3 minute read
Investment drives securities finance innovation
A review of the most important developments across the securities lending market from a technology perspective over the last 12 months
Citi’s 2022 report on the state of market infrastructures and securities services found that when it comes to engagement of digital assets, blockchain or DLT, just over half of the Asia Pacific securities service firms surveyed were active this year.
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The benefits of tokenisation were also clear according to Asian market participants, with 41% describing the potential benefit of tokenisation in terms of market liquidity and variety of tradable assets as ‘extremely valuable’ and 55% referring to it as moderately valuable.
The report referenced the announcement by Asia Development Bank of a project to trial blockchain for settling cross border securities transactions, the findings of which were published in June.
According to Asia Development Bank, project Tridecagon proved that the deployment of DLT/blockchain solutions for the settlement of cross-border securities transactions is possible, particularly in a well-governed and functionally well-defined environment.
Workable functionality
Even under strict assumptions, connectivity between different blockchains can be ensured, natively or with the aid of existing tools and emerging applications. The functionality of the blockchains involved proved to be workable and fit for purpose and all the vendors participating in the proof of concept were able to adapt their solutions to the bank’s requirements and successfully demonstrate the results.
The connectivity achieved between blockchains in project Tridecagon suggests that such functionality can be deployed in a heterogenic system environment, as typically observed in ASEAN+3.
If properly designed, it may be easier in DLT/blockchain solutions to deploy additional functionality at a later stage than in the existing legacy systems. Solutions may be more resilient and tamper-resistant compared with linkages of the existing payment and settlement systems.
However, Asia Development Bank accepts that the limited scope of project may not be sufficient to prove the general usability of DLT/blockchains in all aspects of post-trade processing and financial transactions.
Changes required
In the process of the proof of concept it was recognised that some of the functionality goes beyond what legacy functionality needs at this point and that some legal and regulatory changes are necessary to fully utilise the functionality.
The project set various reality checks, including no legal and regulatory changes. This highlighted the importance of synchronising DLT/blockchain and legacy systems and the fact that the former alone may not be a full-fledged solution, but with synchronisation could improve the existing financial systems.
It was therefore recommended that a thorough analysis of existing transaction procedures and DLT/blockchain functionality be conducted in any project implementation.
The project team also observed that while in actual implementation technology will not be a problem, the governance of a possible consortium would be the key to success –which is why the question of cost, or costeffectiveness, may not be easy to answer until the determination of governance principles is complete.
Technological developments in securities finance have advanced swiftly over the last 12 months, accelerated further by the approaching T+1 shortened settlement cycle coming in North America - which will have a global impact downstream suggests Yuka Hasumi, head of EquiLend Japan.
Investment commitment
“1Source, our distributed ledger technologybased solution, will alleviate concerns by keeping counterparties immediately and always aligned for lifecycle events,” she continues. “This is one such advancement which is only possible because of new technology and a willingness of the market to invest in future-proofing their businesses.”
Hasumi says the desire to automate is strong throughout the region, including in markets such as Korea where the regulator is working hard to track what is going on. Market participants also have a strong desire for increased transparency and efficiency.
“The beneficial owner onboarding process is one area in need of more efficient processes, which is something we have addressed with our new Onboard+ solution,” she adds. “We believe a more efficient onboarding process could unlock substantial assets currently unavailable in securities lending simply due to the fact that those beneficial owners are not onboarded to lending programmes.”
EquiLend’s focus has been on supporting the full front, middle and back office in the ability to connect with counterparties, execute transactions centrally, maintain their books and records, and handle operational processes efficiently.
Stewart Cowan, executive director, head of APAC securities finance product at S&P Global Market Intelligence
Enhanced automation
“We have enhanced our automation capabilities over the past year with support for hard-to-borrow transactions with competitive bid on NGT (centralising client special activity while utilising street-level insights such as real time and depth-of-market data to allow clients to make informed trading decisions); upgraded many of our post-trade solutions around returns, recalls and monitoring of settlements; brought new real time data and analytics offerings to the global market; and set our sights on supporting easier beneficial owner onboarding as well as helping our clients meet new regulatory obligations,” says Hasumi.
Onboarding has always been a particular challenge for market participants according to Stewart Cowan, executive director, head of APAC securities finance product at S&P Global Market Intelligence.
“The manual, email driven process has been broken for a while and it has made onboarding new funds inefficient and time consuming,” he says. “Over the last year, S&P Global Market Intelligence has developed a new tool to streamline this process. This tool transforms onboarding by acting as a central hub for fund information and communication, making the process more efficient and controlled. We believe that it will unlock additional liquidity more quickly to the benefit of all market participants.”