IHS Markit made some major additions to its suite of services in 2019 and has begun this year with a bang in both its data analytics and fintech offerings
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Are you observing any shifts or changes in the securities finance market?
There鈥檚 been an undeniable growth in lendable assets as evidenced in our dataset (see figure one, overleaf) which has exceeded the landmark value of $25 trillion. Thanks to the plethora of supporting evidence in favor of securities lending, the primary question beneficial owners ask is shifting from 鈥渟hould we lend鈥� to 鈥渨hy aren鈥檛 we lending鈥�.
Although the market is growing, demand has failed to keep pace with the increase in market valuation. Market participants continue to innovate, developing new approaches and broadening collateral options which is helping achieve revenue generation in excess of $10 billion in 2018 and 2019. Of course, that revenue is distributed across more participants and across a broader asset base, generally resulting in lower returns on the lendable pool of assets.
Taking a closer look at the demand or borrow level, we see a different story. Figure two below shows the on-loan/borrowed value for US equities from all participants and what is notable is the increasing divergence between the on-loan value and the exchange short interest.
This suggests that more borrowing is taking place via different methods such as broker-dealer internalisation, swap transactions, retail brokers, hedge funds lending their longs and so forth. The demand side has become very focused on the type of borrow source, collateral flexibility, asset quality (high-quality liquid assets), supply stability and risk weighted asset/credit quality of the lender. While fee is a factor, these factors are becoming more material to the overall cost of a borrow than say a few basis points here-or-there on the borrow fee.
Beneficial owners and other lenders are starting to respond by being far more interested in analysing their portfolios and assets and contemplating how they can better position themselves with the demand side. A high credit quality lender, with high-quality stable assets and flexible collateral should (theoretically) achieve above-average securities lending returns. Data and metrics will enable them to demonstrate this as well as validate that their returns are commensurate with all these factors.
There is strong evidence supporting the increased awareness around peer-to-peer (P2P) lending. P2P does have the potential to disintermediate but could also deliver benefits to everyone in the securities lending value chain.
IHS Markit seems to have been growing and expanding its product range quite extensively. What are some of the things you are working on?
IHS Markit is bringing new products and services to the securities lending market, using our information, analytics and expertise to pave the way for greater insight. Innovation is key. We believe in enhancing our products and reducing the workflow of our clients whilst providing additional data points that help in generating alpha.
Last year was a busy one for the securities finance product team, who brought in a variety of new developments and enhancements every quarter. Our development strategy follows three main themes:
鈥� Data 鈥� We recently passed the $25 trillion of lendable assets milestone, thanks to new data contributors and a market lift. New contributors were responsible for approx. 11 percent year-over-year growth in data. Our intra-day capability expanded considerably with more than a 50 percent increase in volumes
鈥� Better user experience 鈥� We enhanced client experience by rebranding our tools, launching a relevant insightful home page and implementing new features, including: a new interactive quote page and a complete overhaul to our performance benchmarking tools with additional metrics and analysis.
鈥� Additional data points 鈥� we launched HQLA flag classifications that evaluate if an instrument is qualified as HQLA in accordance with Basel III requirements. We added stability metrics that highlight and score the level of stability at an asset and fund level across both lendable and on-loan balance. We also announced a collaboration with Credit Benchmark to ingest their credit consensus ratings of unrated sovereigns, funds and public and private companies and subsidiaries. The new credit rating data point can be leveraged for fee modelling, optimised management of capital and RWA, understanding the available supply and loan volumes from underlying funds based upon credit scoring and incorporate the credit scores with other proprietary IHS Markit metrics.
Looking ahead, we have a number of exciting developments
planned, including:
鈥� Ingesting corporate actions data, we will be providing clients with notifications on upcoming corporate events like AGM/EGM, dividend offers, stock splits and consolidations, rights issue offers, etc. This will help clients identify trading opportunities and build compliance alert tools.
鈥� We will be rolling out a compliance app/tool further improving our market leading solutions for beneficial owners. This customisable tool can undertake more than 50 individual tests across a beneficial owner鈥檚 lending parameters, including asset classes, countries, borrowers, limits and security restrictions.
鈥� ESG - our beneficial owner product offering, which has evolved considerably during 2019, is becoming more than just a benchmarking tool, enabling compliance alerts that helps our clients govern their lending programme and activities within their environmental, social and governance (ESG) guidelines and management of programme鈥檚 risk appetite and value at risk
鈥� We will be developing an enhanced risk web portal that will help our clients understand and analyse the risk associated with their programme; this will take into account both loan and collateral portfolios and evaluate outcomes under a variety of stress scenarios. Our model also allows for 鈥榳hat-if鈥� analysis, which is useful when our clients are considering making programme changes such as broadening collateral or adding in term trades.
At IHS Markit, innovation is key and we aim to harness new tools, new sources of data, analytics and expertise to forge solutions to the securities lending industry.
ESG is all over the headlines, what are you seeing from your clients in this regards?
ESG has been at the top of the agenda for many beneficial owners over the past few years. To meet investor鈥檚 changing needs, industry associations across Europe are issuing various principles and framework documents in tackling the approach to sustainable finance investment strategies. How does this affect securities finance? For many years, there have been mechanisms in place to help investors meet the governance element of ESG. This includes, executing voting rights to influence change or signal approval of the management of a given company. Agent lenders use various methods to ensure that securities on loan are recalled in a timely manner, so that beneficial owners can execute their voting rights. The programme management of the beneficial owner is crucial in ensuring that they instruct their agents in a timely manner to recall securities where they wish to vote, ensuring their core investment activity is not affected.
According to academic research published in 2014, lenders tend to reduce the amount of lendable assets around proxy vote record dates, however, this behaviour is less pronounced in securities with higher fees suggesting that in many cases the value of lending revenues is deemed to exceed the value of the vote. The researchers use control variables to determine the impact of lending and likelihood of the vote being contentious, which are summarised in their conclusion: 鈥淭hese results show that recall is higher for firms with a higher proportion of investors with stronger incentives to monitor and exert governance, for stocks where governance is more valuable and for proposals where the returns to governance are likely higher.鈥� (Aggarwal et al, 2014)
Will this change in future?
In short, yes. Beneficial owners will ensure that the companies they invest in comply with their ESG strategies - proxy voting being one of the primary weapons in their armoury. This requires that more robust programme management is put in place to deal with the potential increase in recall instructions, particularly those who adopt a case by case policy to vote.
ESG will also affect collateral management, with beneficial owners not wanting to be exposed to securities that do not mirror their investment strategies. Again, there are already mechanisms in place to exclude securities within their collateral schedule, but this will no doubt grow over time and this has the potential to move collateral to a tailored segregated model.
What鈥檚 the latest news with SFTR and are you seeing new areas of interest?
On 6 January, the European 网爆吃瓜 and Markets Authority finally released its long-awaited level three guidance for the 网爆吃瓜 Financing Transactions Regulation (SFTR). In the level three guidelines there was an updated validation rules and a statement on legal entity identifiers. With only a few weeks left to go before the phase one go-live of the SFTR reporting obligation for investment firms and credit institutions on 13 April, we see the securities finance market speeding up its preparation for the oncoming industry challenge. With the buy side gearing up to its phase two go-live date in October, most sell-side institutions have now decided on how to proceed with their path to SFTR regulatory compliance.
More than 70 major institutions have now selected the IHS Markit SFTR solution, including 19 of the 20 top brokers and 16 of the 20 top lenders; this ensures extensive market coverage for our clients reconciling their transactions and collateral with their peers and improving data quality and completeness before reporting to their trade repository of choice. The geographical split is far reaching with clients all across Europe, as well as in the US and Asia. In collaboration with Pirum Systems, we also recently launched a UTI Connect tool, aimed at facilitating the exchange of unique trade identifiers (UTI) with firms which may still not be on our platform in order to achieve true interoperability. The UTI exchange is the cornerstone of the SFTR regulation, which we are fully committed to support at IHS Markit, whatever your firm鈥檚 target operating model or project path. Through its sleek and advanced platform, UTI Connect is the perfect tool to achieve UTI exchange in order to enable trade repository pairing.
Since late September 2019, we have opened our user acceptance testing environment to clients. More than 60 different entities are now sending SFTR files daily. In the past week, 1,500 files have been sent on a daily basis culminating in approximately 3 million records a day with 9 million error messages processed. Where trades could be paired (i.e. same set of trades submitted by both IHS Markit clients), there were more than 800,000 paired trades in the past week and north of 500,000 messages have been reported to TRs.
All eyes are now turning to the buy-side, which must provide some trade-related pieces of information to the sell-side as early as April 2020. The choice stands between direct and delegated reporting, with both its restrictions and advantages. A dozen major international buy-side institutions have already signed up or are in the process of signing on for the IHS Markit solution with many more in earlier discussion.
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