary Corporate Actions (VCA) product launching later this year. Some people reading this article will already be part of our Design Partner Groups (DPG) for both Recalls and VCA (if you want to hear more, please reach out to us).

In 2017, when the U.S. last shortened settlements (T+3 to T+2), the impact from a securities finance perspective was more nuanced and in many ways a non-event, whereas the move to T+1 is much more impactful and has resulted in much more time analysing operational processes with focus on recalls, affirmation, and emphasis on real time automated connectivity between lenders and borrowers compared to the current outdated model of batch processing.

Pirum’s real-time processing abilities and our Recalls Manager product (the latest iteration of our Front Office Services offering) supports recalls being processed in real-time reducing time to market, manual effort, and overall risk of failure

Considerations for clients to look at the holistic events on the lifecycle of transactions has become of greater importance as businesses look to better manage and mitigate risks and exposures. Lastly, from a recall perspective, the action for the lender to notify and the ability for the borrower to receive, consume and process recalls automatically becomes paramount

given the shortened settlement cycle and eroding timeline to action, source/cover and collateralise obligations.

In closing, do not be Douglas Quaid and look for a Melina at the last resort, start planning and making your decisions now. Ideal vacations do exist and Pirum has the ticket.

Douglas Quaid could not remember a ‘Rekall,’ and it changed his life forever!

Scott Brown, is Head of EMEA Origination Sales

A result-oriented, committed, experienced market professional with extensive experience in Sales, Collateral Management, most aspects of securities processing, and project management. Proven ability to build and manage creative, energised and focused client-facing teams.

Prior to joining Pirum, he held a position within agency collateral management at J.P. Morgan.

Scott started his career at Deutsche Bank in 2001 working in front, middle and back-office roles within Securities Finance.

Scott has also managed client facing teams at RBS and Barclays, the latter with a focus on OTC and ETD.

Well known in the market with an excellent reputation and proven track record of delivery.

Thomas Veneziano joined Pirum in July of 2022 as North American Head of Product, to help Pirum’s expansion into the U.S. post trade market, after spending 11 years at Citibank managing Agency Lending Operations.

Tom has 35 years of industry experience, spanning operations, trading, and prime brokerage.

Prior to Citi, Tom worked at Daiwa Securities in Operations and Treasury Finance Trading, Barclays Bank in Middle Office, Sales and Treasury Finance Trading, Bank of America in Fixed Income Prime Broker, and Treasury Finance Trading. Wells Fargo managing agency lending operations.

Tom also acted as Co-Chair to the Risk Management Association Operations and Tech committee for 4 consecutive years prior to joining Pirum.

Brazil

The Brazilian securities lending market had just over $2.2bn (£1.7bn) of lendable equities at the end of 2022 according to S&P Global Market Intelligence, a figure largely unchanged from the previous year.

In terms of value on loan, the 2022 total of over $1.9bn represented a significant increase on the $1.5bn recorded for 2021, which in turn was more than a fivefold increase over the total for 2020. Lending revenues of $24mn were nearly three times as high as in 2021.

The Central Bank of Brazil (Banco Central do Brasil) financial stability report for the first half of 2022 reported that there were

no relevant risks to financial stability. Capital stress tests showed that the banking system had adequate resilience and that the national financial system maintained provisions appropriate to the level of expected losses and comfortable capitalisation and liquidity. Broad credit growth continued to be consistent with economic fundamentals. Bank credit to households maintained its high growth rate and credit to micro, small, and medium-sized companies also continued to grow strongly. Larger companies continued to mainly access capital markets but again increased operations with the banking system.

Risk appetite of financial institutions remained high on lending to microenterprises and households. Risk materialisation increased due to riskier grants in previous quarters and to the deterioration of the financial situation of micro-enterprises and households. Provisions, however, increased and remained higher than expected losses.

Despite higher provision expenses, the profitability of the banking system remained stable. In line with the base interest rate hikes, the increase in the treasury margin offset the reduction in the credit margin. In the non-interest share of results, services income grew at a slower pace in the first half of 2022 but banks have been able to keep costs under control in a context of high inflation.

Capitalisation remained comfortably above regulatory minimums. Even in simulations with more adverse macroeconomic scenarios, no material non-compliances would occur.

In May, the IMF completed an Article IV visit to Brazil, observing that growth is projected to moderate this year to 1.2%, from 2.9% in 2022 before improving to 1.4% in 2024 and 2% over the medium term.

Headline inflation has rapidly declined from last year’s peak, but core inflation remains elevated, while inflation expectations have edged up. Headline inflation is expected to converge to the target by mid-2025. The outlook is subject to downside risks. However, strong buffers, including a sound financial system, large cash buffers by the public sector, and adequate international reserves, support resilience.

Brazilian authorities aim to achieve a primary fiscal surplus of 1% of GDP by 2026. However, the IMF has recommended a more ambitious fiscal effort that continues beyond 2026 to put debt on a firmly declining path, while protecting social and investment spending, supported by an enhanced fiscal framework, further broadening of the tax base, and reforms that tackle spending rigidities.

Source: S&P Global Market Intelligence

Capital stress tests showed that the banking system had adequate resilience and that the national financial system maintained provisions appropriate to the level of expected losses and comfortable capitalisation and liquidity

equities 2022 (US$)

Canada

Association confirmed that Canada would change to a one-day-following-trade-date (T+1) standard securities settlement cycle in 2024.

Phil Zywot, head of North American equities and US corporates (securities finance) at BNY Mellon and chair of the T+1 subcommittee of the Canadian Securities lending Association (CASLA) later provided an update on securities lending and T+1 in collaboration with the Canadian Capital Markets Association (CCMA).

He noted that T+1 was one of the most widely discussed topics by the CASLA board and that members were showing good engagement. “For securities lending market participants, the T+1 project has gone from 0 to 100 km, from being a blip on the horizon to having two to three meetings a week,” he said.

CASLA members are engaging with three groups:

• Third party solution providers to standardise, automate, and track the recall process from agent lender to borrower

The Canadian securities lending market had just over $57bn (£44.6bn) of lendable equities at the end of 2022 according to S&P Global Market Intelligence, a significant increase from the $46bn recorded in 2021.

In terms of value on loan, the 2022 total of $715bn represented a more moderate increase on the nearly $692bn recorded for 2021.

Lending revenues of $354mn compared favourably to the $301 generated during the previous 12 months.

In February, the Canadian Capital Markets

• TMX Group to explore a way to pair agent lenders that are long inventory in CDS with participants requiring securities to help fulfill sales

• SIFMA to keep the two countries’ securities lending markets aligned and see whether anything new can be learned from US efforts

Next steps are agreeing on industry standard(s) and moving ahead with enhanced automation of the recall process. An automated solution is not likely to materially change current systems, but instead will automate

and standardise the recall process within the existing infrastructure of the lending community.

“Industry participants need to review ways of streamlining information flow of transactions to their custodial banks on trade date, allowing agent lenders to efficiently execute timely recall notifications to the borrowing community, which, in turn, would give them enough time to source replacement securities to fulfill T+1 settlements,” said Zywot.

There are approximately C$1 trillion in lendable Canadian equities across the total lendable market, with about C$65bn out on loan at any given time – a 6-8% utilisation rate. There also is a similar amount of government and corporate debt, with a 16% utilisation rate.

Of the C$65bn in loaned equities, ‘warms’ (securities in quite high demand relative to market availability and so more expensive to borrow) and ‘specials’ (hot or harder-toborrow securities that can command returns of over 100 bps compared to a general average

of 24 bps annually) total about C$6bn - 10% of assets on loan and less than 1% of total lendable assets - with specials totalling about C$2bn of outstanding loans.

Over 90% of equity sales a beneficial owner executes do not impact a securities lending programme as these positions are not out on loan but rather sitting in the client’s custodial account.

When a position cannot be reallocated or substituted by another lending client’s position, the loaned securities must be recalled. However, this currently accounts for less than 5% of client sales.

Less than 1% of fails of the total amount of sales executed by clients are attributable to a security being out on loan.

This number of fails can still be material for certain ‘names’ – less liquid securities (various specials) that are heavily in demand are more likely to result in the recall and sale failing and this may be more challenging when the settlement standard is T+1.

Canada equities 2022 (US$)

The Canadian securities lending market had just over $57bn of lendable equities at the end of 2022 according to S&P Global Market Intelligence, a significant increase from the $46bn recorded in 2021

Colombia

CACEIS Colombia explains that the three stock exchanges agreed to create a new holding company, incorporated in Chile, in which the Chilean entity will hold 40%, the Colombian entity another 40% and the Peruvian entity the remaining 20%.

This combination will not only include the stock exchanges, though. The CSDs of Colombia and Peru will also be integrated, as well as the CCPs of Colombia and Chile and price vendors from Colombia and Peru. However, the Chilean CSD (DCV) and the Colombian Stated-owned CSD will not be included at this stage.

Fourteen years after a multidisciplinary team was created to assess the possibility of integrating the stock exchange markets of Colombia, Peru and Chile, their shareholders finally approved the integration, which is expected to be operational in the third quarter of 2023.

The main objectives of the new Andean market are:

• The development of a regional marketplace through the creation of a standardised business model, leveraged on the synergies brought by new technologies and operational flows

• Granting access to more than one thousand issuers, offering access to three stock indexes

• Enlarging the number of counterparties, since all the stock members of those three countries will be able to access the same platform

Manuel Suaza, head of clients at Santander

Improved market capitalisation is expected for the new Andean stock exchange because of cost-efficiencies achieved in products and market developments, based on the fact that these efforts will be made following unified corporate governance. Market participants should also benefit from higher diversification, based on new asset classes and investment opportunities.

The World Bank notes that Colombia has a track record of prudent macroeconomic and fiscal management, anchored on an inflation targeting regime, a flexible exchange rate, and an upgraded rule-based fiscal framework, which provide a good foundation to secure macroeconomic stability.

GDP strongly grew at 7.3% in 2022, but the economy overheated with activity above the potential, accelerated inflation, and a high current account deficit. GDP is projected to grow by only 1.7% in 2023.

Growth is projected to steadily increase to 2% in 2024 and 3.2% in 2025, as external demand resumes, and inflation and interest rates come down.

The Mexican securities lending market had just over $878mn (£687mn) of lendable equities at the end of 2022 according to S&P Global Market Intelligence, a significant increase from the $673mn recorded in 2021.

In terms of value on loan, the 2022 total of almost $36bn was $2.8bn higher than in the previous 12 month period. Lending revenues more than doubled last year to $5.7mn.

S&P Global Market Intelligence’s securities finance H2 2022 review reports that revenues in Mexico increased significantly over the six month period on the back of increases in

balances, fees and utilisation

On 29 April 2023, the Mexican Senate approved a Bill to Amend, Repeal and Supplement Certain Provisions of the Securities Market Law and the Investment Funds Law.

If approved in its terms by the Mexican House of Representatives, law firm White & Case suggests that it would constitute the most relevant reform to securities market law since the financial reform enacted in 2014.

This observation is based on the lack of depth of the Mexican stock market, the need to make certain processes for the offering of securities more flexible, as well as the generation of incentives for small and mediumsized companies to use the Mexican stock market as a source of financing.

The bill focuses on the incorporation of a new simplified procedure for the registration of securities in the National Securities Registry (RNV) to allow small and medium-sized companies to participate in the Mexican stock market through the public offering of debt or equity securities.

The requirements for companies to participate in the simplified securities registration procedure will be determined by the National Banking and Securities Commission (CNBV) by means of general provisions. Issuers that currently maintain securities registered with the RNV may not participate in the simplified registration of securities.

The bill provides that companies intending to become simplified issuers must apply to the CNBV, jointly with the stock exchange on which they intend to be listed. In order for the CNBV to proceed with the simplified

registration in the RNV, it will suffice that the corresponding stock exchange grants its favourable opinion to the CNBV, releasing the CNBV of its obligation to review and authorise the offering.

The CNBV will also be released of the obligation to supervise simplified issuers, since it will lack the necessary documentation and information to do so. Therefore, reviewing the registration documentation will be the responsibility of the broker-dealers that participate as underwriters, and of the securities exchanges, in accordance with a self-regulation principle.

The broker-dealers that participate as underwriters must include in their manuals the processes for the review of the information and documentation of simplified issuers under the principle of self-regulation, in accordance with the general provisions to be issued by the CNBV.

Securities subject to simplified offerings may only be purchased by institutional or qualified investors.

The stock exchanges on which the securities subject to simplified offering will be listed must set the rules for the disclosure of periodic information to investors with respect to this type of issuers.

The bill intends to enable securities rating agencies to adopt specific valuation methodologies for this type of instruments, in accordance with the general provisions to be issued by the CNBV for such purposes.

The bill proposes to set limits - to be defined by the CNBV - for issuances by simplified issuers.

Simplified issuers may not request from the CNBV the preventive registration of securities issued under simplified offerings, which means that shelf programmes for this type of securities may not be established.

Under the bill, investors of simplified issuers will have the right to report conducts attributable to simplified issuers that they consider to be unlawful without the need for an opinion of a crime by the CNBV.

Mexico equities 2022 (US$)

In terms of value on loan, the 2022 total of almost $36bn was $2.8bn higher than in the previous 12 month period. Lending revenues more than doubled last year to $5.7mn

Source: S&P Global Market Intelligence

United States

The US securities lending market had just over $621bn (£486bn) of lendable equities at the end of 2022 according to S&P Global Market Intelligence, up from the $576bn recorded in 2021.

In terms of value on loan, the 2022 total of almost $16 trillion was actually lower than the total for the previous 12 month period, although lending revenues rose from $3.5bn to almost $4.4bn between 2021 and 2022.

In November 2022, the Securities and Exchange Commission (SEC) adopted amendments to enhance the information mutual funds, exchange-traded funds, and certain other registered funds report about their proxy votes. The amendments make these funds’ proxy voting records more usable and easier to analyse, improving investors’ ability

to monitor how their funds vote and compare different funds’ voting records.

The rulemaking also requires institutional investment managers to disclose how they voted on executive compensation.

For nearly 20 years, registered funds have been required to disclose their proxy voting records, but investors faced difficulties analysing these reports. For example, funds were not previously required to disclose votes in a consistent manner or in a format that is machine-readable.

To enhance proxy vote reporting, the amendments require funds and managers to categorise each matter by type and, where a form of proxy or proxy card subject to the SEC’s proxy rules is available, tie the description and order of voting matters to the issuer’s form

of proxy to help investors identify votes of interest and compare voting records.

The changes also prescribe how funds and managers must organise their reports and require them to use a structured data language to make the filings easier to analyse. Funds and managers are required to disclose the number of shares that were voted or instructed to be voted, as well as the number of shares loaned and not recalled and thus not voted.

This latter requirement is designed to provide shareholders with context to understand how securities lending activities could affect a fund’s or manager’s proxy voting practices.

The new rules and form amendments are effective for votes occurring on or after 1 July 2023, with the first filings subject to the amendments due in 2024.

For decades the collateral markets have operated on a simple premise: collateral with short maturities from high quality issuers is preferable to collateral with longer maturities from issuers with lower credit quality. This assumption helped participants mitigate the risk that collateral would decrease in value by accepting collateral with short maturities from sovereign issuers with high creditworthiness.

As firms accept broader types of collateral, they seek to mitigate liquidity and credit risks with increased haircuts, more onerous eligibility criteria, and more frequent margining.

United States equities 2022 (US$)

However, Transcend’s Todd Hodgin observes that the recent stalemate on the US debt ceiling prompted at least a short term rethink of that basic notion.

The low credit risk of the US government, and the use of the dollar as the global reserve currency, have allowed US debt to be considered a ‘risk-free’ asset. From a credit risk perspective, the prevailing US Treasury rates are used as the risk-free rate for financial analysis and valuation of many assets.

Therefore, US Treasuries were often widely accepted as collateral under securities finance transactions, CCP exposures, and as bilateral derivative margins. Treasuries often enjoy the lowest haircuts under those contracts with few limits on the amount allowed as eligible collateral.

As the US approached the debt ceiling, where no additional borrowing would be allowed under current legislation, market participants began to plan for a variety of potential outcomes in the collateral markets.

One risk being discussed was what would happen to short term T-bills if there was uncertainty about whether the US could meet its short term obligations. Participants were game planning what would occur if counterparties instituted a brief pause in accepting T-bills, a downgrade of US debt lead to collateral becoming ineligible, or an increase in the haircut on that collateral was warranted.

S&P Global Market Intelligence

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