Spring 2023
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CUSTODY
PICTET ASSET SERVICES HEAD
MARC BRIOL EYES
EUROPEAN GROWTH
Securities finance
Experts in London and New York consider key securities finance themes
ASSET MANAGEMENT
Persefoni Chief Executive
Kawamori takes stock of ESG trends
SGX Group Chief Executive discusses opportunities
This quarter issue of Global Investor celebrates sustainable growth, featuring several exponents of carefully crafted and executed multi-year strategies.
A great example is Loh Boon Chye, who appears on our cover just two months before he celebrates his eighth anniversary as chief executive of SGX Group.
In his time, Loh has focused largely on building out the exchange group’s asset class coverage so it now has a full suite of equity, equity derivatives, fixed income, commodities and foreign exchange instruments available to traders.
The strategy has largely been organic but Loh has not ignored the M&A market, rather he has engaged in bolt-on acquisitions to expedite the diversification strategy, including the 2016 purchase of freight market the Baltic Exchange and the more recent acquisitions of FX platforms MaxxTrader (July 2021) and BidFX (July 2022).
A recent interesting move is SGX Group’s partnership with the National Stock Exchange of India to connect the NSE’s Nifty 50 Index futures contract with SGX’s international Nifty 50 product.
Loh said: “The partnership that we have with the NSE for the Nifty…will extend and expand the process of investing in India.”
If this partnership is successful, it is a fair assumption that Loh will look to replicate this model in other markets as he looks to the next phase of his strategy.
Similarly, Daniel Maguire has been chief executive of LCH for almost six years, having joined the LSEG-owned clearing house in 2008. His rise has been meteoric. He became head of SwapClear in 2014, then global head of rates and FX derivatives in 2016 and then group chief operating officer in early 2017 before becoming CEO in October that year.
Like SGX, LCH is also thriving in the current environment, having deployed a multi-year strategy that marries targeted acquisitions with organic growth.
LSEG reported on April 27 its financial results for the first three months of this year and its post-trade arm led by Maguire was the fastest growing business in the group, with revenue up 21% to £289m.
An interesting move by LCH in recent years has been its build-out in the un-cleared swaps markets. As Maguire himself says, it’s unusual for a clearing house to support an area that does not involve clearing but LCH has moved to diversify its book by offering new services in this more esoteric end of the OTC derivatives industry.
LCH’s business is truly diverse now. From SwapClear to the uncleared swaps businesses, RepoClear, CDSClear and ForexClear, Maguire and his team have constructed a formidable business.
Another strong advocate of sustainable growth is March Biol, the chief executive of Pictet Asset Services. The Swiss-based custodian is part of the Pictet Group, one of the most trusted financial services brands on the planet, which is no small claim in a time of volatility and concerns about bank liquidity.
Pictet Asset Services is looking to grow its business in the UK but Briol stresses the priority for his firm is and always will be the quality of the service over assets under custody.
On the topic of sustainability, Kentaro Kawamori, the founder and chief executive of Persefoni, is one to watch. The entrepreneur has developed a series of technology services that enable financial firms to meet their stakeholder and regulatory climate disclosure obligations.
The Arizona-based firm, backed by Bain & Co., already has a strong list of investment bank and asset management clients, and is set to grow rapidly as ESG regulation continues to evolve globally.
Separately, Derek Sammann, the senior managing director and global head of commodities, options and international markets at CME Group, discusses opportunities for the Merc in options, the Libor transition and energy.
Lastly, this issue features two roundtables focused on beneficial owners who are looking to explore further securities finance while protecting the interests of their stakeholders.
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ISSN 0951-3604
6 Trading Places: BlackRock promotes Orr to run equity trading; State Street expands Tahiri’s Middle East role; ICMA hires Patterson in regulatory policy; LME appoints Williamson as new chairman
8 Highlights from GlobalInvestorGroup.com: FCA updates standards after LDI crisis; Hedge fund performance rebounds in first quarter; Firms outline concerns with SEC Treasuries clearing plan; CME eyes new rates products amid options spike
COVER STORY:
10 SGX Group chief executive Loh Boon Chye tracks the Asian exchange group’s progress in diversifying its product mix to cover equities, fixed income, foreign exchange and commodities
DERIVATIVES:
16 LSE Group’s head of post-trade and chief executive of LCH Daniel Maguire discusses opportunities for the UK-based firm across the clearing industry
24 CME Group’s head of commodities, options and international markets Derek Sammann talks options, Libor transition and energy trends
27 Euronext has raised serious concerns about the review of the Markets in Financial Instruments Regulation as the European Commission, Parliament and Council try to find a compromise
29 Eurex hosted in March its annual conference in Frankfurt where its senior managers and other experts discussed the key issues in Europe and across asset classes
ASSET MANAGEMENT:
34 Kentaro Kawamori, the chief executive and founder of ESG fintech Persefoni, considers the main challenges facing sustainable investors in a period of turmoil
38 Asset management expert Ian Hunt discusses the short history of the Investment Book of Record and takes stock of where that initiative is today
42 AXA Investment Managers’ Hans Stoter tackles the difficult issue of asset managers’ credibility when it comes to responsible investing
CUSTODY:
44 Pictet Asset Services chief executive Marc Briol details the attributes that make the Swiss custodian different to its larger, bulge-bracket rivals
SECURITIES FINANCE:
49 European Union Beneficial Owners Roundtable: Some of Europe’s top securities finance experts gathered in London to discuss the key issues facing the industry
62 BNY Mellon’s head of securities finance client relationship management and business development in EMEA Steve Kiely shares his thoughts on volatility in the lending market
65 US Beneficial Owners Roundtable: Asset owners met in New York to talk through the current challenges facing beneficial owners when lending assets
76 CACEIS’ Securities Finance desk takes a look at the current lending market and the key topics that might drive change in the industry
78 Day in the Life: Sunil Daswani, global head of agency lending at Standard Chartered Bank, reflects on his experiences, drawing on 25 years in securities finance
80 S&P Global Market Intelligence’s Monica Damas-Shaw discusses the role of securities finance markets in a time of volatility and uncertainty
BlackRock promotes Orr to lead international equity trading BlackRock has promoted Andy Orr as the new head of international equity trading within the firm’s securities lending business.
Having been at the New Yorkheadquartered investment company for over 16 years, Orr first joined BlackRock in 2006 as a systems developer. He then took on various positions within the firm, which include roles as an equity finance trader and the head of the EMEA securities lending trading desk.
Based in London, Orr will take on a broader regional management role for securities lending trading for the EMEA region. Orr will continue to report to Yoshi Aoyama, managing director and co-head of global trading at BlackRock.
Citigroup promotes two women to senior roles in Asia Citigroup has promoted Vandana Bhatter and Anoushka Dua to senior roles in the US bank’s Markets, Treasury and Trade Solutions (TTS) business, underlining the firm’s commitment to grow its presence in Asia Pacific.
Bhatter has been promoted to head of markets for ASEAN. She will be responsible for leading a fully integrated business strategy, monetising Citi’s local market network, strengthening connectivity both within Asia markets and leveraging Citi’s global footprint and extensive product offering, the firm said.
She reports to Julia Raiskin, the Asia Pacific head of markets, and Amol Gupte, head of South Asia & ASEAN. Additionally, Anoushka Dua has been appointed as the head of TTS for ASEAN.
In her most recent role as head of trade for ASEAN, Dua was responsible for leading the growth of Citi, delivering innovative working capital solutions and focusing on digitising the business and maintaining a robust risk and control environment. She will report to Rajesh Mehta, head of TTS Asia Pacific and Amol Gupte, head of South Asia & ASEAN.
State Street widens
Tahiri’s scope to lead Middle East business
State Street has expanded the scope of Asia Pacific (APAC) chief executive Mostapha Tahiri’s role to lead the firm’s Middle East business.
He will serve as head of the Middle East in addition to his current responsibilities for the APAC region. Based in Singapore, he will continue to report to Andrew Erickson, chief productivity officer and head of International Business, and Lou Maiuri, president and chief operating officer and head of Investment Services.
As State Streets head for both regions, Tahiri will be responsible for: all business activities; driving strategy; increasing client engagement; pursuing growth opportunities and managing diverse stakeholders such as local officials and regulators.
Citi hires ex-JPM exec Hughes in custody product development
Citi Securities Services has hired Mike Hughes, formerly of JP Morgan, as global head of custody product development at the US banking group. Based in London, Hughes will be responsible for leading Citi’s custody business and strategy across all its proprietary markets and global models, the firm said.
Reporting to Matthew Bax, global head of custody, he will work with the client, technology and operations teams to meet Citi’s product suite and client acquisition goals.
Hughes has more than two decades worth of experience in the financial industry: primarily in securities, cash and trade.
In his previous role at Ocorian, Hughes was an independent administrator, where he was the global head of services lines and a member of the board.
Tony Smith departs
BNY Mellon in Hong Kong
Tony Smith has left BNY Mellon in Hong Kong after more than 15 years in securities finance.
Smith served as the director of governance and control within BNY Mellon’s Clearance and Collateral Management division since August 2022.
Just over a decade ago, Smith joined the Hong Kong branch of BNY Mellon, where he was appointed head of collateral management product for Asia Pacific (APAC).
Smith first joined the firm in 2007 within its Global Clearing and Collateral Client Management division. With almost 35 years of experience within the securities lending industry, Smith has worked at a number of financial institutions including AXA Investment Managers and Skandinaviska Enskilda Banken (SEB).
BNP Paribas hires Mashru from Societe Generale
BNP Paribas has hired Namrata Mashru from Societe Generale as a vice president of securities lending at the French international banking group. Previously, Mashru was the vice president at Societe Generale in Hong Kong for eight months.
In a 20 year career, she has held roles at UBS, Morgan Stanley and Deutsche Bank, including a time as vice president
Post-Bonus is always a busy time for People Moves
of prime finance in both London and Hong Kong.
BNP Paribas recently upgraded the technology it supplies to hedge fund clients by launching a digital offering which the French bank claims will enable alternative investment clients to respond to trading opportunities in real-time.
ICMA hires regulation expert from Thomson Reuters
The International Capital Market Association (ICMA) has appointed Miriam Patterson into the role as senior director of Market Practice and Regulatory Policy.
In her new role, she will work alongside Ruari Ewing, with a focus on ICMA’s Legal & Documentation Committee and related groups and picking up in due course on supporting the association’s broader EU and UK regulatory engagement.
Based in London, she will report directly to Paul Richards, managing director, Head of Market Practice and Regulatory Policy.
Patterson joins from Thomson Reuters, where she has worked since 2008, most recently as a senior editor of Practical Law Global Capital Markets.
Prior to Thomson Reuters, she held roles at law firms Latham & Watkins and Allen & Overy.
LME hires new chairman ahead of Nickel reforms
The London Metal Exchange (LME) has appointed a new chairman, promoting an existing non-executive director to take over when the incumbent steps down at the end of April.
John Williamson takes over as interim chairman on April 28, after Gay Huey Evans leaves the role. The Hong Kong Exchanges and Clearing (HKEX)-owned venue started the process of identifying a replacement earlier this year, as it announced Evans’ departure. The move comes as
it implements a series of changes after suspending its nickel market last year.
“This is a particularly important time for the LME as we look to the future and seek to support the market and our customers in a dynamic and evolving landscape,” Matthew Chamberlain, chief executive of the LME said in a release. “John’s deep knowledge of our business and his extensive international experience will be invaluable to us as we look to drive forward our two-year programme to strengthen and enhance our markets.”
Prior to taking up his current role, Williamson was a longstanding nonexecutive director on the board at HKEX. He had been in that post since 2008.
LSE Group appoints data, analytics head
London Stock Exchange Group (LSEG) has appointed a group head of data and analytics, a role the chief executive was doing on an interim basis last year.
LSEG said Satvinder Singh will take up the role on July 3. This position was left vacant by Andrea Remyn Stone, whose intention to depart was announced at the end of June 2022. Singh joins from Mastercard, where he was co-head for advisors in its data and services business.
“Satvinder brings strong leadership experience in financial services, in many parts of the trade lifecycle, and a proven track record of building high performing global teams,” David Schwimmer, chief executive of LSEG said in a release. “His expertise will be invaluable as LSEG transforms how the financial markets discover, manage and analyse data. We look forward to welcoming him to the team.”
Mako and Liquid Capital complete merger with Asian deal Mako and Liquid Capital, two of the last remaining London-based marketmakers, have completed their merger after Mako acquired the last two Liquid Capital units it did not already own.
Mako, which took over Liquid Capital’s European arm early last year, said it completed on April 5 the acquisition of Liquid Capital’s AsiaPacific business which comprises the firm’s trading hubs in Australia and China.
The market-maker said in a statement the acquisition of the Liquid Capital Asia Pacific business was a natural step following the European deal last year, and one that significantly expands Mako’s presence in Asia.
David Segel, the founder of Mako, said: “We are thrilled to welcome the experienced team from Liquid to the Mako Group. Their proven track record and commitment to excellence align with our own values, and we look forward to collaborating and growing together.”
Marex hires ex-IFAD head
Oulhadj to run US clearing
Marex has hired the former head of ICE’s Middle East exchange Jamal Oulhadj to run clearing in North America as the British broker moves to expand its clearing business in the US.
Oulhadj, who was most recently the first president of the Intercontinental Exchange’s (ICE) Abu Dhabi-based derivatives venue, became head of clearing for North America on April 3, Marex has said. Oulhadj is based in the broking group’s Chicago office.
“The creation of this new role is an important step in strengthening our clearing franchise in North America,” a spokesperson for the London-based broker said in an emailed statement.
Oulhadj ran ICE Futures Abu Dhabi (IFAD) for nearly two years from January 2020. He was previously the chief executive officer of RJ O’Brien (MENA) Capital Limited based in Dubai. He spent 14 years at the Chicago-based broker in various roles including chief risk officer and chief operating officer before moving to Abu Dhabi. He started his career in 1996 at CME Group, before joining broker Refco where he eventually led the market risk team.
The European money market including repo and reverse repo grew by nearly a fifth last year to €1.3tn (£1.14tn), according to the European Central Bank.
The ECB published its 2022 Euro money market study that found the Euro money market grew in 2022 by €200bn or 18.2%, up from €1.1tn at the end of 2021.
The study covers five segments of euro money market activity: secured transactions - repos and reverse repos; unsecured cash transactions; issuance of short-term securities; FX swaps; and overnight index swaps.
The report describes developments in these five segments between January 2021 and December 2022 based on actual daily money market transactions executed by the 47 largest euro area banks and reported to the ECB through the Eurosystem’s money market statistical reporting (MMSR) dataset.
The UK Financial Conduct Authority (FCA) has released new guidance for pension funds and asset managers using Liability Driven Investment (LDI) strategies after the volatilitydriven crisis at stresses in September last year.
The FCA published new rules to bolster risk standards and transparency at firms after the September 23 “mini budget” presented by then chancellor Kwasi Kwarteng caused severe market volatility. The Bank
of England was forced to step in and support liquidity at the funds that had been caught by severe moves in Gilt markets, affecting the value of positions held by the funds.
“This guidance sets out what we expect in terms of risk management, stress testing and client communication, so that the necessary lessons are learned from last September’s extreme events,” Sarah Pritchard, executive director for markets at the FCA said in a release. “Many of these lessons will be relevant to firms beyond the LDI sector.”
The European Parliament passed in April its wide-ranging regulations on markets in crypto-assets (MiCA), marking a significant moment for the market according to exchanges active in the region.
The plenary session approved the law by 517 votes to 38 against, with 18 abstentions. The rules will have phased implementation starting in July and extending for 18 months. They will mean changes to the transparency, disclosure and supervision of those issuing and trading cryptoassets in the region. Trading venues have welcomed the move as a step forward in efforts to build trust in the regional market.
“As a major operator of financial markets venues within the European Union, news that European lawmakers have passed MiCA legislation is welcome, and marks a significant event in the evolution of the cryptoassets market,” Duncan Trenholme, co-global head of digital assets at TP ICAP said in an emailed statement.
“We believe strongly in the value that regulation can bring to markets, and we look forward to working within this framework to ensure investors can enter the cryptoassets market within Europe with confidence.”
The Australian Securities Exchange (ASX) has agreed the terms of its A$70 million (£37m) incentive scheme to garner support for the upgrade to its CHESS settlement system, as group moves to reboot the project.
The distributed ledger-based back office upgrade has been beset by delays and spiralling costs, prompting the announcement of a regulatory investigation in March. The Sydneybased exchange has been in the process of initiating a reset of its plans to replace the system, and started seeking vendors for the project in March, its chief executive said in late April.
“Good progress is being made on the CHESS Replacement solution design,” Helen Lofthouse said in a release. “Request for proposals were issued to potential vendors earlier this week. In addition, we’ve had constructive engagement through our newly formed Technical Committee and we will begin scope refinement sessions in May. We have also begun preliminary discussions on the industry testing approach, as well as potential implementation options.”
T+1 migration in the US is less daunting if your firm has invested in new technology, two US securities lending companies have said.
Speaking to Global Investor, Andy Volz, chief operation officer of Clear Street, said he welcomed the switch to next-day settlement as the migration should make his firm more capital efficient.
The Clear Street senior executive said: “We’re a new technology stack and we modify our systems quickly to deal with T+1. Clear Street does quite a bit of equity and option business, and with options being T+1 and equities being T+2, there are capital-intensive things that happen within the broker-dealer. So Clear Street expects to benefit a lot from T+1.”
And the extra capital should help Clear Street’s plans for expansion outside the US. Volz said: “I believe it will make us more capital efficient as we expand globally. Obviously, we need to move capital into those markets and every new market you move into and where you open another broker-dealer, whether that’s Canada, Europe or the UK, will require us to capitalise on it. Hopefully it means that we can run our US business more capital efficient and free up capital for global expansion.”
Hedge fund performance rebounds with better average in Q1 Hedge funds continued to bounce back with a better weighted average returns in Q1 2023 compared to Q4 2022, with multi-strategy and equities funds continuing as the best performers, said asset servicer Citco.
Tortola-headquartered Citco reported an overall weighted average return of 4.49% in Q1 2023, up from 4.11% in Q4.
All fund strategies produced positive returns, apart for commodities at -2.2% and Global Macro at -1.14%. Multi-strategy and equities funds improved their fourth quarter performance with first quarter weighted average returns of 5.78% and 5.42% respectively.
Buy and sell-side firms are concerned about the US proposal to introduce clearing in the US treasuries market, according to a new report from re-
The report ‘Market Views on the SEC’s US Treasury Clearing Proposal’ examines trends in the treasury and repo markets, outlines the main points of the SEC plan and discusses the potential implications of the proposed rules.
The US regulator proposed a set of rule amendments on September 14 2022 requiring direct market users to clear all eligible secondary market transactions (ESMTs) in US treasury Securities.
The Federal Reserve Bank of New York said it is limiting some firms’ access to its reverse repo facility (RRF), a tool used to manage short-term interest rates.
The bank amended the ‘Policy on Counterparties for Market Operations’, stating firms that wish to use its RRF should only apply for access if its use is consistent with the existing business model of the company.
The RRF is one of two tools the bank uses to maintain its overnight federal funds rate, which is the main instrument of monetary policy. The bank said the move aims to cut off access to investment entities set up specifically to take advantage of the RRF tool.
Accessing the reverse repo facility “should be a natural extension of an existing business model, and the counterparty should not be organised for the purpose of accessing operations,” said the bank.
to
Sharegain has said its new partnership with JP Morgan is the latest success in a broader push to “democratise” securities lending by making that market more easily accessible to new groups such as wealth managers and retail brokers.
London-headquartered securities lending fintech Sharegain in April partnered with JP Morgan’s Securities
Services business to improve accessibility to wealth managers and online brokers.
Sharegain’s Securities Lending Technology (SLTech) solution aims to enhance JP Morgan’s securities agency lending offering, said the fintech. The collaboration also adds a new global custodian to its growing roster of clients in Asia Pacific, Europe and the Middle East.
The Financial Stability Board (FSB) has warned firms to avoid a ‘pile up’ as they prepare to transition US dollar Libor positions ahead of mandatory cessation for new contracts at the end of June.
The Basel-based body, which coordinates oversight of national regulators, said in April firms should transition their legacy positions ahead of the mothballing of the Libor rate.
“The FSB encourages market participants to complete the transition of any remaining USD Libor-linked contracts now, in order to avoid a ‘pile-up’ towards end-June 2023 that could introduce operational risks and wider market disruption,” it said in a statement.
Deutsche Boerse has reported a 16% year-on-year increase in first quarter revenue, driven partly by increased trading activity around the bank funding squeeze in March.
The Frankfurt-based exchange giant reported in late April net revenue of €1.2 billion (£1bn) for the first three months due to a combination of interest rate gains in securities services and heightened trading on market uncertainty. The firm said it will deliver full year figures at the high end of its €4.5 billion to €4.7 billion guidance.
Loh Boon Chye will celebrate in July 2023 eight years as the chief executive of SGX Group and he can be rightly pleased with the progress the Singapore exchange has made in that time.
By Luke JeffsSGX Group reported in its 2022 financial year (which ran to the end of June last year) record operating revenue of S$1.1bn (£659m), up 4% on S$1.06bn in the previous 12 months, driven largely by higher earnings in equities, currencies and commodities.
The first half of the current financial year has continued this theme with revenue in the latter half of last year up a tenth on the same period of 2022 to S$571m, driven partly by a 28% spike in derivatives revenue.
The half year earnings were the exchange group’s best since SGX started financial reporting after listing in 2000.
Speaking to Global Investor in April, Loh Boon Chye said the group’s recent record financial performance reflects partly the diversification strategy implemented by the firm over recent years.
“We had a strong 2022 and we have had a good start to this year. As an exchange group, we have now
transformed ourselves into a multiasset platform that, as an international exchange, offers unrivalled access to Asian economies and Asian markets through equity index derivatives, currencies and commodities.”
The breadth of the group is obvious in its latest full-year results (see Chart One): 23% from fixed income, currencies and commodities, 29% from equity derivatives, 35% from cash equities and 13% from data, connectivity and indices.
Another of Loh’s strategies is to establish SGX as the international gateway to Asia’s fast-growing economies including China, offering investors from outside Asia a secure platform for investing across the bloc.
Loh said: “Asia is not a homogenous region, it is made up of many countries that have grown in the last 15 to 20 years relatively faster than the global economy. Having been able to position SGX Group as the trusted platform for accessing the Asian markets, we have also been able to broaden and deepen our asset-class offering.”
He added: “We, as an exchange group, essentially simplify Asia for international investors who are seeking investment opportunities in this part of the world or are actively managing their portfolio that includes Asia.”
And the two strategies are complementary because of the way that international traders increasingly manage their Asian exposure, moving between correlated instruments to maximise their return.
“If you trade the Asian markets, you might be moving in and out between foreign exchange, commodities or equity derivatives. So for every one dollar of risk capital posted with SGX, the correlation of the different asset classes allows us to stretch that further, so that is why FX has grown alongside some of our other asset classes such as equity index derivatives,” said Loh.
The SGX chief executive officer is especially pleased with the progress the group has made in foreign exchange (FX) derivatives, a vast over-thecounter market where international exchanges have historically struggled.
He said: “In foreign exchange, we are the world’s leading exchange for listed FX derivatives in Asian currencies and we have broadened the value chain to include over-thecounter FX.”
Asia is not a homogenous region, it is made up of many countries that have grown in the last 15 to 20 years relatively faster than the global economy
And this is potentially only the beginning for SGX in what is a dynamic asset class.
“The opportunities in FX are enormous. We have been able to grow our listed FX derivatives business in the last ten years through the zerointerest-rate regime, so the relative movements of currencies were predicated on the expected movement between two currencies based on the fundamentals,” Loh said.
“With interest rates at their current level, FX has become an asset class in its own right because it does offer a yield. In the Asian equity markets, FX movements can accentuate positively or negatively your equity market return.” The chief executive also said the exchange is looking at options on some currencies to accelerate the growth in its FX segment.
By volume, SGX’s most popular product remains the FTSE China A50 Index future which last year traded over 100 million lots in a single year for the first time when 103 million contracts were traded. This was up 5.6% on 2021, meaning that the A50 made up last year 40% of SGX’s futures trading book by volume, according to the exchange.
Loh said: “When we look at our A50 futures, the contract has really grown in relevance for international investors to invest in the Chinese economy and the Chinese equity market. In terms of China exposure, we offer not just A50 futures but also our market-leading CNH FX futures and pioneering iron ore derivatives.”
The increase in trading volume last year can be attributed to ongoing
concerns about the future of the Chinese economy given its protracted Covid restrictions but the outlook is more positive now.
The SGX chief executive said: “When we think about China’s reopening, market participants are optimistic that the reopening is a catalyst for growth. Singapore and SGX Group are wellpositioned in that regard. That said, Asia is more than China. China is a critical part of the region’s future, given the size and the growth of the economy, but we also have India where the economy has proved to be resilient and GDP has been growing at near 6%.”
The Singapore Exchange is bullish on India where the group will commence full-scale operation of the NSE IFSCSGX Connect in July with the transition of its Nifty 50 futures contract to GIFT City.
Loh said: “We have also broadened our equity index derivatives through the upcoming launch of our GIFT Connect platform with our partner the National Stock Exchange of India that will bring together the international liquidity that we offer on the Nifty contract with the domestic liquidity.”
The SGX Nifty 50 Index future traded almost 30 million lots last year, making it the exchange’s second most popular listed derivative behind the A50.
SGX’s Indian agreement is also interesting because it could serve as a template to similar deals with other national markets in the region.
Loh said: “The partnership that we have with the NSE for the Nifty, that will extend and expand the process of investing into India. We also have markets like Taiwan and Japan, and also the ASEAN collection of ten economies that have over 600 million people and growing at 5% a year so that potential is huge. As a bloc, it is going to be the fourth-largest economy in a few years’ time.”
He added: “Depending on client needs, SGX Group will continue to work with other exchanges to further broaden the ecosystem. Collaborations and partnerships aren’t new to us. We have a history of partnerships with other exchanges. Besides NSE, we have a partnership with New Zealand’s Exchange where we jointly work on the New Zealand milk contracts so the New Zealand dairy derivatives are now listed on SGX.”
SGX and New Zealand’s Exchange signed in October 2020 an agreement to make NZX’s milk futures contracts available on SGX, something that happened in November 2021.
Loh said: “We have been able to work with them to expand the number of members and have increased open interest by 50%, as well as increasing the liquidity and trading volume.”
He continued on the theme: “We have listing partnerships with
SGX Group Financial Overview July 2021 - June 2022
Acquisitions
contributed 5% to group revenue, 2%-points , total revenue grew $68.1 million or 7% to $1,049.5 million ($981.4 million). FICC revenue increased $41.0 million or 19% to $252.7 million ($211.8 million) and accounted for 23% (20%) of total revenue. There were 1,179 bond listings raising $429.6 billion, compared to 795 bond listings raising $389.1 billion a year earlier. Fixed Income revenue decreased $2.7 million or 18% to $12.2 million ($14.9 million). FICC – Fixed Income $8.7m $3.5m Listing revenue Corporate actions and other revenue 24% from $11.5m 2% from $3.4m
“The acquisitions that would be useful to look at would be to broaden our reach into the ecosystem, expand our market share or serve our customers better around the asset classes that we already offer.
SGX also invested in November 2021 about $200m in a consortium acquisition of Chicago-based fintech Trading Technologies.
Speaking in April, Loh said the company will look at further acquisitions that are consistent with its strategic goals: “We have done a few acquisitions over the last few years. As we look to this year, next year or beyond, we are seeking opportunities to deepen the value chain or broaden our reach in various asset classes.
“There are areas where we can create a better platform overall in the transport of commodities around the link between freight and commodities, such as iron ore, where the ecosystem relies on workflow, so there are opportunities to make that more efficient. If that is something that serves customers better, why not?
“In FX, we have acquired two companies so we now have the full spectrum in OTC and listed derivatives, as well as an ECN, so we think that pulling all that together may better serve the customer.”
SGX Group is positioning itself as a regional market-leader in environmental, social and governance investing. The firm has launched ESG and net-zero versions of its flagship equity indices, and announced in October an agreement to license the MSCI Climate Action Index.
Looking ahead, Loh said: “The climate-related theme in equity benchmark indices is in our view a medium-term opportunity that is beginning to take shape. The pathway for the transition to net-zero is not a straightforward, straight-line process. Whether we look at ESG or sustainability, it is an enormous collectiveaction problem. There may be bumps along the road, but the transition will involve trade-offs and frankly a leap of faith.
“Notwithstanding the unfortunate situation of the invasion of Ukraine, this will require a collective effort through commitments and longterm solutions which can only be built over time through trust.
“What is important to assist the transition to net-zero is to be able to mobilise capital at scale. As exchanges and market infrastructure, we also have a
role to play. We have recently launched the Nikkei 225 Climate Paris-aligned benchmark futures, and we will also look to launch passive capital products linked to benchmarks that will help the transition by mobilising capital to companies that are helping with the transition.
“I would like to reiterate three points. As the international exchange group that operates an institutional platform that offers access to Asia around the clock for international investors, that is an important hallmark of SGX Group.
“If one takes the view that Asia continues to have promise and will continue to grow rapidly and faster than the rest of the world, Asia is not homogenous – and we can simplify Asia for investors.
“Lastly, we look at markets and asset classes with a holistic lens so whether it’s China or other Asian economies, you can invest in them through the equity markets, FX or commodities. Going forward, there will clearly be requirements for ESG versions of benchmarks, so constant and continuous creating and innovating solutions is what makes SGX Group unique.”
Nasdaq and NYSE, and in the next quarter we will launch a depositoryreceipt link with the Stock Exchange of Thailand. So collaborations are there and we will continue to look at collaborations that will benefit the ecosystem.”
Another key strategy for SGX this year is the virtual steel mill, a neat idea that leverages the complementary nature of the exchange’s coking coal, freight and iron ore contracts.
Loh said: “We also offer the global benchmark for iron ore, which has evolved from an OTC-traded and exchange-cleared market into one that offers equal liquidity on screen, which obviously brings in a broader set of financial participants.
“Iron ore is a very reliable proxy for the urbanisation of countries, particularly China, and it is also a good proxy for the macro-economic outlook of China,” Loh added.
SGX is pleased with the progress it has made building screen liquidity in iron ore, particularly its iron ore 62% futures and options, which the exchange sees as a key pillar for the commodity’s eventual inclusion in broader commodity indices.
Loh said: “We will continue to broaden the screen adoption of iron ore, which will lead to eventually its inclusion in commodity indices, bringing us into the investor market, who would then take on iron ore in structured products.”
He continued: “In the commodities complex, for us, it’s not just iron ore. We look at this in two ways, one is the “virtual steel mill” that includes a whole series of ferrous metals including different grades of iron ore; the iron ore also has to be transported so that requires freight, which, while it has come down in price, it clearly went through a very volatile period.”
While SGX has made in Loh’s time massive strides in diversifying its
product offering to allow international traders and investors the opportunity to trade different Asian asset classes, that is only part of the challenge.
The chief executive said: “We have a long track record with participants from Europe and the US trading into our markets. Our contracts are CFTCcertified so they are available to US investors. At the same time, while capital is global and borderless, and we have been able to attract many international firms as our trading members, getting close to them on the ground is clearly a better way to further engage with them – and this explains our presence in Europe and the US, which also helps us attract new customers like the buy-side.”
SGX was a pioneer in 2010 when it extended for the first time its trading day so the Asian market was open in European and US hours, a move that has since been emulated by many of its Asian counterparts.
The SGX chief said this longer trading day remains a key feature of the exchange’s global strategy.
Loh said: “Also interesting for US and European participants is that their day starts when most of the Asian markets are closed or closing, so we offer the T+1 sessions which cover the European and US time zones, allowing them to participate in the Asian markets. In the A50, for example, our T+1 volume is 1516% while the impressive growth in our iron ore screen volume has come largely from clients in Europe and Asia, and the growth has been higher in the T+1 session.”
Interestingly, Loh said SGX is also seeing growing flows from fastgrowing Asian economies that are starting to look beyond their national market for trading opportunities.
Source: SGX Group Annual Report, July 2021 – June 2022
He said: “We have the big economies covered so that is China, India, Japan, Taiwan, Singapore and some of the ASEAN markets. Our equity derivatives cover close to 99% of Asia’s GDP. We see the ecosystem broadening – for instance, we see flows from Thailand into our cash
equity market and we have Taiwanese financial institutions launching ETFs related to our contracts. Also interesting are flows from the other economies like Indonesia, which has a large and growing economy and we have contracts for investors to access opportunities there.”
We have the big economies covered so that is China, India, Japan, Taiwan, Singapore and some of the ASEAN markets. Our equity derivatives cover close to 99% of Asia’s GDP.
The LSE Group is now unrecogniseable from the firm that David Schwimmer took over in 2018, largely due to the $27bn (£21.6bn) acquisition of Refinitiv in early 2021. While much of the British group’s efforts in the past two years have focused on digesting the vast data firm, a quieter success story has been the performance of LSEG’s posttrade business, led by Daniel Maguire.
By Luke JeffsThis success was underlined in the LSE Group’s first quarter 2023 financial results on April 27 when post-trade was the fastest growing of any LSEG business, up 21.4% to £289m.
Schwimmer said about those results: “In Post Trade, our leading franchise attracted a surge in volumes as clients looked to manage risk effectively during a period of heightened volatility.”
The LSEG chief is right that clearing houses tend to do well in periods of heightened activity, given they charge fees on individual trades, but Schwimmer equally knows the success of the post-trade business is largely attributable to a carefully crafted multiyear strategy to develop that business.
Most recently, the LSEG post-trade arm has been exploring the murkier end of the vast over-the-counter (OTC) derivatives market by building out its services for uncleared swaps.
Speaking to Global Investor in late April, Maguire, the Group Head of Post Trade at London Stock Exchange Group and Chief Executive Officer of LCH Group, explained the rationale.
“If you go back to 2009, post the global financial crisis (GFC), G20 leaders wanted banks to collateralise their OTC derivatives, mandating the clearing of the more standardised derivatives contracts through central
As a firm, we have historically focused on clearing but we recognised five or six years ago that centralised clearing for OTC derivatives isn’t always the answer
counterparties (CCPs), and they also introduced higher capital requirements and minimum margining requirements for uncleared OTC derivatives.”
Maguire added: “Whilst sizable, the cleared space was straightforward - across G20 nations, certain types of institutions doing certain sizes and types of trades were mandated to clear and there was then a natural evolution by market participants, beyond the original mandates, to clear nonmandated trades too.”
Once the authorities had tackled the larger, standardised market, it was inevitable they would turn their attention to the smaller and more complex business of complex swaps with the Uncleared Margin Rules, the implementation of which was completed in September last year.
“As a firm, we have historically focused on clearing but we recognised five or six years ago that centralised clearing for OTC derivatives isn’t always the answer.
“So, we started thinking how to bring our infrastructure and expertise to address the more idiosyncratic and esoteric uncleared products that are going to be subject to margin rules. That was when SwapAgent was born.”
LCH SwapAgent, launched in 2017 with the backing of 14 of the world’s top investment banks, offers a rulebook, standardised and transparent Credit Support Annex (CSA), valuations and calculations of risk numbers.
This sounds very “clearing-like”, Maguire suggests, but importantly, SwapAgent is not acting as CCP in the case of a default. “It is a clearing house but not a CCP,” he said.
Maguire continued: “Going back to the regulatory environment, we had Dodd-Frank, the European Markets Infrastructure Regulation (EMIR) and UMR but the other big vector was the Basel III capital rules. If you don’t get caught by the collateralisation, you may well get caught by the capital side of things, or perhaps both. Whichever way you look at it, post-GFC there has been a combination of rules,
regulations and capital requirements that have made OTC derivatives safer but also more expensive.”
“We came to the realisation that this uncleared space will persist and needs to thrive, and whilst there are a lot of good niche businesses in the space making parts of the process more efficient, every time we talked to our customers, whether sell- or buy-side, it was clear that this is a pain point, and a more holistic solution would be preferable. Whenever we speak to one
Euronext is a long-standing client of LCH SA which uses the Paris-based division to clear its European equities and derivatives markets. But this is set to change.
In April 2021, Euronext bought Borsa Italiana from LSE Group for e4.4bn. As part of the deal, Euronext acquired Borsa Italiana’s Milan-based clearing house CC&G and Euronext chief Stephane Boujnah announced in November 2021 that he was committing to invest in CC&G with a view to moving his clearing to his own clearing house and away from LCH.
Asked about the implications of this development, Maguire said: “LCH SA is strategically important for LSEG. Currently, the majority of the Eurozone repo market and the Euro CDS market is cleared in Paris, whereas six years ago that wasn’t the case. As a result of the diversification and business growth, and the continued expansion of connectivity
of the investment banks or their buyside clients they ask: “How can you make this whole process more efficient, like clearing?”
Using SwapAgent as the platform, the clearing provider set about building out its services in this historically underserved market and, rather uncharacteristically for LCH, sought to turbocharge its progress through acquisitions.
Maguire said: “Quantile has a capital, XVA and resource management
of LCH SA’s equity clearing business to additional venues and MTFs, LCH SA has, over time, become less reliant on Euronext originated trades and business.”
He added: “The relationship with Euronext and our mutual customers is a long one and we are the primary clearer for their cash equity business and secondly, we are the primary clearer for their derivatives business. On cash equities, under MIFIR (the Markets in Financial Instruments Regulation) there is the legislation and the principle of open access so, from an equity standpoint, we will continue to offer seamless clearing of Euronext stocks to all of our existing customers under the ‘Preferred Clearing’ model.”
Maguire concluded: “Whilst we may no longer be the primary CCP for Euronext stocks, we are in regular and positive dialogue with our customers to make sure they know they have the option to continue to clear with us.”
We started thinking how to bring our infrastructure and expertise to address the more idiosyncratic and esoteric uncleared products that are going to be subject to margin rules. That was when SwapAgent was born
background and they have had a lot of success connecting to the major dealers to offer compression and optimisation in different flavours, bringing to bear their technology and expertise to really harvest portfolios and make them less capital and collateral intensive and more risk efficient.
“In clearing we always have been open access and have worked, and continue to work, with other optimisation providers as well as Quantile, but we came to the view that this skillset and capability is becoming more core to our overall mission, and we felt the need to have this additional capital and optimisation expertise in-house.”
Maguire said Quantile, which the LSE Group acquired late last year in deal worth about £270m, also has a high integrity, self-reinforcing database of trades.
“They operate both in the uncleared and cleared space across multiple asset classes and hopefully, as we get more traction with SwapAgent and a resultant high integrity database
of uncleared trades, we will be able to harvest, both within, and across, cleared and uncleared to help customers optimise their funding, capital and collateral and enhance risk management.”
More recently, in early April, LSEG also acquired US margin processing firm Acadia without disclosing terms.
Maguire said: “Acadia is a fundamentally important piece of the jigsaw. Customers are looking for more ways to optimise their financial resources, and Acadia’s services enable significant efficiencies in risk management, margining and collateral. It connects the sell- and buy-side across various asset classes – rates, credit, FX and equity and we intend to cover the same asset classes with SwapAgent too.”
He added: “Both Quantile and Acadia are businesses that are connected to customers now, they are real. There are a lot of great ideas out there, but people only have a certain amount of bandwidth and capital to spend on connectivity and the
like, so we put a high importance on businesses that are connected, credible, and already tangibly delivering value to customers.”
As the world’s largest clearer of interest rate swaps, LCH has been integral to the industry’s slow migration away from the toxic Libor reference rate to a new breed of so-called risk-free rates.
LCH has worked on all the major switches (sterling, Euro, Yen etc) that have taken place until now but started in late April the conversion of its US dollar-denominated book, by far its largest by notional.
The clearing house plans to phase-out its US dollar Libor contracts over two weekends: April 22-23 and May 20-21.
At the time of writing, the first weekend went smoothly as LCH moved across about $1.5 trillion of variable notional swaps and zero coupon swaps. Philip Whitehurst, head of service development for rates at LCH, told Global Investor in late April the second
weekend would see a far larger notional moving across, estimating that as much as $43 trillion could convert in May.
Maguire said: “The transition of IBORs to Risk-Free Rates is one of the most existential things that has happened in the industry in a generation. There is the whole Libor transition but the US Dollar one this year is the most significant. We have placed a huge amount of importance on supporting the industry in the two conversion events and we are hopeful they will both take place with no issues.”
The LCH chief said the experience of working on the earlier conversions is valuable as the clearing house prepares for the second, larger migration at the end of May.
“We’ve successfully converted Swiss, Yen, Sterling and Euro indices, as well as a first tranche of USD IBOR linked products, so we have a great amount of expertise and track record in this but really it is a co-ordinated choreography with the dealers, their clients, trade associations, and the other clearing houses.”
But Maguire is not complacent as he looks ahead to May 20.
“The total size of this year’s conversion events is two or three times bigger than the others that we have done in prior years, to give some context around number of trades. It’s a bit of a moving target because trades are expiring and some firms are managing some components of the conversion themselves, but we have seen a shift over the last 12-18 months where the volume of new trades coming in to LCH, be it by DV01 or any other measure, has flipped from 90-10 Libor/SOFR to 10-90 Libor/SOFR.”
He added: “By the end of Q2, Libor, at least in LCH, will be gone.”
The frenetic trading that Schwimmer mentioned was focused around the near-collapse of Credit Suisse in midMarch this year, leading to the Swiss bank’s ad hoc takeover by its main rival UBS.
At the time, clearing experts speculated that firms had generally dealt better with the volatility and margin pressure than they had in the febrile trading three years earlier as markets reacted to the onset of the COVID epidemic.
Maguire said: “COVID and the recent volatility around SVB and Credit Suisse were very different events. When we look at COVID we are quietly proud that we weren’t seen as pro-cyclical in terms of our margins jumping around. We were able to protect our members while ensuring the safety and stability of the marketplace – we were predictable.”
In 2020, trading firms were quick to blame clearing houses for contributing to volatility by imposing large intraday margin calls, which forced clients to liquidate positions to free up the collateral to meet the calls, thereby increasing the volatility, a phenomenon known as pro-cyclicality.
Maguire continued: “With Credit Suisse, there were some big margin calls given the scale and size of the risk positions, but everyone paid on
time, and everyone was well-drilled –which is testament to the huge public and private sector effort since the GFC in 2008.
“While these events may have been different to past ones, people have got much more muscle memory around pre-funding and putting a buffer into the margin account. We’re not in the business of predicting volatility but customers normally sense when it’s coming and proactively prepare for it, which helps the eco-system.”
Maguire concluded: “I am comfortable where we are with our risk methodology, but we continue to scrutinise and back-test every event to test the model – we will never rest on our laurels here. Of course, you must strike the right balance, so the models don’t over-react or under-react and equally they don’t over-hang or underhang post-events as well.”
While clearing is meat-and-drink to a trade rag such as Global Investor, LCH found itself on some unfamiliar front pages after Brexit as European
politicians started demanding the repatriation of Euro-denominated swaps clearing.
The European stance has softened over the intervening years, but the European authorities are still uncomfortable with the fact that most Euro-denominated swaps sit in a clearing house based outside of Europe and, therefore, beyond their control.
The latest proposal from the European Commission in December is that firms have an active account with a European Union-based clearing house, though no-one is really sure at this stage what is meant by “active account”.
Maguire (for his sins) has been at the heart of this debate for years now.
“If you look at where we started in 2016 after Brexit, there were a lot of hard statements around a potential ‘location policy’. If you look at where
we are now, the narrative has evolved significantly. I think it’s reasonable to say that there isn’t a desire to ‘cut-off’ EU firms from the supply of services from UK CCPs but there is still a desire from the EU to have more capability closer to home.”
He added: “The EMIR proposals are now focused on active accounts, which means that EU firms are likely to be asked or encouraged to have an active account at an EU CCP as well as nonEU CCPs. The European Securities and Markets Authority (ESMA) would be given the task of trying to define that in their rule-making.”
Maguire said he welcomes the more nuanced approach from the European Union but he is mindful of the unintended consequences of requiring firms to clear more of their interest rates swaps in a different clearing house.
“We are supportive of the move
away from a location policy, but the real issue is what does this mean for EU firms, such as real-money accounts, pension funds, asset managers and insurance firms?”
He added: “Depending on what prescription comes out of the current negotiations and what mandate will be given to ESMA – and at this stage it is not clear – it could be that EU firms – buy-side and sell-side – have less access than non-EU firms to that global liquidity pool, which would negatively affect them competitively but also affect the way they can manage their risks.”
Clearing houses can calculate and call margin on a client’s net rather than gross position so it is normally cheaper for firms to put all their correlated products under one roof, in this case SwapClear.
Forcing firms to take their Euro
swaps out of SwapClear and clear them in Europe could make these products relatively more expensive, thereby putting those companies at a disadvantage.
Maguire said: “It is clear from all the EU based firms that we talk to –whether dealers, pension funds or client clearers – that they want unfettered access to UK CCPs without any kind of limitation. Depending on where the prescription comes out on quantitative or qualitative, that will determine how good or bad this is for EU firms and the nature of financial stability risks in the EU.”
Maguire said LCH’s primary goal is to be able to continue to offer EU-based firms unfettered access to its services, adding: “We are regulated by the Bank of England and ESMA directly, as well as the Commodity Futures Trading Commission (CFTC) and several other supervisors, and we operate a central bank account with the European Central Bank for all our Euros and are directly subject to EU Law (EU EMIR). We are confident that these elements will allow us to continue supporting our customers.”
And the debate about Euro swaps clearing has not affected the demand for SwapClear, Maguire said.
“We continue to see our volumes grow across Euro and other currencies as well. EU firms tend to clear as much in Euro as in other currencies. We’ve seen no discernible change in customer behaviour, and 2022 was a record year in terms of volumes and growth. A lot of people have taken great heart from EMIR 3 and that they will continue to have access to us.”
While LCH and Eurex Clearing respectfully disagree over the future of Euro clearing, Europe’s two largest clearing firms are also contesting an emerging market: repo.
Easy to overlook in the low interest rate environment that has characterised recent decades, the repo market is currently booming as firms increasingly
use these instruments to alleviate their short-term funding problems.
Maguire said: “Our repo business is growing at pace. LCH Ltd provides a gilt clearing business and LCH SA a Eurozone government bonds clearing service. Prior to 2018, we had some Eurozone debt in LCH Ltd also – this was inefficient for customers. Following consultation with them, we agreed to migrate and consolidate our Eurozone debt offering in one clearing house, LCH SA – this was driven by market participants seeking greater balance sheet netting and funding efficiency.”
LCH RepoClear, based in the clearing house’s French division, processed €288 trillion (£257tn) of Euro debt and UK gilts last year, up more than a fifth (21%) on 2021 which was also a record year at €238tn, the firm said in February.
Maguire said: “In repo clearing, the efficiencies and associated savings are in balance sheet netting, so you trade bilaterally but give up to the clearing house so that your net settlement against the clearing house is a small percentage of the gross nominal. The shift from LCH Ltd to LCH SA of Eurozone debt happened in 2018 and then the volumes started to grow. The more netting you can get, the more you can trade, so it is a more efficient model.
“We have seen the increased attractiveness of Eurozone debt relative to others from a collateralisation point of view, so we have taken an active role in “internationalising” the service to build an international fraternity of Australian, Canadian Japanese, Hong Kong and Swiss banks.”
Maguire said there are three key drivers in the repo market: “Firstly, government debt issuance will continue at higher rates of interest than we have seen over the past number of years. Secondly, banks’ balance sheets continue to be constrained so anything that can help alleviate that is only a good thing. And, thirdly, buy-side and sell-side need more reliable access to funding and liquidity, and clearing is certainly helpful in this regard.”
Maguire is convinced that, based on these three themes, the fundamentals for the repo market are strong but he is fully aware this is a competitive market. As well as Eurex Clearing, CME offers repo clearing through its Chicago-based CCP, leveraging the US exchange’s fixed income trading platform BrokerTec.
Maguire continued: “We’ve started with dealer-to-dealer, and have expanded that, and we now have a sponsored clearing model where we are bringing in the buy-side. Additionally, in LCH SA we will soon integrate our
Our repo business is growing at pace. LCH Ltd provides a gilt clearing business and LCH SA a Eurozone government bonds clearing service
GC (General Collateral) repo service with the much bigger classic repo service.”
A lot of RepoClear’s recent growth has been in the dealer-to-dealer space, signing up new dealers from around the world, said Maguire, before adding: “But I think the next generation of growth will come from the other half of that market, so the dealer-to-client business where people come through a sponsored model, as well as by combining the two repo services into one which will bring even greater efficiency for customers.
“With the environment we are in now, it’s becoming more compelling to access guaranteed funding and liquidity. For example, pension funds in Europe will need access to cash to pay variation margin on cleared swaps as the clearing exemption for EU pension funds expires in June 2023. We’ve got tools to help people do that so it’s about bringing the SwapClear and RepoClear solutions together to help people fix some of those challenges.”
Maguire concluded: “RepoClear has been around for a while – it was launched in 1998! – but it’s experiencing a second coming in some ways as funding and liquidity are becoming more important, in addition to the tremendous netting benefits generated from clearing.”
Another space where LCH is doing well is credit derivatives and specifically credit default swaps. Here, LCH has for more than a decade competed with Intercontinental Exchange’s ICE Clear Credit, which has historically had the larger CDS clearing book.
CDSClear, also based in Paris, has continued to roll out new services, extending its coverage of the credit derivatives universe, most recently by launching credit index options clearing in late March.
Another factor in CDSClear’s recent growth has been ICE’s June 2022 announcement that it would stop clearing CDS in London in March 2023
and transfer that business to Chicago.
Maguire said: “Five years ago, CDSClear, which is part of LCH SA, had around 5% of the Euro CDS index market and we are over 50% now. That has been hard-earned – building up product, building up liquidity and building up a deep partnership with customers. The fact that we have been investing for a while now and building and improving the service, product and risk management, has meant that people have a real alternative to the incumbent clearing house and that has been positive for us.”
CDSClear has positioned itself perfectly to pick up the business coming out of ICE Clear Credit’s London business and is looking to harness further that momentum to expand in Asia and even the US.
Maguire said: “The growth of CDSClear is a great story and has meant LCH SA has followed a similar path to LCH Ltd and SwapClear in the internationalisation of the services and its users. We started to clear US index families a few years back as well as Asian ex-Japan and Australian indices and Sovereign single names last year.
“LCH SA is also regulated by the CFTC and the Securities and Exchange Commission (SEC) due to it holding licences to clear CDS indices and single names for US firms. Our goal is to be the premier global CDS offering and cover all major products and we will keep investing and expanding. We really wanted to make sure we consolidate in Europe in the first instance, and we are feeling pretty positive about that, which is giving us the confidence to go beyond Europe in the future.”
Maguire concluded: “This story also shows that it is possible to move liquidity from one clearing house to another if there is broad market support from all global participants and if there is a compelling economic rationale.”
Alongside swaps, repos and credit, LCH’s other significant derivatives clearing market is foreign exchange. Launched in 2012, ForexClear has also benefitted from regulatory change in the over-the-counter derivatives market.
Maguire said: “If you look at the FX product set – NDFs (non-deliverable forwards) and FX options are subject to UMR – NDFs are seeing real growth in terms of dealer-to-dealer and dealerto-client activity, particularly in APAC and LatAm currencies and there we are seeing month-on-month growth, which is helping us pick up a lot of customers in the APAC region.”
The LCH chief said ForexClear cleared $2.2 trillion of NDF notional in March 2023 alone while the first quarter was 35% higher than the previous record quarter for client NDF volumes.
He continued: “In October this year, LSEG will launch the NDF matching platform in Singapore. The integration of clearing into the NDF matching platform means that customers can decide on a pre-trade basis to clear their NDFs. Margin savings and operational efficiencies will be key benefits of this service – we’re really looking forward to supporting customers as this market continues to grow and there is a lot of interest in this innovation.”
Maguire added: “The second thread is FX options (and associated hedges) where we are connected to CLS for physical settlement and there we are also seeing volumes and the number of participants growing month-on-month at a pretty high rate − this is driven by both margin and capital benefits.”
LCH reported in the first quarter of this year three successive record months for FX options and set on April 4 a daily volume record of €14.8bn.
“We have approximately doubled our volumes over the past year and expect to do so again in the next 12 months, with a number of major global banks activating in the next few months.”
In line with LCH’s strategy to offer more products and services in the less standardised, uncleared end of the derivatives market, the LSEG posttrade business is focusing on delivering capital efficiencies in FX forwards and FX swaps, drawing on the unique capabilities of its various businesses.
Maguire said: “FX forwards and swaps are really important because these products are subject to capital requirements under SA-CCR.”
LCH has developed something
it calls Smart Clearing, supporting customers’ capital optimisation needs by clearing selective portfolios of FX forwards, without increasing margin excessively.
“Essentially what we have done is, with their agreement, analysed various banks’ and buy-side firms’ FX forwards and swaps books, run an optimisation simulation through Quantile so we can take portfolios of relatively delta neutral FX forwards, and put them into ForexClear where we can net down the exposure and manage the initial margin within constraints.
“In addition, any residual uncleared risk can be swept into SwapAgent to further streamline the exposure and capital management process. So, this is supporting customers across the cleared and uncleared space and leveraging Quantile’s services across both.”
Foreign exchange is another market where Maguire sees the opportunity to offer services that straddle the cleared and uncleared divide, offering efficiencies across two correlated businesses that are currently managed separately.
He said: “FX has been and is a longterm play for us. We are seeing good growth in NDFs and options but now, with our capability for customers to be able to ‘toggle’ between cleared and uncleared dependent on their preferences and goals, we have the tools to make these currently uncleared products much more capital and margin efficient and, by extension, more operationally efficient too.”
The point of a clearing house like LCH is to mitigate risks on behalf of clients and the industry at large; these are
highly risk-averse businesses by nature. So, it was somewhat surprising and at the same time entirely appropriate to learn that LCH is set to foray into the most volatile of all asset classescrypto-currencies.
LCH SA said on April 13 it had reached agreement (subject to regulatory approval) with crypto market GFO-X to start clearing bitcoin futures and options traded on GFO-X when it goes live, slated for the fourth quarter of this year.
GFO-X represents LCH’s first cryptocurrency client and the clearing house has set up to support GFO-X a new division called LCH DigitalAssetClear, which sits within its Paris-based clearing house LCH SA.
Maguire said: “We are also looking at how can we take the apparatus, regulatory approvals and technology we have to work with alternative trading venue partners to launch existing and new listed derivatives products and services.”
Maguire is quick to stress that LCH DigitalAssetClear is fully segregated from the other clearing services already in operation, so there is no chance of contagion between the crypto-currency pool and ForexClear’s or any of the other default funds.
GFO-X and LCH are also keen to stress that they are fully-regulated, institutional-grade entities, an attribute that sets them apart from many of the existing crypto markets.
Maguire said: “The offering has been developed in close consultation with market participants, to ensure their digital asset derivatives trading and clearing requirements can be met within a secure, highly regulated, prudent risk management environment.”
We have approximately doubled our volumes over the past year and expect to do so again in the next 12 months, with a number of major global banks activating in the next few months
The start of this decade was marked by huge bouts of volatility and trading activity, which has translated into consistent record-breaking flow into exchange-traded derivatives. FIA data shows that the 10.57 billion contracts traded across global exchanges in March is 54% higher than last year, driven by an 83% boost in options trading to 7.7 billion lots. On a quarterly basis, options trading was up 73% to 20.3 billion contracts.
The CME has certainly benefitted from the hedging demand created by frequent periods of market uncertainty – whether that’s policy driven rates sentiment or the knock-on effects of funding concerns in the sector.
This period last year included trading around the Russian invasion of Ukraine, and yet options have set a new all-time volume record of 5.8 million contracts traded a day in the first quarter of this year. That has meant CME Group recorded an all-time high of $218 million (£174.8m) in revenue from its options business in the first three months, according to its results filing in April.
Derek Sammann, senior managing director and global head of commodities, options and international markets at the firm, says that, rather than being a product of its natural position at the centre of some of the most widely traded benchmarks across asset classes, the continued outperformance is the result of a deliberate expansion in the flexibility of its contracts over the last five years.
Being a global derivatives market at a time of record volumes can be lucrative, but rather than sit on its laurels and reap the benefits of a rising tide CME Group has been busy with transformative projects that are starting to bear fruit, writes Radi Khasawneh.Sammann: “I don’t personally think that daily expirations in every asset class is going to be the natural outcome, but we have certainly significantly added to execution flexibility and that’s been reflected in the record options volumes we have seen.”
“Options are just purpose built for the kind of markets we are now facing, with uncertainty concerns driving volumes around both short and long-term maturities,” he told Global Investor. “We have certainly seen increasing customer demand for short-dated options to complement our monthly and quarterly expirations over the last year.
“Going back five years ago, customers could really only trade quarterly options, but that’s a lot of premium for traders to absorb. So we continued to develop shorter date expirations across the board because they are such a great tool for people’s portfolios which is a major reason why we set a new volume record for weekly options in the first quarter. I don’t personally think that daily expirations in every asset class is going to be the natural outcome, but we have certainly significantly added to execution flexibility and that’s been reflected in the record options volumes we have seen.”
Ever since Covid-related surges in equity derivatives – amid talk of meme stocks and huge demand in the US for ever smaller contracts – there has been an assumption that the growth in options trading has been driven by
retail flow. Sammann says that CME has actually seen institutions take a larger block of that demand as they look to capture the relative cheapness and flexibility of options in the current environment.
“It’s important to note that this has also meant record levels of participation across the board - buy side has been our biggest growth driver followed by corporates,” he added. “That tells you that it’s driven by end users taking term positions and managing risk for explicit dates. Options are becoming a bigger portion of customer portfolios.
“What we like to see is volume and open interest growing across the entire maturity curve, with end-user customers carrying positions, not just looking to trade in and out on the same day. That’s where I think there’s a difference between just focusing on the front-end versus looking at your term liquidity and where and how customers are carrying their positions.”
One monumental task facing the CME has been its role in the transition from US dollar Libor, with mandatory cessation of the rate for new contracts at the end
of June. The exchange launched its first Libor-referencing Eurodollar contract in 1981, and has been the dominant force in the market for decades.
Results calls over recent years have been characterised by persistent questions over the transition to the “risk free” Secured Overnight Financing Rate (SOFR) preferred by US regulators. In the event, the exchange has managed to retain and even overshadow Eurodollar numbers ahead of schedule. The first quarter saw a record 5.2 million contracts a day traded in SOFR futures, higher than the Eurodollar peak. March also saw combined futures and options average daily volume (ADV) overtake the Eurodollar record for the first time (see chart above).
“Within the interest rate complex, our main focus has rightly been on shifting the balance of our Eurodollar business to SOFR contracts,” Sammann said. “That has been a great success, extending into our conversion processes which has gone incredibly smoothly.
“Our greatest concern going into this was seeing a reduction in open interest, but the story has really been an almost instantaneous conversion of that open interest, and if anything the Eurodollar/
SOFR complex has so far outperformed treasury contracts because there has been so much focus on the short end of the curve. The SOFR transition has not limited or inhibited that in any way and that is probably the greatest compliment we can pay to the way a process of this magnitude has been managed.”
For the CME, the weekends of April 15 and 22 marked the conversions of listed and over-the-counter US Libor referencing rates contracts. In a process timed to coincide with rival and dominant OTC interest rate swaps clearer LCH’s own process, CME has now successfully switched 7.5 million Eurodollar contracts and $4 trillion of swaps – effectively drawing a line under the years-long process for the firm.
Along with a swathe of Libor conversions globally across currencies, the changes tie in with a process that began for the firm in 2006 – the transformative merger of the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT). Most recently, the firm in October started trading its three month euro short term rate (€STR) referencing contracts, launching with related spread and basis contracts.
“That ties into the industrial logic of bringing together CME and CBOT originally, which was predicated on the idea of bringing the whole yield curve together in one place and allow people to trade the curve spreads,” Sammann says. “So for us, we’re always looking at ways to do that and it ties directly to our themes of creating operational efficiencies and capital efficiencies for our customers. We want to put the additive tools inside the portfolio to make it as efficient as possible and release synergies
for our customers’ portfolios. If you put that on the same platform that’s where the magic happens.”
The CME racked up more than 80,000 lots in the complex within four months – far outstripping the more recent and lightly traded Eurex version of the European risk-free rate. Europe’s more established Euribor contract will continue to exist, unlike other regions, meaning a more fragmented liquidity picture.
The volatility in energy markets, by contrast, reduced volumes across the sector as margins suffered from elevated pricing driven by geopolitical constraints and supply shocks related to Russian policy and sanctions. The CME has a West Texas Intermediate (WTI) crude oil contract which is a key bellwether for global markets, and Sammann says that there are positive signs emerging as exchange-traded fund (ETFs) issuers and financial participants return to the market.
“Within energy what we have seen is a recovery from lows in the middle the fourth quarter,” he added. “To give you an example, open interest in WTI has bounced back up to 1.9 million contracts, so we added roughly half a million contracts in the first quarter. And that’s coming from ETFs which you can see in the roll data. That’s a good sign of an allocation of positions back into crude oil, and we find that encouraging. Everyone has a role to play in maintaining a healthy market there, and we’re seeing a more diversified mix of participants coming back to the market.”
Its position in energy market grows out of its takeover of the New York
Mercantile Exchange (NYMEX) in 2008, a deal which also saw the acquisition of a metals business (COMEX).
“Since we bought NYMEX and COMEX in 2008, what we have managed to do is really build out the base metals business and that has accelerated over the last five years,” Sammann adds. “A prime instance of that is the stunning success we have had building out the copper franchise. Our entry there was a need to build a product that dealt with the problem of an unhedgeable basis with the US copper market at that time. More recently, our approach on markets like Aluminum has been very much the same, with the issues around the market structure of some physical delivery markets, we have seen an uptick in brokers using COMEX products that have never done so before and would likely not have done that.”
With issues around the operation of the main physical metals market – the London Metal Exchange – still in the process of being resolved after an unprecedented suspension of its Nickel market in March last year, the CME has seen more interest from its highest tier market-makers (Cat 1 members) connecting to COMEX for its largest contracts, presenting a huge opportunity for CME, Sammann says.
“With the footprint and credibility we built in our Copper business, we are now attracting Cat 1 members, brokers and traders who are adding COMEX products, specifically Copper and Aluminum and that has driven record volumes, open interest and participant rates,” he added. “Increasingly, physical customers are telling us they need an alternative and we’ve stepped in and built differentiated products with the right infrastructure, known rules and the deterministic market behaviour that consumers need.
“They need certainty on how trades are processed, how trades are cleared, and how money flows. Moving physical markets is a slow process, and it’s a multi-year project to become an accepted but the percentage growth we are seeing is really compelling.”
Increasingly, physical customers are telling us they need an alternative and we’ve stepped in and built differentiated products with the right infrastructure, known rules and the deterministic market behaviour that consumers need
The European Commission, European Parliament and European Council started on April 18 their Trilogue meeting to try to reconcile their different positions on some key aspects of the regulation of European market structure.
By Luke Jeffs.
The MIFIR Review covers key issues such payment for order flow, systematic internalisers and the European consolidated tape. Euronext has been vocal in its views on many of these issues and outlined again its position as the crucial meeting began in late April.
Nicolas Rivard, head of advanced data services at Euronext, told Global Investor the MIFIR Review presents an important opportunity to review the European capital markets regulatory framework and strike a better balance in Europe between competition, transparency and fragmentation.
Rivard said there are positive elements in each of the Commission, Parliament and Council texts but there are equally proposals about which Euronext is concerned.
Euronext’s position on payment for order flow is simple: the practice should be banned.
Nicolas Rivard,Rivard said: “Euronext has always been clear that to ensure that retail investors get the best services that avoid conflicts of interest, the best approach is a full ban on Payment for Order Flow (PFOF). A ban on payment for order flow is the only way to secure investor protection. The European Parliament, Council and Commission
Euronext has always been clear that to ensure that retail investors get the best services that avoid conflicts of interest, the best approach is a full ban on Payment for Order Flow (PFOF)head of advanced data services at Euronext
agree on the principle of a ban on PFOF but the Council is proposing an opt-out for members states.
The second important issue addressed differently by the three texts is the balance between lit and dark trading, specifically systematic internalisers’ obligations with regard to mid-point trading.
“On this, we think again that the approach of the European Parliament makes sense. Although the initial approach of the Commission was interesting, it is clearly much more restrictive in terms of what the SI can do. The Parliament has come up with a compromise,” said Rivard.
Euronext accepts that systematic internalisers have value in specific cases. But the group feels the European rules should be consistent across nonlit and lit venues.
Rivard said: “Trading at mid-point in legitimate circumstances is fine but assessments demonstrate that it should be limited for small orders. The simple reason is that you cannot trade at midpoint on price-forming markets and we believe this should apply also to systematic internalisers, so it should be limited to larger orders above a certain threshold.”
The last and perhaps most contentious issue up for debate in the coming weeks is the European consolidated tape, a single record for European share prices.
Euronext view is priority is to have a post-trade tape for bonds. But the divisive issue is the level of pre-trade data used in the equity tape. Both the Council and Parliament back pretrade data in the equity tape, but Euronext has serious concerns about the Parliament proposal which it sees as “distortive”.
Rivard said: “The Council’s
consolidated tape proposal is a posttrade real-time tape with a snapshot of pre-trade data on each trade. We can call it an execution tape that provides market participants with a price and volume across all execution venues. So that basically gives investors a realtime prices across all type of European venues and a quasi-real-time view of liquidity on lit markets because every few seconds you would have a quasi full update on the market.”
“This tape covers all the non-trading use-cases put forward by the European Commission and this is the proposal that we endorse. We believe it will bring a lot of value and transparency to the market, achieving the key goal of the MIFIR review.”
Euronext was in February one of 14 European exchange groups to sign up to a joint venture (JV) to participate in the selection process for the provision of the European consolidated tape. Other members are Deutsche Boerse, Nasdaq, SIX Group and Wiener Boerse.
Rivard said: “We have carried out a deep assessment, and we have evidence there will be an important demand for this tape based on the revenue we generate from various usecases. We believe there will also be a number of candidates to run the tape of which the JV we are creating with 13 other exchanges is one.”
Euronext points out that the European Parliament proposal for a real-time pre-trade tape with five levels of depth, would drive trades away from lit markets.
“The trading tape put forward by the Parliament is an attractive simple story but with foreseeable side-effects on market quality. If you look at the US, when you have a trading tape, you basically favour non-transparent markets and non-transparent trading. That’s because the pre-trade real-time tape becomes a reference benchmark and, as it is in the US, trading at the reference price is not trading on a lit market nor is it contributing to price formation,” said Rivard.
Euronext also has concerns that the Parliament proposal would disadvantage retail traders who can be more easily arbitraged by algorithmic traders.
Rivard said: “At the end of the day, that tape is only going to contribute to less transparent trading, to the detriment of transparency and fairness of treatment across all participants.
“In our view, the Council execution tape covers all of the relevant use-cases whereas the European Parliament tape covers in addition trading use cases which we understand was not the intention and this will have a negative on the market particularly for smaller or retail investors, and would contradict the goal of having more transparency.”
The Council’s consolidated tape proposal is a post-trade real-time tape with a snapshot of pre-trade data on each tradeRivard: “Trading at mid-point in legitimate circumstances is fine but assessments demonstrate that it should be limited for small orders.”
Index Futurisation session at the Eurex Derivatives Forum 2023, writes
Amelie LabbeImplementing initial margin (IM) requirements for non-centrally cleared derivatives was a key component of the Basel Committee’s Uncleared Margin Rules (UMR), a significant piece of post-financial crisis regulation.
Tightened IM rules have meant more oversight on posting collateral for over-the-counter (OTC) derivatives transactions, making these products more expensive to build and trade.
This led to a wave of innovation for alternative products that can be cleared in an exchange-traded environment, cutting costs and complexity in the process.
European exchange Eurex responded to these market developments by launching a listed product suite that targeted derivatives with a large OTC market and no listed alternative. Among these were the dividend futures and total return futures (TRFs) on the EURO STOXX 50 index, which launched in 2008 and 2016 respectively, followed in 2019 by an equity iteration for basket TRFs.
The TRF was built to hedge the implied repo risk of equity markets and provides returns analogous to an OTC total return swap. It made active trading of equity repo much simpler, according to Natasha Sibley, Fund Manager in the Diversified Alternatives group at Janus Henderson.
Speaking from the sidelines of the Eurex Derivatives Forum event in Frankfurt, the Deutsche Boerse-owned venue’s head of equity and index product design said the firm plans to launch further contracts if Europe’s first bitcoin futures contract makes a strong start.
“From April we will be focussed on developing the Average Daily Volume of both the euro and dollar-denominated contracts to the point where there is sufficient liquidity to bring options on those futures, which make up a significant part of the flow on unregulated exchanges,” Zubin Ramdarshan told Global Investor. “So this is a first step in a process of building our presence in this asset class.”
Eurex set April 17 as the launch date for a bitcoin index future it has developed with FTSE Russell and Digital Asset Research, which is vetting the crypto markets and instruments used to determine the index price.
“Having a centrally cleared product with a clearing intermediary to sit between buyers and sellers in a familiar jurisdiction was increasingly an attractive proposition to institutions we were speaking to, so we created a product to meet that demand,” he added. “It was for the same reason that we opted for a cash settled contract with an established Benchmark Regulation-compliant index provider with a robust methodology.”
The cash-settled contracts will trade 21 hours a day and settle at 5pm central European time.
“The idea we had was to cater to a global client base, so we will be offering futures in Asian trading hours as well as Europe and US time,” Ramdarshan added.
The exchange said it will have at launch two market-makers covering Asian trading and two other market-makers for the Europe and US trading sessions.
The market came together in 2016 to design and launch total return futures and has continued to work closely to ensure it continues innovating, as panellists of the Product Innovation: Equity &Eurex eyes bitcoin options after futures liquidity builds Eurex has said it may launch bitcoin options if the German exchange manages to build strong liquidity in the bitcoin futures contract launched in April.
“We had traded repo using OTC swaps for some years but switched to TRF when Eurex launched this product. The standardisation of the listed contracts meant that we could trade in and out without the operational hassle of novating,” she says.
Eurex TRFs are now entering a mature phase with a market size of EUR 120 billion outstanding notional
and almost 50 active members. In the past few years, index TRFs have grown annually on average by 85%, with almost 38 million traded contracts since their introduction. The segment had a record year in 2022, with over EUR 540 billion in notional traded, surpassing the 2020 pandemic year. Basket TRFs activity started accelerating as well, with volumes last year three times
The head of Eurex has said the collapse of US crypto market FTX late last year should not “discredit crypto technology or assets” after the German exchange said it plans to launch Europe’s first bitcoin futures contract.
Speaking as he opened the Eurex Derivatives Forum in Frankfurt, Michael Peters said FTX last year and the recent problems at some US banks that support crypto firms have rocked that sector.
The Eurex chief executive told the delegation: “Who would have thought a couple of weeks ago that Silicon Valley Bank, Signature Bank, Silvergate Bank and First Republic Bank may cause so much trouble to our markets and the industry?”
“Unfortunately, with Silvergate and Signature, we lost two important puzzle pieces of the crypto ecosystem. Another recent event we learned from was the FTX crypto incident that shed a light on the need for proper regulation.”
He added: “We learned that it is important to differentiate between the use of blockchain from what potentially is poorly risk managed fraud. But FTX should not discredit the technology as such or the crypto assets but rather motivate regulators to allow regulated market organisers to start playing a bigger role in this field.”
Peters’ comments came an hour after Eurex said it will launch on April 17 a bitcoin index future backed by FTSE Russell, making the Frankfurtbased market the first traditional European exchange to list a bitcoin index future.
Peters went on to say: “Our industry has been shaken and our capital markets are under severe stress. We have seen stress in the banking sector that has been extremely strong during the last two weeks. Credit Suisse, one of the most relevant banks and a true Swiss icon, will be taken over by UBS.
The Eurex chief also mentioned the January 31 cyber-attack on ION Markets as a wake-up call to the industry: “Another major market incident impacted us severely about four weeks ago. The cyber-attack on a key technology supplier has raised questions around resilience and exposure to the risk of failure of a systematically important part of the industry infrastructure.”
Peters was opening the annual Eurex Derivatives Forum in Frankfurt which he said this year is bigger than ever with over 1,800 registered delegates.
higher than in 2021, and over EUR 20 billion in notional traded since launch.
According to Elena Marchidann, Vice President, Equity & Index Product Design at Eurex, demand for the TRFs and for additional products available in a listed and cleared environment, took off relatively quickly, attracting a diverse set of market players and use cases.
“The launch of the first index TRF opened the door for a whole range of other opportunities – we went on to launch subsequent TRFs on other indices, including an FTSE 100 TRF, as well as single name baskets of equity TRFs,” she said. “The futurization further evolved with the introduction last year of thematic index futures which provide more granular exposure to structural trends.
“The focus continues to be on innovation, jointly with our members, by bringing some of the more bespoke OTC financial products into a more standardized listed framework, not only to create efficiencies from a cost perspective but also to grow the market by encouraging more participants to join.”
Serkan Batir, Managing Director, Global Head Index Product Development and Benchmarks at Qontigo, adds that the combination of innovation and regulatory requirements catalyzes for the ecosystem.
“We have seen a growing number of products act as the launchpad for others in the industry: we have seen that with ETFs , which in combination with futures and TRFs have helped grow the ecosystem,” he says. “One instrument triggers the other, no matter which platform it is traded on.”
While that trend started with benchmarks such as the EURO STOXX 50®, Batir explained, a similar pattern is unfolding with more targeted strategies. He singled out the thematics segment, where Eurex has introduced futures on the STOXX® Global Breakthrough Healthcare, STOXX® Global Digitalisation and STOXX®
Global Digital Security indices, as an example.
“As interest in such as thematics continues to grow, I expect more investor demand for products that support their entire trading and hedging environment,” said Batir.
Working together
When creating a TRF as a futurized alternative, the main requirement was to have a product that mitigated banks’ concerns as they were the main firms impacted by UMR phase one in 2016. Demand was driven by banks
needing to hedge the implied repo risk originating from structured products. A wider set of firms, including an increasing number on the buy-side, would find themselves in scope of the latter stages of UMR, culminating in phase six in September 2022.
“The fast adoption that happened in the TRF space in a relatively short period of time was because of the margin netting benefits,” says Omar Bennani, Head of EMEA Delta One Trading at J.P. Morgan, adding the stage was set for futurization as far back as 2008 when there was a shift from OTC
dividend swaps into futures. “A listed product can also be more effective with publicly available rules set beforehand, and due to its liquidity and visibility in terms of pricing and volumes.”
Eurex designed the TRF in close partnership with the banks. But the process was not without its complexities as TRFs are not plain vanilla products in themselves, having never been traded before in a similar construct on a derivatives exchange.
TRFs aimed to combine the best of both worlds: the flexibility seen in some aspects of swaps trading within a listed
Matthias Graulich, global head of fixed income, funding & financing strategy and development at Deutsche Boerse AG, said the European Commission proposal in December balances the Commission’s political objectives and the interests of swap dealers.
Speaking on the fringes of the Eurex conference in Frankfurt, Graulich said: “The European Commission has made it clear in many instances that it is not comfortable with the risk of Euro-denominated swaps being cleared outside of its control.”
LCH, the clearing house owned by the LSE Group, remains the dominant clearer of Euro-denominated swaps despite concerted efforts over recent years by the European authorities and Eurex Clearing to increase Euro swaps clearing at the German CCP.
Graulich added: “This leaves the Commission in a difficult position with generally two extreme options: Either they do nothing, which appears not really an option, or the other
extreme they could introduce rules to force clearing into the EU but that presents the risk of a cliff edge and the possibility of unintended consequences which no-one wants.”
The Commission proposed on December 7 last year changes to the European Market Infrastructure Regulation “to strengthen EU open strategic autonomy and safeguard financial stability by requiring clearing members and clients to hold, directly or indirectly, an active account at EU central counterparties (CCPs), and reduce excessive reliance on systemically important thirdcountry CCPs.”
Graulich, who is also a Member of the Executive Board of Eurex Clearing AG, added: “Therefore, I think the European Commission proposal represents a neat compromise, which considers the EC’s systemic stability and monetary policy interests as well as those of EU market participants who can still have a choice and can still optimise
their portfolios. The proposal also ensures a continued level of competition and the ability to diversify risk which is a key element in a healthy eco-system.”
Eurex Clearing has significantly increased its swaps book in the past five years, to about 20% of the market at the end of last year, up from about 11% in 2019 and 6% in 2018.
Graulich said: “Whether there are active accounts or not, we are on a good track to build out our market share based on a strong “Home of the European Yield Curve” value proposition. For example, our cross-product margining is becoming increasingly important because of higher interest rates which is driving increased adoption by hedge funds and pension funds.”
Eurex Clearing offers margin discounts on clearing of correlated products such as Euro interest rate swaps alongside the Frankfurt-based CCP’s vast inventory of Euro interest rate futures including the Bund, Bobl and Schatz contracts.
environment. Recreating this duo in a product relied on the collective work of multiple groups of stakeholders at all stages of the product workflow – all with potentially differing requirements.
But during the initial stages of the product design phase, some aspects needed to be considered to achieve a broader market consensus.
One such situation occurred when a decision had to be made regarding if the TRF product should be an OTC cleared swap or listed future, and how it should be quoted. The TRF product
was initially a centrally cleared OTC swap. During multiple iterations with the Eurex members, it became obvious that a listed version of a swap would better consolidate liquidity and provide more synergies for the market.
“A strategic decision had to be made between launching a centrally cleared OTC swap or as an exchangetraded product, in the form of a fully fungible TRF. Under the listed alternative, a possible approach was that the product could be quoted in index points, which in theory was
European firms may have to adapt to a shift in focus by the European Union towards geopolitical security in response to the Russian war in Ukraine, a senior German politician has said.
Speaking at the Eurex derivatives conference in Frankfurt in March, Joschka Fischer, the former minister of foreign affairs and vicechancellor of Germany, said the European Union’s priorities have changed in the past year since Russia invaded Ukraine.
Fischer told the delegation: “Economic interests will continue to be very important but there will be a change and it has already happened. In Germany, the business community is not used to a contradiction between geopolitical security goals and external economic goals. In future, you may see there is a difference and this will change the behaviour of big companies.”
Fischer, who left office in 2005, said the Russian invasion of Ukraine in February 2022 will have a profound and long-term effect on European politics.
“We had this debate about Eurosceptics who said: “Let’s go back to the European nation states”. After Putin’s attack, name one European nation state that has been able to
manage the crisis? There is none.”
Fischer added: “So for the European Union, size matters in the 21st century. The EU, if it didn’t exist, it would have to be invented, and there is no Eurosceptic debate nowadays because it’s obvious that without sticking together, we have no future in the 21st century.”
The comments came on the second day of a conference that has been dominated by talk of the banking industry’s resilience following the announcement that UBS was taking over Credit Suisse after that Swiss bank was bailed out by its national regulator.
A panel of experts said firms should expect further volatility as money markets deal with a reduction in liquidity provision by central banks.
Deutsche Bank’s board member with responsibility for the corporate and investment bank hailed international efforts to calm markets after a turbulent weekend following the sale of Credit Suisse.
much easier for the banks from an implementation perspective,” recalls Marchidann. “However, after working with a group of 13 banks and putting it to a vote, it was decided that the best approach was to have a listed TRF product that would be best suited for those end clients used to trading OTC swaps in basis points, in spread terms.
“In the end, we decided to put the complexity in the trading layer rather than in the back-office applications. We know how difficult is to change systems downstream so it was a conscious decision from the banks together with Eurex to have a product ultimately suitable for the buy-side clients.”
Bennani recalled that, back in 2016, several decisions were made to balance the requirement of having an easy to understand product with the complexity needed by the dealers for their risk management. One was the approach to use when designing a brand new dividend curve in order to match the dividend treatments on OTC swaps. A discussion between using EURIBOR versus EONIA rates also popped up as most products were found to reference the three-month EURIBOR.
“There was no obvious solution at the time, but in the end the overnight risk free rates were deemed the most practical option,” says Bennani.
According to Bennani, the way the TRF was constructed, which tried to closely match the features of standard total return swaps, facilitated the migration of interdealer trades in EURO STOXX from OTC to Eurex. For instance, buy-side firms and hedge funds also came into the market early on, and started to execute and carry trades that could generate alpha by positioning through the term structure of the TRF curve.
“Having the TRF cross margin with other positions on the exchange made trading repo more efficient than it was when we were using OTCs,”
says Sibley. “It also reduces our counterparty exposure, something that is particularly valuable for our UCITS vehicles, which have explicit limits here.”
The ease of trading TRFs in a listed environment has attracted new players in the market, and as such, agrees Batir, they have replaced their swap counterparts in many other areas.
However, some clients will always require a more ‘bespoke’ product, so OTC products still have a role to play. Expanding TRF instruments to other underlyings referencing illiquid stocks or regions, or less mainstream products, could prove a challenge that some in the market are unwilling to take on.
“That being said, as trading the implied equity repo is emerging as an asset class on its own, the TRF product can prove versatile with multiple uses, depending on supply/demand dynamics and market environment,” says Marchidann. “The Covid crisis was an event that put index TRFs in the spotlight, notably because of widespread concerns about company dividends.”
Total return futures, which are less sensitive to dividends than regular futures and priced more explicitly, based on realized dividends, could be a suitable alternative for longerterm investors in such volatile circumstances.
In terms of client adoption for TRFs, Bennani highlights that term structure carry trades are executed by the buyside (hedge funds and some asset managers), and typically offset the flows stemming from the issuance of some structured products and the dynamic hedging of exotics books.
“Put simply, there is an equilibrium between the exotics desks and buyside or even some delta one desks,” he says. “There has not been a major shift yet towards these products for beta replacement as market participants still like trading the standard EURO STOXX futures given their
high intraday liquidity and active order book, but total return futures have proved their attractiveness to directional investors during COVID given their ability to minimize exposure to dividend risk
A remaining challenge revolves around education as not all clients are fully aware of the product construct and cost efficiencies within a listed environment.
“A key task for Eurex is to keep on educating both sides of the market to make sure they understand how the TRF product works and how they can optimize margin costs at portfolio level,” says Marchidann. “The TRF together with all other equity and index derivatives can bring significant margin offsets as the hedged trades are basically using the same pool as a TRF.
“This is also something we consider: how we can improve order book liquidity, support clients during the onboarding process and make the data more accessible to foster further adoption.”
What is next in the futurization toolbox?
Looking into the future of futurization, the direction of travel is firmly from OTC to listed. In that perspective, Eurex and Qontigo are listening to their clients: innovation will likely accelerate as there is still a considerable number of OTC derivatives cross-asset classes which could be captured into a centrally cleared and exchange-traded environment.
The futurization toolbox will encompass more customization down the road. This is because there is a desire from clients to maintain the flexibility inherent of OTC products, while benefiting at the same time from the transparency, liquidity and synergies associated with listed derivatives.
This customization could cover products including bespoke basket TRFs, and thematic and systematic indices. Thematic indices are more complex to develop than their sector counterparts as they require processing of advanced and complex data sets either in-house or using data vendors. They are designed for more precise exposure management to reflect a specific view and strategy in portfolios and therefore require more education on the investor side in terms of understanding opportunities and risks.
“To compare, we saw similar developments of futures products with sector indices in the early 2000s, spreading more widely to market making activities. Today we are talking about an ecosystem with an open interest of EUR 12 billion on futures and nearly EUR 9 billion,” says Batir. “We expect to see the same path on TRFs with our thematic index range as underlyings.
“I believe that thematic indices and listed futures products on Eurex can definitely offer the right set of tools for investors and the ecosystem to manage their short- and long-term risks.”
A key task for Eurex is to keep on educating both sides of the market to make sure they understand how the TRF product works and how they can optimize margin costs at portfolio level
Elena Marchidann, Vice President, Equity & Index Product Design at Eurex
A rising star in the fast-changing climate disclosure and carbon management industry is Kentaro Kawamori, the chief executive and co-founder of Persefoni, a technology firm that helps investors and other financial firms satisfy their stakeholder and regulatory climate disclosure obligations.
By Luke JeffsKawamori co-founded Persefoni in 2020 and secured in September the following year a key partnership with and investment from Bain & Co., the US consultancy group.
Persefoni and Bain & Co. worked most recently to launch in March 2023 Net Zero Navigator, a ground-breaking tool that helps firms define their carbon reduction strategies by drawing on Bain & Co.’s vast net zero experience.
Arizona-based Persefoni already lists Citi, alternative asset manager TPG, Japan’s Sumitomo Mitsui Banking Corporation and US bank William Blair among its growing client list of banks, asset managers and asset owners.
Speaking to Global Investor in late April, Kawamori said sustainability is now truly a global trend that straddles all asset classes but some asset managers are more advanced than others in their understanding of the key issues.
“The best way to think about this is the companies that have the most capability and those that are spending the most time and money getting ready are the ones that tend to have the highest amount of capital from left-leaning, liberal types of limited partners (LPs).”
“That can be European or British pension funds, and Canadian pension
The companies that have the most capability and those that are spending the most time and money getting ready are the ones that tend to have the highest amount of capital from left-leaning, liberal types of limited partners
funds have been a huge part of this story, though they are not talked about so much. Then, to a lesser degree, there are the US pension funds. You’d think that California and those folks might have moved a bit faster, but they are actually quite slow. There are other regions, such as Australia and New Zealand, where the government sectors have been pushing quite a bit.”
Japan is also a rapidly growing market for Persefoni (see box on Asia) while the services that the firm provides have resonated particularly in the private equity and venture capital (VC) markets where carbon disclosure can be patchy.
The chief executive said: “If you correlate where we’ve seen most action from general partners (GPs) and portfolio companies measuring and ultimately disclosing their carbon footprint, it is linked to control investors. This is a complex exercise, so we’ve had, for example, VC firms go to their portfolio companies that tend to be early stage, and the VC firms will conclude that they don’t have the time or money to do that.
“In contrast, if you are a massive buyout fund doing ten billion dollar deals every few weeks, they have a huge priority to immediately push this into a portfolio company to start disclosing. Generally, we’ve seen that correlate to control-type GP structures.”
Persefoni is a truly global firm with offices in Japan, Singapore, German, London and Canada as well as its US base so Kawamori has a unique perspective.
He said: “From a regional perspective, specific to financial services, there is this rhetoric that the Europeans are far ahead, which interestingly becomes a bit of drag for them as this perception that they have more expertise was true even a year ago, but the Americans have caught up so quickly, mostly because this is an investor and a regulatory issue for them.”
The Securities and Exchange Commission could publish as soon as June its requirements for US regulated firms’ climate disclosures which has focused minds in the world’s largest financial market (more on this later).
Kawamori continued: “It’s not that they all of a sudden care more than the Europeans, which is certainly not the case. Rather, Americans continue to be some of the most enterprising businesses on the planet, so every GP
The world’s fastest growing economies are embracing the challenges of environmentally sustainable development and drawing on technologies that enable them to better manage that process. Kawamori said the opportunity for his firm in Asia is real and increasing.
He told Global Investor: “If I look at our customer base today, it is 5% Japan and 2% greater Asia Pacific, but if I look at our pipeline it is significantly greater. Japan is the biggest market partly because of their participation in the G7, and the former Prime Minister made this an aggressive agenda item. They are also one of the few countries that has made a net zero commitment.
“They [the Japanese government] have worked with the stock exchange on corporate governance regulations to
require disclosure. Theirs is maybe the single greater effort across governmental sectors in a country because they also went to the municipalities and told them to pass energy efficiency measures.
“Companies went from almost no expertise to a huge amount overnight. Then two months ago, they came out with the requirement that anyone who sells to the Japanese government must start providing product carbon footprints, which is beyond anything that anyone has required until now. This is an incredibly difficult and expensive thing to do, which requires a whole new class of regulations.
“Japan is the leader. Hong Kong is in the process of adopting regulation, while Australia and New Zealand are on the same path. Singapore is also a rising star.”
has a story or even some sort a fund related to climate.
“The Americans have moved incredibly fast whereas the Europeans got stuck and have been moving more slowly. We are seeing significantly more action in the US and in Japan than we see in Europe, where this is a lot more talk than action.”
Asked about the effect of the Russian invasion of Ukraine on European energy supply and how that has affected attitudes to climate change, Kawamori said natural gas has emerged as contentious subject.
“What we are going to see fully come to a head, and this is something we discussed on a panel at COP 26 in Glasgow, is the far-left position of: “Stop all oil and gas development immediately” but most educated people will know that is just not feasible.
“So, the big battle ground is going to be natural gas. What did the Germans do? They replaced the NordStream pipeline with American and Qatari gas, so we’re going to see an interesting evolution around: “Is natural gas a transition fuel?” Separately, the French have gone massively into nuclear … so those are conversations happening in the financial services sector.”
The Persefoni chief said the financial services sector and particularly the banks are struggling to come up with the right story to explain their positions on natural gas.
Kawamori mentioned a recent dinner he had with a board member from a large global asset manager: “The board member said we’re in purgatory because we get a sale from the far left and they tell us we’re not doing enough and then we get a sale from the far right who say we need to stop this ESG “woke” stuff, and then in the middle there is a need to continue developing fossil fuel infrastructure like LNG terminals.”
Kawamori added: “I see that consolidated among the large players
who continue to bear the brunt of the financing for that sort of infrastructure.”
Asked about allegations of greenwashing last year against the asset management divisions of leading investment banks, the Persefoni chief said it is too easy to blame those firms, rather there are other issues at play.
“We have some of the largest European, UK and US banks as clients. These banks are dispersed and don’t really talk to each other, so where we have seen examples of greenwashing, it wasn’t necessarily a systemic issue in the bank because they operate so independently of each other”.
He added: “If you look at the asset management arms of those banks, I’d say they are 50-50 at fault. So, 50% is on them because they should have done more due diligence and shouldn’t have put green labels on everything. The accountability wave has come quickly; however, they should have been more diligent. The other 50%, however, is on some of the large data providers in this space that sell massive amounts of climate and ESG data.”
And this is where Persefoni comes in.
Kawamori said: “Every carbon and climate analytics package on the planet is derived from one data set called CDP, which is a non-profit voluntary register for corporates to report their carbon footprint into. The founding chair of CDP sits on our Sustainability Advisory Board, and we know them well.”
“The problem with the data set is that it is unverified, so a corporate can simply report their number, but there is no level of assurance or audit that proves the number is correct.”
He continued: “However, every vendor who has a data analytics package they sell in this space uses CDP as the derivative data. So, you immediately see the problem that we are using this low fidelity data set to make all these assumptions and build these models.”
Kawamori sees a role for Persefoni here as it has authenticated data on firms’ carbon emissions.
“What will happen is companies like Persefoni will replace CDP’s data set because we have the actual data from companies - they bring in the activity data and do hyper-granular calculations on our platform. We
will anonymise and publish that and replace CDP’s data set at scale. That is one of the paths we are undertaking over the next few years.”
Kawamori said this process will “unfortunately” take at least another three years to build out the data set to the scale required to be considered high fidelity.
That said, Persefoni data covers today some 220,000 unique investments linked to about 15,000 unique entities so the set is large and growing, he said.
The regulation referring to climate disclosure is complex and varies across jurisdictions. The US equities regulator the SEC is set to finalise in the coming months its Climate Disclosure Rule based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Kawamori sees these proposals as “the least stringent disclosure regulation” compared to the European Union’s Corporate Sustainability Reporting Directive (CSRD) first proposed in April 2021.
The regulation is dense and layered, the Persefoni chief added. “Under the regulatory frameworks being pushed by the SEC and CSRD, the financial services sector automatically has liability because of the way that they are adopting the standards. Then you have the TCFD, that’s the UN G7 accepted framework for financial services customers. Within that, one of the questions is around disclosing your carbon footprint for which the guidance dictates that they use the greenhouse gas protocol. Then, when you go a layer deeper, you have another protocol called PCAF, which is the only financed emissions accepted accounting framework under the Greenhouse Gas Protocol”.
Kawamori added: “The SEC and CSRD say you must be scope 3, so automatically if you are a financial services company, scope 3 category 15 is financed emissions, so it triggers
an automatic coverage that they must start disclosing their activities.”
Under the current rules, investment firms are not required to report climate emissions for every investment or even every fund but, in effect, that is where they are because that is what investors demand.
Kawamori said: “It’s technically voluntary if you look at it through a regulatory lens, but if you are a GP raising capital, it’s not necessarily voluntary. Today, it’s moving into investment and even debt covenants.”
The Persefoni chief cited the example of Canadian pension funds that through their private equity arms expect firms using their private credit to disclose in detail their carbon footprint.
The potentially landmark SEC proposal has, however, been subject to vocal opposition from a handful of US politicians and companies, a lobby group that Kawamori takes seriously.
CV: Kentaro KawamoriHe said: “There is no doubt that US opposition has the potential to affect the US proposals. The fact remains that the US is the only country in the world where climate change remains a contentious issue. Nowhere else would you hear people say: “No, this is a bad idea, we shouldn’t address it.”
The Persefoni chief said the lobby may be relatively few in number but its high profile reflects its spending on Capitol Hill.
“I think the biggest risk is that in this next election cycle, if these people get somebody who decides to make this a platform in the presidential run, then this message is going to get amplified. There is a significant risk in that,” Kawamori added.
He concluded: “The SEC ruling being finalised will give us a first glimpse of how serious is that opposition, that is, were they successful in watering it down or eliminating it entirely? I don’t think it will be, but we are obviously watching it closely.”
2020-Present: Chief Executive and Co-Founder of Persefoni
2019-2023: Co-Founder and Board Member of Umbrage, a digital product studio acquired by Bain & Co.
2019-2020: Venture Partner at Rice Investment Group
2018-2019: Chief Digital Officer at Chesapeake Energy
2017-2018: Cloud Advisory Lead at Accenture
2015-2017: Director, Publisher Strategy & Solutions at SoftwareONE
2014-2015: Senior Manager, Product Management at Insight
2013-2014: Commercial Solar Project Coordinator at Energy Industries Corporation
I think the biggest risk is that in this next election cycle, if these people get somebody who decides to make this a platform in the presidential run, then this message is going to get amplified. There is a significant risk in that
fintechs
Ten years ago, Investment Book of Record (IBOR) was the big subject in asset management: it monopolised industry literature and dominated buy-side conference agendas. In 2014, the Global IBOR Standard Working Group published a key document in the history of asset management technology. It was the result of a collaboration across some of the most prominent global asset managers, including Vanguard, Eaton Vance, Ontario Teachers, M&G, JPMorgan and LGIM. Their best data architects and designers were allocated to the task.
The standard proposed a universal book of record, where the positions delivered from the IBOR were defined by the needs of the user, or of the requesting process, and not dictated by the IBOR itself. It said that position management systems should not maintain any positions at all: they should just maintain definitive and complete transaction records, and derive appropriate position statements from them when the demand arose.
The IBOR Standard has become a universal target, or an idealistic
irrelevance, depending on your perspective.
The dominant buy-side platforms, like Simcorp Dimension, Markit thinkFolio and Blackrock Aladdin, have continued to operate with accounting- or custody-based positions, or simple rolling balances, ever since. Despite dire and confident predictions, overnight batch processes populating positions on a flush / refresh basis have not become extinct.
Against this, there has been real progress in the IBOR space. Finbourne has developed an investment data architecture embodying many of the principles put forward in the 2014 standard. Aprexo, now part of Carne, similarly built an investment data store which drew inspiration from the 2014 standard. Now Limina, an innovative Swedish technology provider, is building its Portfolio Management, Order Management and Compliance systems around a live-extract IBOR which aspires to the 2014 standard.
So do we still need what the 2014 standard defined? And what has changed that makes IBOR Standardbased developments possible and relevant now?
Everyone who has worked with asset management systems will be familiar with arguments over the construction of positions. One user wants it one way, while another user says that this is wrong, and wants it another way. Software vendors try to please their clients, but in trying to do so, more often than not cause dissatisfaction for other users and clients. The one who shouts loudest (or pays the most) gets what they want, while the others have to live with the result. Frequently, individual users shadow and amend positions in spreadsheets to get the view that they need. This is true whether the systems in question support accounting, compliance, portfolio and order management, performance, execution or risk.
It is often said an IBOR should provide a single version of the truth on positions. Under this interpretation, it is a kind of golden copy that cannot be disputed, like a definitive price or analytic. This is a naive view. Position data is inherently relativistic, and what is right or wrong depends on the perspective of the consumer of the data.
For example, a reconciliations clerk matching settled positions to a custodian report will not be interested in unsettled trades, let alone in unexecuted orders. A fund manager, on the other hand, will want to see both included in the positions that they see. If they are not included, then the manager may well replicate orders that have already been placed, generating rework and confusion as a result. A fund accountant will not want to see dividends in cash positions until they reach their ex-date, while a securities lending manager will want to see projected dividends as much as six months ahead. A client executive will want to review positions for her clients that include known upcoming injections of cash or stock; a trade processing manager would have no use for this. The truth is that there are many perfectly legitimate versions of the truth for position data.
In addition to IBOR, we often
see references in asset management to PBOR (performance), ABOR (accounting), CBOR (custody) etc, evidencing an acceptance that different parts of the business require different views of positions. However, it is a false inference to conclude that, because they need different views, they need different books of record. The important thing for an IBOR is not that it should deliver a single version of the truth for a single purpose, but that it should deliver consistent views of positions, based on
the same underlying transaction data, and crafted to meet the diverse needs of its consumers. This is what the 2014 IBOR Standard sought to deliver: it may have been better named as UBOR - the standard for a Universal Book of Record.
Until the recent trends to outsourcing and front-to-back platforms (like Simcorp Dimension and Blackrock
Hunt: It is often said an IBOR should provide a single version of the truth on positions.
copy
cannot
The important thing for an IBOR is not that it should deliver a single version of the truth for a single purpose, but that it should deliver consistent views of positions, based on the same underlying transaction data, and crafted to meet the diverse needs of its consumers
Aladdin), technical architecture in asset management was dominated by ‘best-of-breed’ approaches. Under best-of-breed, different functions in the asset manager select the platform which best suits them, and the platforms are then strung together across an integration architecture. Data management platforms (like Markit EDM) and data warehouses (like Eagle and Netik) sprung up to facilitate this integration, and to bring data together from disparate sources; they were integral components of best-of-breed technology.
For the manufacturers of best-ofbreed platforms, there was an obvious data design issue. They could not rely on the structure, completeness or integrity of the data environments into which they would be integrated:
these would be different in every implementation. As a result, every best-of-breed platform had to carry its own self-contained capability in market data management, transaction data management, position data management etc. The consequence was that asset managers commonly maintained, in parallel, multiple stores of overlapping data, and had to manage the inconsistencies (and live with the inefficiencies) that this implies.
Key issues in IBOR design are timelines and completeness. Timeliness is the objective of including transactions in position data at the point that they happen, rather than sometime later. Completeness is the objective of including all transactions in position data, and missing nothing out.
For the manufacturers of best-of-breed platforms, there was an obvious data design issue. They could not rely on the structure, completeness or integrity of the data environments into which they would be integrated: these would be different in every implementation
Early front office platforms, like Charles River, LatentZero and LongView, were based on flush / refresh position management: they loaded start of day positions every day, based on accounting or custody records, and overwrote whatever was there before. Intra-day, they added trades to the start of day positions to create a real-time view. However, this view did not deliver a complete picture, because it lacked data on transactions other than trades, and there are a lot of these. Over time, the platform providers increased the range of transactions that were included in their position views, but completeness was never a real objective: accounting and custody continued to provide a safety net of completeness, albeit in an untimely form.
The next generation of platforms, like Aladdin and Simcorp Dimension, moved towards better timeliness and completeness, maintaining rolling balance positions based on near realtime postings. While this delivered intra-day positions that were more complete and more timely, the user was given little or no choice over the positions presented. The user got what they were given: the rolling balances that were stored in the database.
Position management in a conventional asset management system, whether its positions are delivered by rolling balances or through a flush and refresh, is very hard to change. Conventional platforms are built with the assumption that position data is available in their database, and they just need to access it: they are not architected to request their position data from a service on demand, based on a specification of their required view.
It would be a mammoth task to reorient Bloomberg AIM, Simcorp Dimension, Blackrock Aladdin etc to operate in this way. It is much easier for a new platform, like Limina, to assume from scratch that positions are requested as required from a service, rather than just available in the database.
The IBOR Standard design was technically very demanding: it defines a live extract process, based on raw transaction data, that delivers current, past or future positions on demand, based on data valid at any point past or present, at the user’s option. Further, it requires the user (or consuming process) to specify the states of transactions and positions to be included in the extract. It is an awful lot easier to build an inventory system, that adds transactions to old positions to create new positions. Conventional asset management systems do just that.
It is key to the delivery of a standard IBOR that the underlying transactions are maintained in full, in every state, and in every version. Nothing is deleted or amended, so new versions of transactions are simply added when there is a change, creating a time-series for each transaction. Every version has a full record of the transaction in its current, past and expected future states. This creates a highly de-normalised data store, which is consequently heavy on storage. Finding the right versions of the right transactions when an extract is requested is a demanding computational task, and requires extensive indexing to enable efficient identification of those transaction records. This further increases the demand for data storage.
When the IBOR Standard was published, these heavy storage requirements, mass indexing and intermittent intense computations were seen as too demanding for the technology then available. The specification of hardware to support a standard IBOR would have to be at the high water mark of demand, and so would be very costly. Now, the Cloud has opened up almost endless storage at low cost, while compute power can be claimed and released to map changes in demand. The idea that indexing can be a large component of
a data store no longer seems so strange – it is how Google works, after all. So the technical constraints on IBOR have largely evaporated.
Since publication of the IBOR Standard, it has become an accepted design objective that users of data should be able to define the lens through which they see their data. The implication of this is that the structure in which data is stored should not be a constraint on the views available of the data. In the position data presented by conventional asset management systems, this constraint exists, and operates to the detriment of the user: the view of positions available is the view that is stored. If the user wants a view that is not stored, then they will have to construct it outside the core system: spreadsheet heaven is usually the result. The live extracts in a standard IBOR allow the user to define the lens that is appropriate for their need at the time of the extract.
The IBOR Standard proposed a fully bi-temporal approach to position data: bi-temporality dictates that the effective date / time of a position statement can be different from its data point. So a user of a standard IBOR can request a position based on data available at the effective time of the position, before the effective time, or after the effective time. This allows, for example, an accounting position to be constructed as of month-end, but with a week of late adjustments, or a compliance view of what a manager will have expected a position to be, to compare to the actual outturn.
While not unique at the time, this was
an unusually rigorous requirement, and demanded that all states of every transaction should be maintained, along with the date at which that state became known. It also dictates that, in every state, there should be an expectation of the timings of future state transitions. Since the time of the Standard, bi-temporality has become accepted as a best-practice approach to the representation of data that evolves over time. It no longer seems like an unreasonably demanding requirement.
In the standard IBOR model, position data is delivered from a service, rather than maintained in a database. Like much else in the Standard, this seemed like a radical idea at the time: even market data was then normally delivered in bulk into a database, rather than requested in real-time, so the idea that position data should be requested as-needed was a bridge too far. In the time that has elapsed since the IBOR Standard was drafted, the idea of micro-services as the basis for application architecture has emerged, and is now fully accepted. A live extract IBOR is a natural fit within current architectural thinking.
The business objectives of the IBOR Standard have always been relevant, and remain so today. However, the passage of 10 years has transformed the design outlined in the Standard from an ambitious, theoretical and technically over-demanding concept into a very practical proposition. We should expect that next generation investment platforms will follow it closely.
The passage of 10 years has transformed the design outlined in the Standard from an ambitious, theoretical and technically overdemanding concept into a very practical proposition. We should expect that next generation investment platforms will follow it closely.
Responsible asset managers may be loath to admit it, but they face a credibility problem.
In part, this stems from a belief that they could and should be more transparent about what they do, how they do it and why.
Greenwashing is a case in point. For all the millions of words devoted to it, significant instances of greenwashing at a corporate level remain relatively rare. Most issues in the asset management sector revolve, by and large, around the subjective nature of ESG factors and the definitional uncertainty around what constitutes a sustainable investment.
No-one doubts these are thorny issues that need addressing. There is a reason why regulators are striving to evolve labelling, disclosure and rating regimes to prevent investors buying funds that fail to meet their expectations.
But it is reasonable to ask whether the level of attention greenwashing attracts is commensurate with the size of the problem. If we conclude that most of what we read and see is really about the fear of greenwashing, rather than concrete evidence of it, the answer must be ‘no’.
Why, then, is there such scrutiny? Is
it simply because so much regulatory effort goes into reducing the risk of greenwashing? Or does it also reflect increasingly widespread scepticism around asset managers’ sustainability claims?
If sunlight is the best disinfectant, asset managers should accept that their record on transparency leaves much to be desired. That has bred distrust. With sustainability becoming a defining feature of the investment landscape, asset managers should take the opportunity to commit to being more open as a core part of their efforts to effect meaningful change.
Providing more complete information to investors should, of course, be one part of this. But addressing the clear mismatch between responsible asset managers and their investee companies should be another.
Today, a basic demand of most sustainability focused asset managers is that investee companies are open and clear about their ESG strategies and policies. On the whole, most are: they are under pressure from clients and other stakeholders to disclose their carbon emissions, among other
things, and recognise the need to show progress. This helps facilitate engagement.
But there is an asymmetry here that risks limiting further advancement. If, for instance, companies fail to set ambitious enough targets or refuse to embed ESG elements into remuneration policies, asset managers can vote against management (or even divest).
The problem is that, generally speaking, asset managers do not hold themselves to the same standard. No equivalent sanction is applied for missing targets. This is problematic when responsible investors are often themselves major organisations with large workforces and significant carbon footprints.
Most asset managers have made pledges and commitments to reduce carbon emissions and achieve other sustainability ambitions. For instance, more than 300 organisations are signatories to the Net Zero Asset Managers Initiative, which aims to galvanise the industry to commit to a goal of net zero.
The commitment to NZAMI requires
asset managers to report on their actions and update their targets regularly. It also ensures that stewardship is comprehensively implemented. But no initiative in isolation can eliminate the discrepancy between asset managers and their investee companies. They may not admit it, but company executives might well wonder why they face revolts against their remuneration packages while those of their shareholders remain relatively risk-free.
It is partly for this reason that we at AXA IM now include ESG targets in the remuneration of our senior executives. Aligning compensation with our ESG ambitions not only demonstrates our commitment to achieving them, but it also sends a message to investee companies that we are on a similar journey, with shared incentives to deliver meaningful change. This policy is reflected in our “AXA IM for Progress Monitor”, which is a set of metrics recently published against which we will report annually on progress made, notably on our website.
This, to our minds, is a powerful way to enhance dialogue with companies. But it would have a exponentially larger impact if more asset managers would transparently link executive pay to their own ESG policies. Doing so would not only scale up efforts to make and accelerate progress, which is in all our interests, but help limit backsliding on commitments to ESG targets. After all, excuses will ring hollow if asset managers can point to their own
obligations and progress as evidence that ambitious goals can be set and met – or punished if missed.
In many ways, it comes back to transparency. If asset managers are clear about their own ambitions to achieve specific metrics and report regularly on their progress, it can only improve the quality of their engagement. It also removes a reason for investee companies not to strain every sinew to meet key metrics.
This is particularly important now because it has become alarmingly clear how precarious a situation the world is in. The recent landmark report by the Intergovernmental Panel on Climate Change (IPCC) showed in stark detail how greenhouse gases are changing the planet, with its current warming trajectory set to exceed the 1.5-degree
In response to the IPCC report, UN secretary general António Guterres, said: “Our world needs climate action on all fronts: everything, everywhere, all at once.” Both as businesses and as stewards of capital, asset managers should heed his words and do everything they can to help avert a climate catastrophe.
temperature threshold set in the Paris Agreement.
From a corporate perspective, the positive news is that most companies, despite soaring inflation and significant market volatility, have not jettisoned ESG initiatives. The ESG backlash in the US has been an unwelcome development, but we can see that engagement more broadly, allied with regulation, is having a positive influence on corporate behaviour.
However, it is increasingly apparent that far more needs to be done and quickly. In response to the IPCC report, UN secretary general António Guterres, said: “Our world needs climate action on all fronts: everything, everywhere, all at once.” Both as businesses and as stewards of capital, asset managers should heed his words and do everything they can to help avert a climate catastrophe.
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Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
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With over half a trillion of assets under custody, Pictet Asset Services is big enough to be relevant but much smaller and, therefore, nimbler than some of the world’s largest custodians who count their client assets into the tens of trillions.
For Marc Briol, Chief Executive Officer of Pictet Asset Services, however, this is very much part of the story – differentiation by quality of service rather than scale.
Speaking in London at the end of April, Briol told Global Investor: “We want somehow to be a predictable nice surprise, in the sense that people know what they get from us, which is a division focusing only on active investors. We want to be known as the European asset servicing boutique for active investors.”
Pictet Asset Services is one of four divisions that makes up the Switzerland-based Pictet Group, with Wealth Management, Asset Management and Alternative Advisors.
The asset services arm draws on the Pictet tradition of actively managing investments: “Active investors are key. That is our legacy and heritage because that is where we come from, we are active investors ourselves so we think we have some proximity with active investors whether for private clients or funds.”
But Briol is keen to stress his division is ring-fenced from the other businesses, which the chief executive said makes it a “pure play provider”. “This model has the advantage of being completely clean in terms of conflicts of interest in that we are mutually exclusive, which
is a very different positioning from our competitors. I respect their business model but we think it’s complicated to explain to a talented fund manager or private banker that he is being serviced by his competitor. This is not the case with Pictet Asset Services.”
Briol said there are no cross-subsidies between Pictet Asset Services and the other divisions of the group: “We position the offering at arm’s length.”
“From that perspective, the strategy will remain the same. We would also not contemplate taking over parts of competitors that would potentially exit some markets or segments. We would always tend to prioritise organic growth.”
In terms of geographies, Briol said Pictet Asset Services is strong in Frenchspeaking Switzerland and is making a push in the UK, German-speaking
Switzerland, Paris and Monaco, partly for opportunistic reasons. “A lot of our competitors have exited the market,” said Briol.
“If you think about the UK, there were major competitors who have, for very good reasons, refocused their efforts on other regions or segments. So we have positioned ourselves as an interesting alternative for managers who need some diversification for reasons of counterparty risk.”
He added: “We are in London today and the number of talented managers you have here is just amazing. There is a lot we can do here, while there is a lot that we can improve on our platform to be more competitive. We will be proposing ISA by the end of the year, which is a key requirement for fund managers here.”
Briol added: “The Pictet brand is our best salesman. We can capitalise on the excellent reputation established by asset management and wealth management for example. It is part of the coherent values that we apply in the asset services business.”
In response to the question “How do you compete with the massive US custodians that spend billions on IT?”, Briol said: “People may say we’re too big for someone or too small for others but what matters is that we have the critical size to be credible and to be able to invest in the platform, technology and people but we are still small enough to remain agile and be able to listen to our clients.
“To paraphrase our senior managing partner: “We don’t want to be the biggest but the finest”. There is a
Pictet is one of the most trusted financial services brands on the planet which counts for a lot in a year when some banks, including another famous Swiss name, have found themselves in trouble, writes Luke Jeffs
We want to be known as the European asset servicing boutique for active investors
profound truth in that, in the sense that we must be credible for clients and I think we are. The awards that we consistently win show that we are consistently doing a reasonably good job.
“That said, technology is a musthave but it is not enough. Technology for the sake of technology is not interesting. One of the things we hear from clients is that they like the fact that our platform is good and that it is not changing every year. Another comment I find interesting is: “When we call you someone answers the phone” which shows that at some point, beyond a certain scale, it is difficult to keep the clients’ attention,” he added.
Many of Pictet Asset Services’ larger rivals have spent the last years trying to replicate the systems and services that their clients offer in the hope that their customers will outsource these functions to the custodian, an effort that has been only partially successful. Briol is sceptical.
“We do not want to impose our technology solutions. We have all the custodial and fund administration functions on our platform PictetConnect but we would never cross the bridge by providing a portfolio management system, which is something that some of our competitors do. I am really not convinced about that.
“We put a lot of emphasis on interfacing with the clients’ portfolio management system, to be a true partner rather than imposing solutions through a one size fits all approach.”
Briol said his firm invests a lot in the platform and the interface, taking a “best-of-breed approach” that involves some inhouse development and some vendor software.
“There are certain things that we can do internally and there are certain things that we would buy external components and integrate them. It’s really where we can add value that we would keep that internal. An
example would be highly customised client reporting for big pension funds and that is something we would do internally.”
In terms of human resources, Briol said the firm now has about 250 people in Switzerland, Luxembourg, the UK and Singapore where it has been hiring selectively.
A thread running though Briol’s comments is that Pictet is focused on long-term, sustained growth rather than short-term trends, an objective it shares with its asset management clients.
He said: “Another blessing we have as an unquoted company is that we have time in front of us. There is a slide that we show when pitching, which shows the evolution of assets in the group, so that goes up and down, and the line of the staff which just keeps going north. That shows that in tough times, like we have now, we’re not firing anyone. We’re sticking to the model. We are building loyalty with
As a financial services firm of more than 200 years’ standing, Pictet is a strong exponent of sustainable investing. Marc Briol, the chief executive of Pictet Asset Services, said his firm is working hard with its clients to help them meet their environmental, social and governance (ESG) objectives.
He said: “We are convinced that ESG matters. Our firm is committed to the idea of longer term investing based on resilience. ESG ties in social as well and we have talked about staff retention which is a core part of our ESG values.
“For institutional investors, we provide all the reporting and advise around how they can comply with the regulations, particularly in Switzerland where we are dominant in the institutional segment. In Luxembourg, we engage with all the Article 6-8-9 and that’s where the added-value starts.”
Articles 6, 8 and 9 are the most commonly used fund classifications under the European Union’s Sustainable Finance Disclosure Regulation (SFDR), with Article 9 being the most demanding.
Briol said: “Typically, we engage in discussions with clients and we did have some tough discussions with clients at the outset because all clients wanted to go to 8 or 9, and we had those conversations where we thought that may not have been a good idea because of their investment style. In effect, we had a lot of clients that went for something else, namely a lower score, which I think was good for them.”
Pictet Asset Services offers the standardised ESG reporting that firms require and has worked also on various ESG research projects.
“There is an initiative that we supported in Switzerland called
Enterprise for Society with the Swiss Federal Institute of Technology Lausanne (EPFL), the University of Lausanne and IMD Business School to set up a new centre to think about the impact of climate change,” Briol said.
“We subsidised an academic paper on what we think of important themes such as: “Is it better to exclude or engage?”
“What are the impact on the portfolio when you exclude or engage?” We were really trying to find objective material to engage with our clients.”
On the relative effectiveness of engagement and exclusion, Briol said: “If I think about the pension funds that we have, they typically favour engagement over exclusion where they might set a deadline for any transformation to be effective. If this does not happen, the conviction is that naturally those investments would not bear any value residually so they would progressively be exited from the portfolio.”
As a custodian to client assets, there is, of course, only so much that Pictet can do to promote responsible investing. “We have convictions as a bank but we can’t exclude investments from our client portfolios. So it’s more about engaging and providing them with transparency and a
different perspective,” Briol said. Asked if ESG has lost some momentum due to the European energy crisis linked to the Russian invasion of Ukraine, Briol believes these events are testing firms’ commitments.
He said: “I think now opportunism is over. A lot of people were just taking advantage of this easy label but now the industry is becoming more stringent and that is a positive development. That said, I think the acid test is ahead of us.
“For that last 10-15 years, everyone had the tailwind effect and being virtuous was not something that had a price. Now it is changing so it is going to be interesting to see going forward how those convictions stand the test in terms of performance. The jury is still out on that.”
Briol said the regulatory pressure around responsible investing is not going to ease up, however, and that will ultimately be telling: “It is a mixture of bottom-up pressure from clients, raising questions and I think that will accelerate with the new generation so that will only accelerate. And there is top-down pressure from the regulator. Nothing is realistically going to happen unless there is pressure from the regulator and they will continue to apply that.”
the staff which in turn build loyalty with the clients, and that is part of the culture as well.”
Briol said he is present in client pitches and he thinks that is important: “Managing partners get involved with clients and I think that is central to the model. If you want to properly manage an organisation, you need to feel the heat so to speak and be there not only for good discussions but also the difficult discussions. It is important for me to get feedback from the field, to hear people complimenting us or complaining about something that could be improved is central to me. That is the ultimate acid test.”
And talking of what is important to clients, Briol has a clear understanding of his firm’s role: “We are an asset servicer so we need to focus on getting the basics right. We want our clients to focus on Alpha generation and we take care of the rest. So that’s what we’re trying to do and central to that is the idea of the one-stop-shop. So that is a modular, comprehensive offering where people can pick-up custody, fund administration, transfer agency, ManCo companies, trading services. Making the lives of our clients easier is central to us.”
Most asset managers have had a mixed three years since COVID but this has not translated into client turnover for Pictet Asset Services, said Briol. “If firms are facing fee-compression, clients might renegotiate but if people are only going for the cheapest, we probably would not be the right provider so it’s probably not the right partnership. What we see generally is that people are quite loyal, particularly when they are going through tougher times with performance or people are reimbursing their money from the fund, then we will stick to our guns. We have the patience.”
The near collapse in March of Credit Suisse and its subsequent acquisition by UBS shocked the banking world, which could have long-term implications for the industry, Briol said.
“Globally, we have been through
turbulent times, both in Switzerland and other parts of the world as well. That has an effect. The negative effect is that the perception is that the banking sector is unsound. That is a concern.”
Briol added: “It is never an opportunity for us to rejoice when competitors are in difficulties because we need competition based on healthy arms-length friction between actors. But the reality is that what we do puts us in a strong position when there is instability in the market. People are looking for stability so they can focus on their core business of managing portfolios. They don’t want to be
distracted by: “Is my provider going to change his priorities?””
Briol is right that Pictet’s founding principles are attractive in times of uncertainty, nor are they about to change.
The chief executive concluded: “We have been independent for some time now, over 200 years, and we want to continue to be independent and to control our own fate. We have never embarked on a takeover, I think we’d be bad at that because it’s not in our DNA. What we do is organic growth through the selective inclusion of excellent talent.”
The 2023 EU Beneficial Owners’ Roundtable was moderated by Andy Dyson, the Chief Executive of ISLA with EquiLend as the lead sponsor. The roundtable was held in late March with a panel of industry experts discussing topics from the data, ESG, collateral and the change from 2022 to 2023.
Chair: Andy Dyson, Chief Executive Officer, ISLA
Stephen Kiely, Head of the BNY Mellon Securities Finance Client Relationship Management and Business Development Teams in EMEA
Olivier Zemb, Head of Equity Finance and Collateral Trading, Caceis Bank
Andrew Geggus, Global Head of Agency Lending, BNP Paribas
Cassie Jones, Managing Director, EMEA Head of Financing Solutions Client Management, State Street
Nick Davis, Executive Director, EMEA Head of Relationship Management, J.P. Morgan
Dimitri Arlando, Head of EquiLend Data and Analytics EMEA & APAC, Equilend
Maurice Leo, Client Solutions, Agency Securities Lending, Deutsche Bank
Ernst Dolce, CEO & Co-Founder, Biben Capital Markets
Dimitri Arlando, Head of EquiLend Data and Analytics
EMEA & APAC: A look back in history shows us that during extreme macro-economic turmoil, the resulting volatility usually means it’s good for security lending in terms of revenue generation, and 2022 has been no different really.
We’ve been collecting data since 2013. We all know that 2008 was a record in terms of revenue generated for the industry. 2022 came in at $9.89 billion revenue generated for security lending participants, slightly shy of DataLend’s 2018 high of $9.96 billion. 2022 revenue was 7% higher than 2021 and 30% higher than 2020.
We had a lot of aggressive rate hikes in 2022. The war in Ukraine, and the resulting energy crisis, high inflation, and more recently, the regional bank issues in the US and Credit Suisse, here in EMEA as well.
Focusing on EMEA, 2022 revenue came in at $2.18 billion broken out as $1.4 billion for equities and $800 million for fixed income. As you can see, the fixed income market performed exceptionally well in 2022 with a 25% increase over 2021. $700 million of revenue was generated from corporate bonds globally in 2022 and $250 million of that came from EMEA. The driver behind the strong performance was on the balance and the fee side with both increasing significantly in the year.
US equities contributed the most to revenue overall led by electric vehicle companies and meme stocks. EMEA and
APAC didn’t perform as well, and revenue was actually down for both regions compared to 2021.
For EMEA, Equity revenue is dominated by German and French names as you can see, and in Asia, Korean names dominated the top three. However, Korea was actually the fourth best performing market after Taiwan, Japan and Hong Kong. The top four markets in Asia actually accounted for 85% of the revenue.
In lendable terms this number averaged $26 trillion for 2022 but fluctuates between $26 and $30 trillion across the year. Collective Investment Schemes dominate the lendable inventory with 53% of that the total, however, when it comes to on loan, pension funds and government entities have more out on loan, and you’d expect that because collective investment vehicles have very strict guidelines on what they can or can’t do, and that’s not the same for pension plans and government entities.
Andy Dyson, Chief Executive Officer, ISLA: Cassie, when you talk to your clients, is what we see there in the data recognisable in their experience in terms of your programs?
Cassie Jones, Managing Director, EMEA Head of Financing Solutions Client Management, State Street: I think in particular, the fixed income trades are definitely reemerging off the back of the crises that we’ve been seeing in the markets, and it’s worth just spending a few moments on what’s happening in the markets as well.
Of course, this market environment produces volatility, and in turn is generally good for securities lending revenue for the beneficial owners, but you have to also be thinking about the risk that you’re taking in these programs, and of course, your agent lender should be taking care of this on your behalf.
Andy Dyson: Ernst, what are your thoughts on what you see there in terms of market footprint when it comes to performance and where performance is coming from?
Ernst Dolce, CEO & Co-Founder, Biben Capital Markets: What we observed is that the trend in corporate bonds will continue. I remember noticing this trend eighteen months ago, even though corporate bonds are not currently dominating performance; equities still account for 60% of total revenue.
A look back in history shows us that during extreme macro-economic turmoil, the resulting volatility usually means it’s good for security lending in terms of revenue generation, and 2022 has been no different really.
Despite the shift in results for securities lending, the market continues to beat records year after year, with only 10% utilisation rate of total lendable assets. The utilisation rate has not increased meaning that the market participants managed to generate more revenue from their assets on loan.
Andrew Geggus, Global Head of Agency Lending, BNP Paribas: I would refer to the fixed income businesses as rockstars and I don’t think that’s ever happened before, but that is definitely a trend that I think we’ve seen for the last 18 months and that we see carrying on as well.
You need to make sure your clients are comfortable with their risk parameters and the whole point of having strong risk parameters in place is that during times of volatility it’s there to protect you. I do think we will see some clients maybe start to review their risk parameters on the reverse side, so maybe pulling back a little bit – which is not what we want, we want to push so we can optimise revenues.
Andy Dyson: Maurice, where do you see the performance in the markets in terms of what we’re seeing there?
Maurice Leo, Client Solutions, Agency Securities Lending, Deutsche Bank: The headline numbers I agree with in terms of growth overall at an industry level. I think there’s certain clients that have benefited much more and part of that is also the story Dimitri mentioned around concentration, particularly to take US equity revenues in the top 10 names, it’s typically about 50% of total revenues year to date.
Andy Dyson: Is that latitude more to do with the credit they’ll take, the duration their take on the reinvest, what is it that they’re buying that gives them that yield?
Maurice Leo: Yeah, I don’t think it’s always actually buying. I think it can be through reverse repo, which is a different risk construct and one that a lot of them like. The government, sovereign entities that lend, the pension
funds that can lend, can typically do duration, they can do collateral transformation. All the things that UCITS and mutual funds struggle with, because of the regulatory perimeter they have to work within. And that’s for understood reasons but I think that’s why our business is increasingly segmented, and clients are not in a homogenous offering anymore. I think regulation is probably the primary driver but its own their own risk profile [driving performance] as well.
Stephen Kiely, Head of the BNY Mellon Securities
Finance Client Relationship Management and Business Development Teams in EMEA: One thing I’ll just say on the performance aspects is that, we’ve seen momentum, we’ve seen many of the trends that have already been discussed by Cassie, Andrew, etc and trends in asset classes, but what we’re also seeing is it’s not just about the revenue.
We saw in September last year during the volatility caused by the mini budget action when there was a lot of volatility, and we’ve seen it again now with SVB and with Credit Suisse, etc., that clients are looking to us to help them with liquidity management, not just increase revenue, especially in September last year. Requests such as, “Can you help us transform collateral? Can you help us raise cash? Can you help us deploy cash? So we’re seeing that as a trend. It’s a driver of volume and the entry of some new participants into the program. It’s not just about the revenue.
Andy Dyson: One of the things that I see and I think we’ve got to recognise is that one of the unintended consequences of the regulatory agenda over the last 10 years is how business has flowed into larger names. What are you seeing from a performance and opportunity perspective?
Olivier Zemb, Head of Equity Finance and Collateral Trading, Caceis Bank: I agree with everyone else’s comments but I will be a bit cautious when it comes to US equities. As Maurice said, revenues are highly concentrated on a few names. This could then have a significant impact on programmes’ performances. Other than that, I think it’s going to be a very good year, especially on the govies side. Regarding credit, 2023 should also be an excellent year for corporate and convertible bonds, probably even better than 2022 which was the best year ever in terms of returns, as commercial property and the retail sector remain sought after. Finally, revenues generated on ETFs should keep on increasing. I think the correlation between stocks, industries and countries is higher now than before.
Nick Davis, Executive Director, EMEA Head of Relationship Management, J.P. Morgan: We have certainly seen a convergence for both the client and trading businesses. The occurring theme is maximising performance, capital, and efficiency which includes, but not limited to, the lending of assets while mobilising collateral. Mobilisation has been key to help facilitate the financing of both long and short cash trades. Risk taking is also being
reviewed by clients following a shift in some programs out of operations and into a Treasury function.
Clients see additional value in moving away from the traditional indemnified program and approving more non vanilla type trades, esoteric forms of collateral or increasing general utilisation in specific markets. These examples would see additional value being added to their lending program.
Andy Dyson: I think a couple of you mentioned the idea of, is it collateral transformation, or is it the provision of liquidity? Other drivers there were the arrival of margin rules for uncleared derivatives, and as they’ve gone down into the lower waves of those investment management clients. Surprise, surprise, many of those clients don’t have a trading desk to actually manage their own liquidity.
Stephen Kiely: We’re seeing clients starting to put their treasury financing and maybe their securities lending together to realise the efficiencies within their own organisations. I think that’s changing the dynamic somewhat, and we’re seeing clients tweak their programs here and there.
Nick Davis: It’s about managing an efficient book. Should assets be better utilised under a lending transaction or through synthetics?
Andy Dyson: The point you may say is spot on and it is one of the conversations we’re having a lot of is Total Return Swaps. What does that look like? How is that business evolving? It’s always been a part of the broker-to-broker world and it’s always been a feature of certain very large clients. What should we expect to see from a regulatory perspective?
Nick Davis: There are two key regulatory points I would like to raise, US T+1, and 10c-1. Addressing US T+1 first. If you want to be transacting in the US market, you need to be able to support this new timeframe. If clients can offer a pre-notification on sales, you are not going to see any real change to your day to day with this new time frame being implemented.
Fund Managers as we know tend to trade right up to the market close, therefore from an industry best practice perspective, what is a realistic time frame that sales can be accepted by market participants?
Fund Managers as we know tend to trade right up to the market close, therefore from an industry best practice perspective, what is a realistic time frame that sales can be accepted by market participants?
The second regulation is 10c-1, and I see two main challenges. First point is the reporting every 15 minutes. The current model certainly doesn’t allow for a 15-minute turnaround.
The second point is around reporting from an inventory perspective. The regulation asks that you report on the total inventory. Will beneficial owners want to disclose their total inventory? In addition, some beneficial owners may want to hold back a certain percentage of their lendable. Therefore, will that disrupt liquidity? Could we see incorrect data being supplied? There are still challenges that need to be addressed.
Andy Dyson: I think you’re right that one of the challenges with increasing your settlement rate or reducing your time is that if you’ve got endemic issues embedded in your market, its just going to make things worse, certainly in the short term.
Cassie Jones: I think we’ve all seen that on CSDR. Even the regulators have said the fines are much larger than they expected and they’re not seeing an improvement in the fail rate. Something’s got to give in the markets to be able to improve that. Do they need higher fines, or is it just something that’s an investment in technology and continuing to automate things?
Ernst Dolce: The market should not push for higher fines or encourage the regulator to do so! The penalty is computed as a basis point times a notional, depending on the size of the trade - the fines are already large enough. For some markets, such as credit and emerging markets, increasing the size of the penalty could kill the liquidity. Therefore, we all need to be careful.
Andy Dyson: We had a conversation at the Bank of England somebody said that when you look at going to the insurance market to buy an indemnity, it’s very expensive. So, my comment was, it’s probably the right price and what you’ve been charging for the last 30 years has been the wrong price. I don’t know if anybody agrees.
Even the regulators have said the fines are much larger than they expected and they’re not seeing an improvement in the fail rate. Something’s got to give in the markets to be able to improve that.Cassie Jones, Managing Director, EMEA Head of Financing Solutions Client Management, State Street
Ernst Dolce: Indemnity is very expensive, but the clients are not paying the right price to be honest. Even though the indemnity could be replaced by an insurance, the insurance cost remains high.
Olivier Zemb: About indemnity, I think we need to distinguish two types of trade. On the one hand, GC trades that are too cheap and probably not profitable. If you add the cost of indemnity with a potential CSDR penalty if you don’t deliver on time, you may work at a loss. On the other hand, if you look at specials, you’re on the safe side. The question then is do we need to split the indemnification between the type of trade, type of counterpart and provide indemnity on specific situations, and not on others. It’s a major subject.
Cassie Jones: But also it’s an education point as well with clients. There’s a huge mismatch between the cost of the indemnification and the economic benefit that the client receives.
Stephen Kiely: Olivier made an excellent point. There is no other insurance which is so binary as agent lender indemnity. With agent lender indemnification, it’s really black and white, you’re indemnified or you’re not, every trade, every borrower.
Olivier Zemb: The market is always right. There will always be someone who will be tempted to lower the fees to capture more business and will reduce the levels for the whole business.
Andrew Geggus: It’s been a race to zero for the last 20 years.
Andy Dyson: What we’re seeing in the technology space, what you’d like to see and what we expect to happen next?
Andrew Geggus: I just wanted to have a look back at what we discussed last time around and what has actually happened over the last 12 months, we made some predictions at the time, some have panned out, some haven’t. Firstly, we spoke about distributed ledger technology at length last time around. There is a divergence of views between some people saying it’s more of a pipe dream / longer term, and some people saying there are real use cases shorter term. What we have seen over the last 12 months have been a select number of use cases, I think there has been progress made by HQLAx, as well as JP Morgan’s Onyx business unit – I think they’ve publicly announced different use cases. It’s not going to be rapid in terms of its development, however each use case is a step in the right direction from my point of view and we can probably touch
on the potential benefits of distributed ledger technologies further down the line.
Secondly, we also spoke about AI, this is something I think firms are using much more internally. I think a lot of firms are using robotics and AI in their internal systems but I haven’t seen a sort of “mass-adoption” within the Securities Finance market of a single product.
Lastly, we spoke about standardisation. We spoke quite at length about how to really benefit from technology and all the capabilities it has. We needed much more standardisation across the market, we spoke quite at length about the CDM work, the Common Domain Model that ISLA is doing, and that has actually progressed quite significantly over the last 12 months in conjunction with ISDA and ICMA.
Despite speaking about all these fantastic future technologies, I think in 2023 the key things that we need to address with the help of technology are trade matching and settlement, onboarding, KYC, and operations exception management.
I think with that, one of the key points, for me, is that, luckily, technology providers in our industry are coming up with solutions. I think this is absolutely key – is interoperability.
Ernst Dolce: I think there’s another impact – if the regulator finds that the market participants did not play the game –i.e. they did not increase the “interoperability” – probably, as Cassie mentioned, it will become more expensive. The fintech that are not playing the game of “interoperability”
We need to have some kind of harmonisation across the industry but at the same time you need to deliver tailor-made solutions for your clients. We need to provide more and more granular details. There are two things to look at, the big picture and also the clients’ view.
will disappear because you will have the big firms that will go after that market. Currently, in Europe, I know at some firms that are doing their own platform and looking to emulate Blackrock Aladdin’s model, because they don’t believe that the fintech are taking seriously the lack of interoperability.
Olivier Zemb: I agree with you. We need to have some kind of harmonisation across the industry but at the same time you need to deliver tailor-made solutions for your clients. We need to provide more and more granular details. There are two things to look at, the big picture and also the clients’ view.
Nick Davis: If we go back to the start of the year and what occurred across the financial sector, proves that transparency into a client’s lending program remains a key requirement. Clients want to be able to see their risk profiles, collateral, counterparty exposure and revenue performance. Having that in-house technology is key to meet those requests from your clients.
Dimitri Arlando: Trading desks are now actually saying, show me the settlement rates because that’s important to us. That’s really driven by the search for efficiency. As desks are being squeezed from a fee perspective and everything is becoming more expensive in general, people try and find ways to be more efficient and our data can help you do that.
Andy Dyson: For us, ICMA and ISDA, the CDM is a digital standard that they can use to define which fields, which transaction types they want to pull out of your systems on the premise that you’re all describing those trades in the same way. ISLA doesn’t want to be in the process of products and services. What we want is to create that level playing field that gives the regulators the opportunity to pull the information they want, which means from a regulatory perspective, one of their big challenges is they think we need to do something, and it takes them years to figure it out because the process, the consultations, the implementation.
Andrew Geggus: One difficulty for firms within the market is the cost element of it, because resources are limited.
Typically, agent lenders are custodians, custodians don’t have bottomless pots of money to spend on development. When we do have limited resources, we’re also seeing things like SFTR come along, or CSDR. I think when we move through the regulatory roadmap for the year ahead, it’s pretty thick still.
Stephen Kiely: I agree with Andrew’s point that fundamentally as an industry, we need to spend more technology dollars on some of the things that are unseen. Let’s just think about this, BNY Mellon does around 18,000 securities lending trades a day and uses a lot of technology. NGT being some of it. If I go back 10 years, that number will be less than half.
And yet if I go back 10 years, the way we do KYC is the same. The way we onboard clients is the same. The way trades are settled is the same. That needs to catch up and if we’re talking costs, we need to cut down the expenses there.
Andy Dyson: Another factor that I recognise is that you have businesses to run and therefore it’s quite hard to be the person that says: “I’m going to spend a lot of money on sorting out KYC because that’s going to have benefit now and over the next 10 years. But it means that we’re going to make less money this year.” It’s not a good conversation with your boss.
Stephen Kiely: That’s the challenge because people are judged in the short term. Every single person on this table has a short-term annualised budget. What are you going to make? And if you move away from that because you want to invest in the industry, that’s a hard conversation.
Nick Davis: We should also remember how far the industry has come and how robust we are in times of extreme volatility. More clients are taking advantage of APIs, tokenisation will improve the timings when it comes
to settling and returning loans, increased transparency for all market participants, and an ongoing focus on sustainability.
Olivier Zemb: Risk management as well. Ten to fifteen years ago, risk management was less present. Now we have loads of limits in terms of trading and so on. The system is more robust as a whole. We can absorb shocks.
Andy Dyson: We sort of morphed into that world of data. Dimitri is there anything else you would add in terms of how you see the changing role of data in the businesses that these guys run.
Dimitri Arlando: There are two key areas to focus on from a performance measurement perspective. Firstly, attribution. Essentially getting a good understanding of why your
“It’s really important to make sure that you are truly comparing like-for-like, tools like ours allow you to do just that and compare your performance with portfolios that have the same securities as you.”
Dimitri Arlando, Head of Data and Analytics EMEA & APAC, EquiLend
programme is performing better or worse than previously, and really trying to identify if it’s a specific market or a specific security.
The second aspect is relative performance: how are you doing in comparison to your peers and to the industry? Now, that’s the interesting one.
And I think that’s where the evolution is really happening right now, because it was the case and it still is the case for most part, that people look at their performance numbers and they use tools from providers like us that allow them to look at their performance and compare it to a peer group.
It’s really important to make sure that you are truly comparing like-for-like, tools like ours allow you to do just that and compare your performance with portfolios that have the same securities as you. But the problem then becomes when you’re looking at peer groups and you look at sovereign wealth funds, for example, who are very different across the world and have varying levels of appetite for risk, and they have varying investment guidelines as well.
It becomes tricky to benchmark because now you’ve got a whole world of things you can do with that portfolio and a lot of different options. And you don’t necessarily have all the tools to be able to benchmark your performance properly.
A number of beneficial owners are now saying: no, we
“ I think that money is not going to be transitory. Some of its going to stay there because of the interest rate environment.”
Maurice Leo, Client Solutions, Agency Securities Lending, Deutsche Bank
don’t want to see that, we’re more interested in looking at the same data that trading desks use to do their trades. So they’ve moved away from saying, how’s my performance compared to my peers to now saying, am I getting the best out of my assets?
Cassie Jones: I think that granularity and performance is really important because if you can then extrapolate that and understand the drivers of performance moving forward, clients can come back to those opportunistic trades.
Maurice Leo: In a way, beneficial owners have been a catalyst for change particularly around data. The whole ISLA securities lending performance measurement group was borne out of, or championed, very heavily by a beneficial owner in particular, who chaired that group. That’s led to guidance notes that I think will accelerate in adoption this year, which will deliver more consistency, understanding around that data. And I think it’ll make it more valuable and as a result.
Dimitri Arlando: I think it is a really important point. So obviously, we’ve done a lot of work on the performance measurement working group to try and drive those standards. However, we still have some way to go.
Andy Dyson: I think also that what SFTR delivered was a clear understanding of what’s a trade and what’s not a trade, and that rigor has fed through into the way people define things like inputs for performance benchmarking, it’s gone into standards around the CDM. So in that sense, SFTR was a great catalyst for the creation of standards and digital standards.
Olivier Zemb: You need to have some metrics in place. Data providers have done a great job, but I think more granularity is needed for good benchmarking. For liquid assets such as large/mid cap, benchmarking works well and is very easy. For small caps, corporate bonds, not so much…
Nick Davis: I break data down into four points.
• Descriptive and Diagnostic
– This includes the benchmark providers that the industry utilises, with the addition of your prop overlay (performance of your book vs the industry), backward looking and your current footprint.
• Predictive
– This is where diagnostics play an important part in conjunction with quantitative research and AI, to establish your value add and how you can achieve outperformance.
• Prescriptive
– How you achieve the above.
Andy Dyson: So how much of a particular asset do we have in a collateral pool? How many days would it take to sell it? What could be that price movement over those days? So, in addition to sort of haircuts, people looking at almost liquidity stress buffers, etc. On collateral, where are you guys seeing in terms of what your clients are asking you more generally?
Stephen Kiely: I think a positive trend in terms of the questions we’re asked by clients is, they are starting to be more concerned with liquidity and credit. And I think that’s absolutely the right way to go. The only true value of whether something is liquid or not, is: is it being bought and sold? And so we’re seeing clients put greater emphasis on the liquidity of their collateral and not too concerned about whether it’s single or double A.
Olivier Zemb: We have to bear in mind that in terms of risk, collateral has to be seen as secondary or derivative. The
“I’ve observed a shift in the buy-side’s approach to pricing collateral, as they are now considering not only risk and diversification, but also the potential uses (reuse) for the assets.”
ErnstDolce, CEO & Co-Founder, Biben Capital Markets
primary risk is counterparty risk. Collateral is certainly key but you need to check what you are receiving from which counterpart and then you can adapt your collateral profile and haircuts. Right now, haircuts are pretty much standard but this is an area where we need to be flexible.
Ernst Dolce: I’ve observed a shift in the buy-side’s approach to pricing collateral, as they are now considering not only risk and diversification, but also the potential uses for the assets. For instance, some firms are looking to reuse the collateral for intra-group trades. While some firms previously avoided such transactions, they are now recognizing the value of the assets they receive as collateral and seeking to leverage them. Other firms are focused on finding the most cost-effective way to deliver the collateral, which involves comparing the value of different assets, such as government bonds and credit, for various types of transactions like derivatives, repos, securities lending, and collateral. However, implementing
these strategies is challenging and requires building new pricing models.
Cassie Jones: The buy-side need to consider their specific funding and opportunity cost, so that’s where it takes a step up from just general triparty optimisation to asset optimisation. If you can have a view of your entire inventory as the buy-side, and you can actually identify when securities are trading special, for example, you don’t want to tie that up as collateral in a repo trade. You want to lend that on the market. But having just a more real time view of your inventory sources and uses of collateral goes a long way.
Andy Dyson: ESG, does that change the client’s dynamic?
Cassie Jones: We just have to find the balance. There is a cost and benefit trade-off of limiting your collateral schedules so that it reflects your ESG parameters, but then you’ll never get anything out on loan. So there’s that trade off.
Nick Davis: Collateral is secondary. When clients are looking to restrict asset classes due to their own ESG mandate, it is on the lendable and not necessarily on the collateral.
Maurice Leo: A slightly different angle on collateral: HQLA. So if you think the other angle is there is a lot of money moving out of deposits at the moment in Europe because interest rates are rising and in the US because of concerns with bank risk. So you’re seeing that money move. I think that money is not going to be transitory. Some of its going to stay there because of the interest rate environment.
And I think you’ve also got a lot of government agency money parked at the ECB which has been parked there on favourable terms for a long time. And the ECB is anxious that that money gradually and orderly moves off balance sheet, that’s all going to flood into money markets, into repo, into the products that we all operate in.
And arguably a lot of it is conservative and is going to gravitate towards government collateral. So government collateral is likely to become more expensive as you see more of that money coming in. So for those clients that probably ringfence and depend heavily on that, that’s going to be a difficulty. If you’re lending it [government debt], I think potentially you’re going to see enhanced spreads.
Andy Dyson: Can I just get your closing thoughts on what you expect the market to look like as we go into the remainder of this year or any other closing thoughts.
Nick Davis: Continue to support funding requirements for our clients which will enhance asset optimisation, taking
I’d like ‘23 to be a year where more beneficial owners come to the realisation that securities lending can do more for them than just be a source of revenue.
Stephen Kiely, Head of the BNY Mellon Securities Finance Client Relationship Management and Business Development Teams in EMEA
additional risk through non indemnified style trades, accessibility to other liquidity sources, and continued efficiency both at the front end and operationally.
Olivier Zemb: As a whole, I think we need greater harmonisation together with tailor-made solutions for clients. For trading, govies will be a major element this year, like previous years, but I don’t think we have seen the ‘flight to quality effect’ yet, even if the markets are quite jittery. Repo markets are not moving a lot in terms of spreads between peripheral and core govies.
Maurice Leo: Focus on the [US] debt ceiling, unfortunately, it’s going to be there in the second half of the year. There’s no getting away from that – we have had dress rehearsals before so we’ll deal with that.
Ernst Dolce: I expect an increase in liquidity solutions and a shift in the debate from securities financing/collateral management to liquidity solutions. For instance, in securities lending transactions, we may see more General Collateral (GC) trades with shorter durations, and longerterm evergreen trades, which last for more than one year, may become bullet trades with proper risk management. For unsecured transactions, evergreen trades may also transition to bullet trades, especially if the cost of singlename Credit Default Swaps (CDS) is reasonable for covering specific banking risk exposure.
Dimitri Arlando: I think the use of data and performance will continue to evolve. Transparency will continue to increase and we’ve seen that play out already but the regulations that are coming down the pipe like 10c-1, will push that along even further. From a performance perspective, I think we’re going to have another strong year in revenue terms. I think there’s still a lot of turbulence from a macroeconomic perspective to ensure that there will continue to be opportunities for revenue in the lending markets.
Cassie Jones: On the back of that I think we should put more power in the hands of the buy-side so they can take advantage of the market volatility in those opportunistic trades in partnership with your lender. But one thing I want everyone to keep an eye on as well,is the balance sheet constraints remerging.
Andrew Geggus: Long periods of volatility for this year. I think we saw it recently with banks, but I do think we’ll see more episodes occur. I think this will help drive the fixed income area of securities lending to remain as the rockstar. I do think that we also will see some developments in the interoperability space which is really hopeful for me.
Stephen Kiely: I’d like ‘23 to be a year where more beneficial owners come to the realisation that securities lending can do more for them than just be a source of revenue.
What measures did your organisation take to manage risk during the recent market volatility in the Securities Lending market, and what was the outcome of those measures?
We always try to put ourselves in the place of our clients, understanding their concerns and giving them confidence in the safety of their programme. Collateral is often the focus in times of market volatility; therefore, we directed clients to their collateral adequacy reports and emphasised the daily collateral stress tests that we perform. We regularly re-evaluate the risks and act in the interests of clients and the overall lending programme, and from a relationship perspective, we were proactive in
increasing client communication, which reassured our clients in the market conditions.
The programme did not experience a loss of liquidity for clients as the recall process was very robust. Clients did not restrict highly liquid assets, e.g., government bonds, from lending programmes, to have access to liquidity if required, and borrowers experienced stability of supply as a result. The experience of the UK’s September 2022 Mini-Budget volatility helped all parties to have faith in securities lending programmes.
In terms of outcome, the main period of volatility passed without any serious incident and with the reputation of the programme enhanced.
How has the recent market volatility impacted your organisation’s Securities Lending business?
The effect has been minimal, in that we haven’t seen significant changes to clients’ programme parameters, and simultaneously clients have benefited from the increased revenue that acts as a hedge against volatility. Increased volatility and/ or market events always bring us closer to our clients due to the raised level of client contact, and we believe that results in deeper levels of trust, through pro-active, twoway communication.
How have your clients responded to the recent market volatility in the Securities Lending market, and what
client communication, which reassured our clients in the market conditions.
We regularly re-evaluate the risks and act in the interests of clients and the overall lending programme, and from a relationship perspective, we were proactive in increasing
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.
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actions have you taken to reassure them?
Success in this environment depends on preparation beforehand. Market trends come and go with such frequency, that we work to ensure that clients and their programmes are as equipped as they can be to weather unusual conditions and take advantage of opportunities as they present themselves. As already mentioned, volatility often leads to questions from clients and opens opportunities for dialogue and greater education. As a result, clients often gain a greater understanding of the securities lending market when it goes through periods of volatility.
We have seen increased interest from clients in using their securities lending programme, not just as a tool for generating incremental revenue, but as a tool for accessing financing and liquidity management. When volatility and market events squeezed liquidity, clients looked to their lending programmes for answers, and we have developed the apparatus to provide those answers. We can offer solutions to raise cash and deploy cash, as required through our Securities Finance product suite.
Looking ahead, what steps is your organisation taking to prepare for potential future market volatility in the Securities Lending market, and what lessons have been learned from the recent experience?
To continue a theme, we are expanding our efforts to enhance
and align clients’ programmes when markets are calm, in order to lean on this progress during periods of increased volatility. For example, our clients are well educated in how we manage risk and we will increase this to ensure even higher levels of comfort. BNY Mellon has a set of solutions to not only protect and enhance securities lending revenue streams, but to also manage the programme to our clients’ benefit.
For the most part, we have learned two things: clients trust us to manage risk pursuant to their direction; and they are looking for Securities Lending to provide liquidity management tools – not just revenue generation. This changing view of Securities Lending is an industry trend, and it is the responsibility of industry leaders to facilitate these solutions as markets move with greater speed and clients become more sophisticated.
Steve is a securities finance professional with over 20 years’ experience in the securities industry, mostly in securities lending and repo. Steve is the head of the BNY Mellon Securities Finance Client Relationship Management and Business Development Teams in EMEA, where he is responsible for sales, market visibility and client management across the whole securities finance suite of products. Before he began working at BNY Mellon, Steve was responsible for securities finance sales and relationship management at Citigroup in London for seven years focusing on Luxembourg, Nordics and the Middle East. Prior to this, Steve was Head of Capital Markets Operations at HVB London, specialising in fixed income and derivative structures. Steve has extensive experience with both the buy and sell side of the market, vendors and industry bodies, and is a regular contributor to industry press and event panels.
When volatility and market events squeezed liquidity, clients looked to their lending programmes for answers, and we have developed the apparatus to provide those answers. We can offer solutions to raise cash and deploy cash, as required through our Securities Finance product suite.Steve Kiely, Head of the BNY Mellon Securities Finance Client Relationship Management and Business Development Teams in EMEA , BNY Mellon
During March 2023, Global Investor/ISF held the annual US Beneficial Owners’ Roundtable in New York with the help of EquiLend as the lead sponsor. The roundtable was moderated by Global Investor’s Managing Director Amelie LabbeThomson who was joined by an esteemed group of speakers to discuss recent trends, developments and challenges in the securities finance space.
Chair: Amélie Labbé, Managing director, News & Insight, Global Investor Group
Brooke Gillman, Global Head of Client Relationship Management, eSeclending
John Templeton, Global Head of Sales and Relationship Management for Securities Finance, BNY Mellon
Amy A. Dunn, Executive Director, Americas Head of Relationship Management, J.P. Morgan
Mike Saunders, Head of Agency Lending, Americas, BNP Paribas
Nancy Allen, Head of Data and Analytics Solutions, EquiLend
Francesco Squillacioti, Senior Managing Director, Global Head of Client Management, State Street
Cherie Jefferies, Director of Fixed Income Trading, State Board of Administration of Florida
Michael Stamm, Director of Financing & Collateral Management, State of Wisconsin Investment Board
Amélie Labbé: The global securities finance industry has generated an increasing amount of revenue for lenders since 2020, with the Americas region specifically spearheading that growth in multiple areas.
We are gathered here to analyse the situation and see how recent events and potential future developments will impact this situation, which brings me to my first point today looking at current market drivers and challenges.
I would like to hand over to Nancy Allen from EquiLend to take us through some key metrics to set the scene for our discussion today.
Nancy Allen, Head of Data and Analytics Solutions, EquiLend: I have a high-level overview here to set the scene for our discussion today. Looking at revenue in 2022, we were up 7% over 2021, with lender to broker revenue of about $9.9 billion.
When you look at that 7% increase, global equities increased by 2%. Overall, global fixed income was up 25% and we’ll talk a little bit about the drivers behind that significant increase in fixed income. Looking regionally, the Americas was up 10%. Equities were up 7% in the Americas and fixed income up 19%. In EMEA, we were
up 6% with equities and fixed income up 22%. In Asia, primarily dominated by equities, we were down 2%.
Jumping into a couple of highlights into some drivers of revenue. We had seven interest rate hikes in 2022 worth 425bps; that’s the highest since 2005, where we had eight interest rates. The rate hikes were key drivers behind the increase in revenue for fixed income.
What we have here is the revenue by quarter and overlaying the revenue we have the average basis points. You can definitely see an increase in the average fee going from Q1 of 2020 - of 31 basis points - up to a high of 39 in Q3. So far in Q1 2023, we’re coming in at about $2.2 billion and that’s up until March 17th.
Amy Dunn, Executive Director, Americas Head of Relationship Management, J.P. Morgan: In terms of borrower behaviour, counterparties have become acutely focused on RWA and actively targeting RWA friendly client types which are associated with the lowest capital requirements. This has led to providers smart bucketing whereby client types are grouped by their risk weighting which will dictate trade flow. For example, sovereigns and central banks are associated with the lowest RWA and highest demand whereas pensions, insurance companies and ‘40 Act Funds are associated with the highest RWA and lowest demand. This will clearly have an impact on performance based on what bucket a lender falls into.
Francesco Squillacioti, Senior Managing Director, Global Head of Client Management, State Street: I think [Amy] hit it right on the head and that’s certainly a concern for our counterparties as well as for agent lenders looking at RWA usage: trying to make sure that we’re getting out the most efficient high value trades that we can. Certainly, looking at the different types of clients in the program, we’re seeing those sorts of patterns turn out in terms of sovereign wealth funds, etc., at a zero riskweighting, looking a bit more attractive than a 40-Act. So, that’s certainly a consideration where you are having discussions with clients – making them aware of RWA impact, both from where we sit as agent lender, as well as where from where our counterparties sit, and showing what those impacts are.
We had seven interest rate hikes in 2022 worth 425bps; that’s the highest since 2005, where we had eight interest rates. The rate hikes were key drivers behind the increase in revenue for fixed income.
Nancy Allen, Head of Data and Analytics Solutions, EquiLendAs Nancy points out, it was still a pretty good year. I think our performance echoed a lot of what she presented earlier. The other part is that lender participation has grown, as well. When we think about going forward and bringing new clients onto the program, we’re just trying to make sure that the types of assets that we’re bringing on are as accretive as they can be to the program as we look at what clients are looking to enrol.
Amélie Labbé: Amy, I’m just going to ask you to share what your thoughts are on what the drivers are going to be
that will impact lender and borrower behaviour in the near future, but also if you can give a bit of a flavour as well on types of collateral that we’re going to be looking at as well.
Amy Dunn: On the back of Francesco’s point, I would agree that client interaction is key. As it relates to the impact of RWA or any headwind facing our industry, in order to remain relevant and competitive, strong consideration of program changes that allow for greater flexibility will be beneficial. We have a limited number of levers at our disposal but the more levers approved, the better positioned a lender is to capture the next revenue opportunity. Common considerations are: collateral flexibility, counterparty or market expansion, conducting a cost/benefit analysis ahead of recalling for proxy, increased participation in trade opportunities and review of cash collateral guidelines.
Cherie Jefferies, Director of Fixed Income Trading, State Board of Administration of Florida: When it comes to borrowers, we depend on our securities lenders to evaluate the borrowers that we use. When we look at the alternative for different collateral between the regulation and the tax harmonisation that’s transpired over the past several years, for us, that’s always evolving. We’re always looking at different types of collateral. Currently we’re looking at adding some non-cash
I think there will always be a need for the traditional securities lending model, but as we contend with a smaller universe of specials, rising interest rates, market volatility, evolving UMR and seg IM rules, lenders are faced with new challenges that require different solutions.
Amy A. Dunn, Executive Director, Americas, Head of Relationship Management, J.P. Morgan
collateral availability to our program. We’re in the process of doing that now, so that has not been finalised, but we always are looking to keep our program abreast of the changing regulations and environment.
Brooke Gillman, Global Head of Client Relationship Management, eSeclending: I think when you talk about flexibility around guidelines, what is starting to transpire now in the industry is not just the things that Cherie and Amy and Cesco were speaking about in terms of collateral types and different sort of transaction components to what the economics are of the trade but it’s also about structural flexibility. I think that will be an ongoing theme and so there are a lot of new ways that people are approaching what are the same types of and results in terms of exposure on transactions but done through either a different legal structure or a different mechanism. We have spent time as agent around this table educating the client beneficial owner community on what they can be comfortable with on collateral and things like that.
The next five, ten years will be much more around structural differences of trade types. So whether that may be pledge models or similar models in that sense, central counterparties, agency prime on indemnified programs, there are lots of new structural differences I think that will
The next five, ten years will be much more around structural differences of trade types. So whether that may be pledge models or similar models in that sense, central counterparties, agency prime on indemnified programs, there are lots of new structural differences I think that will come into play across the marketplace in order to keep up with the needs that are being driven by these regulatory capital constraints.
Brooke Gillman, Global Head of Client Relationship Management, eSeclendingcome into play across the marketplace in order to keep up with the needs that are being driven by these regulatory capital constraints.
Amy Dunn: I would agree. There is an increased focus on identifying ways to leverage the existing pipes and infrastructure in alternative ways. I think there will always be a need for the traditional securities lending model, but as we contend with a smaller universe of specials, rising interest rates, market volatility, evolving UMR and seg IM rules, lenders are faced with new challenges that require different solutions. The industry is beginning to view collateral management, securities lending / financing and liquidity more holistically.
For example, lenders that employ leverage or derivative strategies may be facing new requirements that have forced organizations to think more broadly about how they approach collateral and manage liquidity. Those lenders are not only thinking about these products individually but also how they can be interconnected to optimize overall returns.
Some clients are also exploring alternative ways of utilizing cash collateral. We have worked with certain clients to focus on optimisation and consider opportunities such as leveraging cash collateral raised through a securities lending transaction to finance their needs in a more cost effective way.
Amélie Labbé: One topic that some of you touched on is the US regulatory agenda. So can I just turn to John and Amy to give us a very few high-level comments on some of the main regulatory things to look at and that you believe will impact the market or impacting the market currently.
Amy Dunn: The top three regulations that the industry is focused on would be: T+1, which is going to have a significant impact across the US, 10c-1, commonly referred to as US SFTR and Form N-PX which is focused on enhancing the reporting of proxy votes by 40 Act Funds.
John Templeton, Global Head of Sales and Relationship Management for Securities Finance, BNY Mellon: Yes, I would definitely agree on those all being the top three. The other ones that we’re focused on are central clearing of U.S. treasuries, the changes to the U.S. capital rules (moving off of standardised RWA and into either revised comprehensive or advanced RWA metrics) and the bilateral repo transparency rules, which is going to require a number of our beneficial owners to start to report those transactions.
The other ones that we’re focused on are central clearing of U.S. treasuries, the changes to the U.S. capital rules (moving off of standardised RWA and into either revised comprehensive or advanced RWA metrics) and the bilateral repo transparency rules, which is going to require a number of our beneficial owners to start to report those transactions.
John Templeton, Global Head of Sales and Relationship Management for Securities Finance, BNY Mellon
Amélie Labbé: One of the big topics that we kind of bring up every roundtable is, measuring, tracking, cost risk performance. My first question for you is what tools do you think are working in the current environment? What data do you look at? Is it of interest to you to measure this performance effectively, but also to keep an eye on competition.
Brooke Gillman: As a lender, you need to know your comparative data set and make sure that it is the right comparative. We are a bit different than the custodial banks or a more traditional agents in that we don’t run a pooled program, so every client truly has a different program, and this makes it even more challenging to identify the appropriate peer comparison set.
Today, more clients are using securities lending for different reasons. Many are no longer lending for the sake of lending only. The point is that every program is uniquely different, and you need to appreciate that and apply it when you’re looking at the comparative data sets. Otherwise, it’s going to be confusing and will lead to the wrong conclusions about performance.
Lenders need to understand why their program may differ from others and know how to assess their own
performance. Understanding why you look a particular way within your peer universe is key and knowing what levers can be applied to make a change to performance is important.
The other thing I would say we’re seeing is the level of beneficial owner engagement on data is very different today than it was many years ago. If you roll the clock back 25 years in this industry, there was no data available. That has changed dramatically and now there’s very good data from several different sources. It’s daily information. You can have data overload quite easily, but how do you use data in an efficient way to make different decisions is what is important.
Mike Stamm, Director of Financing & Collateral Management, State of Wisconsin Investment Board: Brooke, I think you highlight a struggle we certainly have, which is, finding good apples to apples comparisons. We certainly have peer beneficial owners who likely have similar books to us, but they may not view collateral schedules the same, or may not use cash collateral the same way, so their economics become very different. One thing we try to do through data is to understand the important positions in our book, where do we have an opportunity to really earn some revenue? We focus on that stuff on a ticker level, and beyond that, it is as you have mentioned, we try to find novel ways to utilise that more
commoditised part of our book in a way that can help us differentiate our pool of GC from other similar pools.
John Templeton: I think it’s also where the regulations start to align with the data as well. If you think about T+1 settlement coming in and the advent of potentially increasing fails, being able to see what drove fails is going to end up being very helpful.
A key for our clients will be how quickly they’re able to provide their sales/recalls to their agent to be able to make sure that their assets are being returned to their custodial account as quickly as possible.
We also see a lot of demand from clients. It’s not just whether the data is available, it’s how data is available and how to make it easier for them to be able consume it into their systems.
That flexibility to be able to set up reports in multiple different ways, whether it’s a report, or it’s a data extract, or an API that’s going system to system to a client. There are a number of clients who are looking for that type of data to be able to analyse it faster than they did before.
Amélie Labbé: Looking specifically at how and where innovation is coming from, where it’s going as well and where you see investment going into, in terms of tech
We need to get the best assets out at the best rate that we can, the most efficient way possible and we can’t do it really without reliance on data and analytics.
Francesco Squillacioti, Senior Managing Director, Global Head of Client Management, State Streetand any sort of comments you have around that. Michael Saunders - I know that you actually have some very interesting thoughts that you shared last year on this topic, so I’m keen to hear some key issues this year as well.
Mike Saunders, Head of Agency Lending, Americas, BNP Paribas: Securities finance is a maturing business. While the lender base has grown, the number of participants has grown, but the number of personnel has shrunk. For the most part, that’s through the efficiency of technology.
Aside from analytics there are vendors out there that will help you with onboarding, with liquidity discovery, with proxy identification, with collateral management, with efficient use of capital and collateral optimisation not to mention ESG analytics. And the list goes on.
Most of the information that we’re developing internally is really just pulling all of our vendor services together to make it operationally easy whether it’s a trading or risk management perspective, client web reporting, all of that, just to make that run more efficiently.
I think a lot of the technology in the fintechs that are out there allows you to do that. So, I only see that becoming a greater and greater portion of our overall business and activity.
Francesco Squillacioti: To the point made about efficiency, that’s really the name of the game. We need to get the best assets out at the best rate that we can, the most efficient way possible and we can’t do it really without reliance on data and analytics.
We’ve also got a team that – our Algorithmic Trading group - is dedicated to pricing, and they’re constantly looking at pricing across the market, across what we’re doing, looking at trends within our own book and just making sure that we’re trying to capture any possible move that we can in pricing and then on the client side. So, certainly, a lot of time and investment is spent in that type of technology for us.
Cherie Jefferies: We have a data provider that we use and we have worked with them in our sec lenders or with the information on the provider with our sec lenders to get certain securities out or look how a security is going to be loaned out before we purchase.
We don’t do it too often but we have done that in the past and when it comes to the data that was provided by our sec lenders, what we found several years ago is, we had different departments pulling different data from our sec lenders and we have created a program that accumulates all this data so everyone has access to the same information and everyone’s pulling the same information, so the beneficial owner, we’re all looking at the same ratios, we’re all looking at the same levels, revenues. We’re
all making the same decisions off the same information, so we’ve been working on that for several years and almost completed and so we’re excited about that.
Nancy Allen: On the technology front, as a fintech, we continue to focus on connectivity and bringing efficiencies to the market.
On the innovation front, I would highlight a big initiative that we’re working on, which is called OneSource, which is designed to be a single source of truth in the securities lending market for lifecycle events and the aim there is to eliminate reconciliation issues. It will be a game changer. We do have a number of the organisations who have already committed to working with us on developing OneSource. A lot of the issues in lending happened after you put that trade on and OneSource will help address those issues and streamline it to be more efficient for everybody, including the beneficial owners.
Amélie Labbé: Brooke, I’m keen to get your thoughts on where demand is coming from for the beneficial owners and how it’s impacting liquidity and if you could maybe give us some comments as well on revenue opportunities that potentially exist as well for beneficial owners when it comes to alternative forms of collateral, for example?
Brooke Gillman: I think that the biggest trend is the approach that beneficial owners are taking globally is very different than it was a few years ago. Beneficial owners are looking at it more as one of their investment tools.
Depending upon what their goals are they’ll use security lending or repo differently. We still see traditional securities lending programs and activities, but we’re also starting to see securities finance used more as a broad financing tool. Asset owners are looking at securities financing from a big picture perspective. We are seeing a lot of collateral transactions and a lot of collateral funding trades.
It’s all about using securities finance as a tool in the portfolio management decision making process. As more asset owners adopt this approach, we will continue to see growth in our industry. They will also continue to evolve how they look at their programs and therefore providers will adapt and offer new solutions and services in order to try to keep up.
Michael Stamm, Director of Financing & Collateral Management, State of Wisconsin Investment BoardMike Stamm: Brooke you made a point about a holistic view of sec finance, and that is something we think about a lot. What is the best fit for our assets to meet our needs for liquidity, revenue, collateral, and safety. And that fit may include swap, futures, repo, and sec lending. What we look for is opportunities to reduce bad carry trades, if we
What we look for is opportunities to reduce bad carry trades, if we are borrowing cash to reinvest in a lower yielding finance structure, we should examine that. And it can be more difficult than you expect to identify those implicit carry trades. I find it a very interesting puzzle to fit together.
are borrowing cash to reinvest in a lower yielding finance structure, we should examine that. And it can be more difficult than you expect to identify those implicit carry trades. I find it a very interesting puzzle to fit together.
Amy Dunn: To Brooke’s point around broadening the conversations to include more than just traditional securities lending, the ability for an organization to provide this suite of services under one umbrella will be a differentiating factor when selecting a provider especially as the industry continues to evolve.
Mike Saunders: So it’s this concept, at least the one we see, of the securities lending activity becoming central to the funding needs throughout an organisation. Securities lending is one tool for liquidity management, the kind of cheapest form of collateral. We see this as part of the reason for the increased utilisation of corporate bonds in the market. Yes, of course, a lot of that is interest rate driven but I can tell you that a fair amount of beneficial owners have been in the market lending their portfolios just to raise cash that they’re using for other purposes. So, it’s this whole concept and I think, Brooke, you touched on it before, that securities lending cash is cheaper than credit facilities, revolvers and things of that nature. The general premise is, I see these walls breaking down and securities lending is now securities finance.
CACEIS’ Securities Finance desk takes a look at the current lending market, the hot topics that might drive change, and the opportunities this year for clients looking for extra performance.
Off to a good start: a very positive Q1 for lending revenues
The industry had doubts about how it would top the exceptional year 2022 but we are doing well so far. Total securities lending industry revenues for Q1-2023 are up 24.5% on the same period in 2022, reaching $3.414bn according to S&P Global. This makes Q1-2023 one of the best performing quarters in recent history, with an average lending fee of 53bps - up 39% on the same period in 2022. DataLend confirmed this, revealing a year-onyear worldwide increase across all asset classes of 27%, even with a 5% fall in loan balances.
How do we explain these excellent figures? Firstly activity on US equity specials continues to heat up, and in the EMEA equities space, Swiss equities have pulled ahead. The only notable decline has been on ETF activity. On the fixed income side, corporate bonds fees are on the rise but with the liquidity that will become less abundant, especially with the end of TLTROs and various ECB programs, we all anticipate a rising demand for HQLA assets as well. The second semester will be very interesting indeed.
What are the industry hot topics in 2023
Regulation is the first topic for the lending industry. The main focus now being on the incoming Basel CRR3 and CRD6 putting pressure on balance sheets, which shall push for more client selectivity from agent lenders based on capital requirements and RWA consumption. Regarding CSDR’s settlement disciple regime, we observed that it is now well established but questions around a mandatory buy-in process scheduled for 2025 remain, although it seems SFTs will be exempt. Another theme is coming from the level 1 review of UCITS and AIFMD which might constrain buy side players acting as agent lender for their own funds to justify on the split of the revenues they take.
A second key topic is indemnification, as it is still a dilemma for agent lenders that haven’t yet stepped up to solve it. Indeed, these clauses are somehow
still offered to clients despite the high cost of it. That is why, for instance, some agents now favour special transactions, stating indemnified GC transactions lack profitability, but clients are not ready to give up this clause and agents are struggling to stop providing it, aware of the fierce competition.
The third topic we can identify is obviously the challenges of technology. Similar to any industry, we need more data and granularity to answer clients’ and market players’ needs. For example, we need finetuning benchmark data especially for less liquid small capitalisation or corporate bond type assets to ensure clients have benchmarks aligning
2022 was an exceptional year for revenues and the trend continues into 2023. There remains a great deal of uncertainty which makes forecasting more challenging, but active markets nevertheless mean favourable lending opportunities for our clients.
Julien Berge, Head of Fixed Income and Repo
Innovating and keeping pace with changing financial markets is essential in combination with streamlined processes that meet regulatory constraints but leave a degree of flexibility for individualised customisation.
Olivier Zemb, Head of Equity Finance and Collateral Management
with best execution standards. Another example would be on the dynamic collateral selection required by ESG-oriented clients, which is heavily dependent on IT and costly data like ESG indexes. Automating AGM data collection and management to ensure timely securities recalls is also major a challenge that only technology will help address.
Three main themes are emerging for beneficial owners this year: ESG, cash reinvestment and collateral pledge.
Regarding ESG, regulators had been clear about the important role securities lending plays in financial market efficiency. So, the consensus we are seeing amongst ESG/SRI lenders that lending can be compatible with their portfolio strategy is very important. The difficulty comes from the variations in the approach. To resolve this, the International Securities Lending Association (ISLA) has drafted a set of good practices for ESG matters which establish a comprehensive framework for action. This will certainly help beneficial owners fine tune their lending programme.
Regarding cash reinvestment, the positive interest rate environment has changed the perception of the asset owners on the possibility of reinvesting the cash received as collateral. Nevertheless, the investment supports remain an essential choice for the client. It must be sufficiently secure not to increase portfolio risk, that is why so far, most reinvestment is currently performed via money market funds.
The third theme concerns pledge structures which can allow agent lenders to maintain an aggressive profit split or even offer a better one. Data providers note that pledge (as opposed to transfer title) structured transactions doubled last year so there is clearly a trend here and clients willing to accept this type of collateral
have an excellent opportunity to enhance the profitability of their lending programme.
Donia Rouigueb - Head of Sales Securities Finance and Repo: “Regulation-driven transparency and ESG-focused best practices is good news for lenders as it gives them confidence to lend their securities, they are enhancing the value for their investors and playing a key role in maintaining market liquidity.”
Securities lending is safer than ever and remains a legitimate source of additional revenues for beneficial owners into 2023, and as long as the constraints service providers face are not too restrictive, clients and their end-investors will continue enjoy the performance enhancement possibilities in this promising market.
Rouigueb, Head of Sales Securities Finance and Repo
CACEIS is an asset servicing banking group dedicated to institutional and corporate clients and one of the world’s market leaders in asset servicing. CACEIS’ Securities Finance desk designs bespoke securities lending, borrowing, liquidity and collateral management services for its clients, leveraging its group’s core asset servicing activity as well as a broad regulatory expertise to meet its clients’ specific risk/return requirements.
Julien Berge and Olivier Zemb both joined CACEIS in 2019 respectively as Head of Fixed income & repo in Luxembourg and Head of Equity Finance & Collateral Trading in Luxembourg.
Donia Rouigueb joined CACEIS in 2015 and is currently Head of Sales for Securities Finance and Repo services, developing tailormade products for institutional, asset manager and corporate clients of the custodian franchise.
Regulationdriven transparency and ESG-focused best practices is good news for lenders as it gives them confidence to lend their securities, they are enhancing the value for their investors and playing a key role in maintaining market liquidity.
DoniaJulien Berge, Head of Fixed Income and Repo Olivier Zemb, Head of Equity Finance and Collateral Management Donia Rouigueb, Head of Sales Securities Finance and Repo
If you could define your journey in the industry with one word, what would it be and why?
Educational. I have worked in every area of securities finance from front to back, from an individual in operations to managing global teams. This has also spanned over five organisations. At every step of the way, I have learnt new skills – technical and personal –through experiencing different market cycles. It’s wonderful to be in a place and role where you can look back at the experience you have gained and use it to help others on their career journeys and work through new situations that arise, be it market impact, geopolitical or risk in the many forms that it comes.
What are some big challenges you have faced and how did you tackle them?
When I look back through my career there are two which stand out. The first was the global financial crisis in 2008, and the aftermath which was still felt in the following years. The second were regulations and the unintended consequences of which made business more restrictive.
As with these challenges and any that you encounter in life, you seek
It’s wonderful to be in a place and role where you can look back at the experience you have gained and use it to help others on their career journeys and work through new situations that arise, be it market impact, geopolitical or risk in the many forms that it comes.
“A day in the life”, spotlights inspirational trailblazers in the financial industry. In this issue we are proud to have spoken to Sunil Daswani, Global Head of Agency Securities Lending, Standard Chartered Bank
to understand the issues. And most importantly, to protect your clients through transparency, being available to answer questions and be reassuring that if you do not have an answer that you will find out and get back in a timely manner.
Teamwork and collaboration of course come into play also, as you are surrounded by a wealth of experience from everyone in the team – the newest members as well as the longest serving people. It’s important to listen and to foster an environment of openness and for everyone to thrive, to not just solicit feedback but then to bring about any change to improve processes or the general workplace.
How has the industry changed over time? What changes are you yet to see?
Regulation, regulation, and more regulation. As we continue to see large organisations come under scrutiny, whilst a lot has already been done to protect investors, it’s clear that more still needs to be done. What I have particularly liked is the opportunity to comment on proposed regulations. What I have seen is the importance of industry associations bringing participants together to discuss these issues and then to take the lead to collate all the information concisely to respond to any proposals by regulators.
What advice would you give to newcomers joining the industry from diverse backgrounds?
Identifying as someone with an Asian background coupled with being LGBT myself, it’s important to ensure you always can be your authentic self. A safe workplace is very important and unconscious bias will exist. Whether you choose to disclose specifics of yourself where others may not be aware is a personal matter, but one where you should ensure you have the support network around you. Most organisations I have worked in have formal groups that you can join where you will get formal and informal advice – but at the end of the day educating people is important. Educating people
who may not realise they have a bias, or may not have experienced what you have, helps to create that safe workplace environment. Without education, change cannot take place.
How do you stay motivated and engaged in your work, even during difficult or stressful times? Could you describe your approach to maintaining a healthy work-life balance?
In the formative years of my career, I was 24/7 round the clock focused on work. I would go on holiday but still respond to emails and take calls. At Standard Chartered, our ‘block leave’ policy means we are required to take two weeks leave back to back, and not access work systems or respond
to external emails. I was at the time of my life where I embraced this for all the right reasons, but what I learned too was that I was able to switch off and recharge. It was the best feeling ever. Returning to work after block leave and having a solid team also in place meant that everything was going fine, and any mini fires were put out with very capable people. Now on any holiday, I switch off completely and it really helps.
Other than that, if I can’t take time off, I like to play chess and that really helps me get my mind off things. I also appreciate my family (parents and siblings) more than ever and like to spend quality time with them, be it going out for a meal, helping them with gardening or just enjoying a facetime call and a laugh.
Sunil joined Standard Chartered Bank in August 2020 and is the Global Head of Agency Securities Lending. He has over 25 years of experience in the industry. Sunil is responsible for the business, strategy and development of securities lending for our clients.
Sunil previously was Head of Securities Finance Solutions at MarketAxess, with a focus on the firm’s regulatory transaction reporting products, mainly Securities Financing Transaction Regulation (SFTR).
Prior to MarketAxess, Sunil worked at Northern Trust, where he was Head of International Securities Lending. He was responsible for trading, product management and clients in EMEA and APAC. He held several other senior roles at Northern Trust, including Head of Sales and Relationship Management for Capital Markets in EMEA and APAC. Sunil also sat on the board of directors EquiLend and various boards at Northern Trust.
Sunil has served on numerous securities finance industry associations across those regions such as the International Securities Lending Association (ISLA), Australian Securities Lending Association (ASLA), the International Capital Market Association (ICMA), and most notably holding the position of Chairman of Pan Asian Securities Lending Association (PASLA).
Sunil was voted by Yahoo Finance as one of the 100 most influential LGBTQ+ leaders in the workplace. He also champions the Bank’s internal employee network group, SC Pride, to raise awareness of LGBTQ+ and create an inclusive workplace culture.
Sunil holds a Bsc. in Economics from the London School of Economics and Political Science.
2022 was a year marked by market volatility, geopolitical risk, investor uncertainty, and a sharp decline in asset valuations. The securities finance markets offered a counterbalance to the fall in investment returns over the course of the year, as 2022 generated the second highest securities lending revenues since 2008. During the year, the securities finance market generated revenues of over $12.5B (see Fig 1), with over $10B going directly to lenders. This increase of 9% YoY reflects favorable market conditions for securities lending (volatility often provides multiple opportunities for market participants) and a beneficial owner community that has become more engaged and more informed than ever before. As market valuations and the use of passive investment strategies have increased over recent years,
so has the number of market participants engaging in securities lending. After hitting an all-time high of $37 Trillion in 2021, the value of lendable inventories fell throughout 2022 to a low of $29T at the end of December, while the average value of available assets over the year was $31T. As we looked at the client breakdown (see Fig. 2), asset managers were the largest contingent of the lender base owning just over 57% of the total lendable assets available in the market (equating to just over $18B). Pensions funds were the second largest contingent, with just over 19% of all assets, followed by Sovereign Wealth funds (11%) and insurance vehicles (5%).
Despite having a smaller lendable inventory, our data shows that pension funds, as seen in Fig. 3, had
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the greatest proportion of their assets on loan over the year, 36% ($850.2M) in 2022, falling from 37.2% ($892.6M) in 2021, followed by asset managers, 24.53% ($578.9M) compared to 24.13% ($578.8M) in 2021 and Sovereign Wealth funds, 24.45% ($577M) in 2022 vs 22.87% ($548.7M) in 2021. Insurance vehicles contributed just over 5% ($132.7M) of all on loan balances. Average on loan balances were $2.36T over 2022, a slight reduction from $2.39T over 2021.
Throughout 2022, revenues increased across the lending community, which was positive for investment portfolios. Asset managers received the largest share of the lender revenues over 2022 ($4.2B vs $3.4B in 2021), even though they had less on loan than pension funds which generated ($2.69B vs $2.42B) and sovereign wealth funds ($1.5B vs $1.1B in 2021). Insurance vehicles generated $450m in revenues over the year ($436.4M in 2021), as seen in fig. 4.
Over the years, securities finance has become an integral part of the investment management process. Risk management has become an increasingly important consideration for all beneficial owners as they seek to
protect both their revenues and investors in a new era of higher interest rates, increased volatility, and greater uncertainty. As the industry has changed, the increase in engagement across the beneficial owner community has been initiated by a fervent desire to better understand the tools and processes required to optimize performance, oversee compliance, manage risk, and minimize opportunity costs.
At S&P Global Market Intelligence Securities Finance (SF), our current focus is the introduction of solutionsbased capabilities where we combine data and analytics to provide transparency and tools, so that clients have a better understanding of how their programs are being run. We have done this by focusing on three separate pillars we believe are essential to the oversight and management of any securities finance activity: control, monitor and understand.
Many beneficial owners lend through their custodian or a third-party agent. When lending through an agent lender, any direct control that an owner has
Over the years, securities finance has become an integral part of the investment management process. Risk management has become an increasingly important consideration for all beneficial owners as they seek to protect both their revenues and investors in a new era of higher interest rates, increased volatility, and greater uncertainty.
over their assets is transferred to the lending agent. Therefore, it is particularly important that a robust framework is in place that dictates the terms and conditions in which an agent lender can engage when lending a security. Many of the program parameters are negotiated through the Securities Lending Agreement (SLA) with the lending agent, these should be reviewed regularly to ensure that any new market initiatives or workflows are being captured. Regular reporting should be required to ensure that the agreed conditions are followed. It is also advisable that these conditions are captured by an internal securities lending policy to ensure that all internal stakeholders are aware of the lending structure. As seen throughout the past year, effective and timely reporting remains essential in managing and identifying potential risks.
Active monitoring of the securities lending activity is essential to ensure that risks are managed, and revenues are optimized. The monitoring function for a beneficial owner can be split into three different areas: Exposure, Exception Management, and Liquidity Management. Managing exposures should occur across lending agents at the counterparty legal entity level and collateral holdings level (credit ratings, maturity buckets, liquidity profiles). Overseeing this requirement across different lending vehicles and agents can sometimes be both complex and cumbersome. As part of our offering, we provide access to consolidated reporting and a portal to give asset owners a wholistic view of their programs.
Exception management lies at the heart of any oversight function. A clear and timely process to identify exceptions is critical for effective risk management and
the heart
function. A clear and timely process to identify exceptions is critical for effective risk management and program governance. These checks should be made daily to ensure that any potential exceptions can be addressed promptly and that the program is not assuming additional and unauthorized risk.Fig 4. 2022 Revenue © S&P Global Market Intelligence
program governance. These checks should be made daily to ensure that any potential exceptions can be addressed promptly and that the program is not assuming additional and unauthorized risk. With an increase in both the quantity and type of regulations affecting securities lending, having an appropriate and effective exception management process allows asset owners to both recall and efficiently restrict assets, and to be aware of any opportunity costs that may exist as a result. To address the need for beneficial owners to independently monitor adherence to agreed lending parameters, we launched a Compliance Check portal for beneficial owners. The portal provides an exception-based tool to identify potential breaches of lending parameters at the transaction, instrument, market, and counterpart level.
Equally important to any lending program is understanding the liquidity profile of their loan positions. We also provide liquidity data to assist with the efficient management of lending limits and identifying any potential market liquidity squeezes.
Understand
All beneficial owners should have a deep understanding of the activity taking place across their asset pools and understand how this can be either expanded or contracted if their risk profile is adjusted. A securities lending program’s earnings potential is often linked to its appetite for risk and therefore, appropriate benchmarking is considered the best practice. As was seen during 2022, the “specials” market (stocks being lent at a fee greater than 500bps) has become an important driver of revenues for many asset owners. Having a clear understanding of these rates, the liquidity risks associated with lending these positions and the potential revenues should any of the metrics be adjusted, remains critical to optimizing a lending program. We offer extensive reporting and access to relevant data for proper oversight management.
S&P Global Market Intelligence has developed several tools that are specific to beneficial owners to assist them in meeting the challenges listed above. These tools are proving popular across the beneficial owner community as volatility remains a key feature across all markets.
Looking towards the spring and summer months, we believe that securities lending revenues will remain robust. We also believe that the first half of 2023 has the potential to produce strong returns for beneficial owners. To ensure that a lending program is participating in these returns in a risk-adjusted manner we encourage all beneficial owners to consider many of the controls that have been mentioned. As our engagement with beneficial owners continues to grow, we believe that S&P Global Market Intelligence is well placed to independently assist and advise the beneficial owner community on the best way of achieving their securities lending goals.
Monica Damas-Shaw, Director, Head of the US Beneficial Owner Product and US Team Lead for Securities Finance. Her role focuses on the development and expansion of the beneficial owner offering, as well as the management of beneficial owner relationships in the Americas. Monica joined S&P Global (formerly IHS Markit) in April 2019. Prior to S&P Global, she worked at JP Morgan and Credit Suisse as a Securities Lending client relationship manager. In both roles, she was responsible for managing and assisting large institutional clients with their securities lending programs. Monica holds a B.B.A in Finance from Hofstra University.
Looking towards the spring and summer months, we believe that securities lending revenues will remain robust. We also believe that the first half of 2023 has the potential to produce strong returns for beneficial owners.
