In the evolving landscape of securities finance, the traditional model that assumes market participants both self-clear and self-finance has been deeply ingrained, due to the control it affords over operations, risk management, and liquidity. However, with advanced technologies and specialised agent clearers, the market can reconsider this model.
Specifically, broker-dealers can confidently outsource clearing and settlement, while maintaining their self-financing capabilities and counterparty relationships. This approach offers a strategic balance between operational efficiency and financial control, providing an alternative to the conventional model.
Clearing and settlement processes are complex and resource-intensive, requiring significant investments in technology, personnel, and regulatory compliance. By outsourcing these functions, the market can leverage economies of scale, reduce fixed costs, and convert them into variable costs that align with their transaction volumes that can lead to a 30-50 per cent reduction in fixed operations cost based on client feedback. This approach allows broker-dealers to allocate resources more effectively, focusing on core activities that drive revenue.
Some third-party clearing and settlement providers have invested heavily in technology, building sophisticated clearing platforms that use advanced data processing, AI, and predictive analytics to maximise settlement efficiency.
Developing and maintaining these technologies requires significant investment in teams of designers, engineers, and data scientists that may be prohibitively expensive to develop and maintain in-house for some firms. Such capabilities include trade processing, real-time settlement monitoring, and risk management, all of which contribute to more efficient operations.
Additionally, outsourcing allows the market to tap into the specialised expertise of these providers, ensuring that their operations remain compliant with ever-changing regulatory requirements, such as the treasury clearing mandate, while benefiting from the latest technological advancements.
The regulatory environment in securities finance has become increasingly complex, with stringent requirements around reporting, capital adequacy, and risk management. Outsourcing can help market participants navigate this regulatory landscape by partnering with providers who have deep expertise in compliance.
Specialised service providers are equipped to handle the nuances of regulatory reporting, reducing the risk of non-compliance and the associated penalties. Moreover, by outsourcing, one can enhance their risk management capabilities, as third-party providers often offer advanced risk monitoring tools that provide real-time insights into market exposure and counterparty risk.
Maintaining a self-financing capability and counterparty relationships
In a world where trade processing, clearing, and settlement can be efficiently scaled up and down through agent clearing platforms, market participants can focus on their core strategic advantage of self-financing and managing their counterparty relationships. This decoupling allows them to maintain direct control over liquidity management and financial risk, which are critical aspects of their operations.
Liquidity is the lifeblood of any company’s operations, and during periods of volatility liquidity management is a critical differentiator. By maintaining self-financing capabilities, firms can ensure they have the flexibility to manage liquidity according to their specific needs and relationships. Self-financing allows market participants the control over their capital to fund trades and manage their balance sheets more effectively.
Using platforms that have invested in analytics, datasets, and digital tools, can enable seamless sourcing of liquidity through resource optimisation. This includes pre and post-trade analytics, including sophisticated collateral optimisation services, ensuring firms remain well-positioned to access liquidity and reduce funding costs even in times of market volatility.
Similarly, relationships with financing counterparties are a critical component of an effectively managed business model. These relationships are built on trust, reliability, and the ability to manage risk effectively. By retaining self-financing capabilities, market participants can continue to manage and diversify their counterparty risk directly, ensuring they have the necessary collateral and credit arrangements in place.
This direct management of counterparty relationships also allows broker-dealers to negotiate more favourable terms and respond quickly to changes in market conditions. The leading agency clearers can provide differentiated tools to help manage this process in addition to the liquidity they can provide themselves as a counterparty to their client.
Decoupling self-clearing from self-financing can introduce a new dynamic in risk management that broker-dealers must carefully evaluate. While outsourcing clearing and settlement can reduce operational risk, without sufficient insight and tools it also introduces counterparty risk associated with the third-party provider.
Using an agent clearer that provides a strong, consistent balance sheet, credit rating with resilient technology are key considerations in any outsourcing decision. This includes assessing the provider’s ability to manage operational disruptions, such as technology failures or market shocks, which could impact the clients’ operations. Market participants should also establish detailed clearing agreements and maintain ongoing monitoring of the provider’s performance to mitigate counterparty risk.
However, the leading providers, often affiliated with leading banks, typically have robust systems and processes in place, backed by significant investments in technology and infrastructure and can reduce operational risk when evaluating the holistic, end-to-end trade lifecycle process. This can lead to fewer operational errors, faster trade processing, and more reliable settlement, all of which contribute to a more stable and efficient operation. Sophisticated clearers can, for example, offer access to liquidity through their fungible box of securities that allow for an increase in settlement velocity and efficiency, which may surpass what is possible when self-clearing.
Retaining self-financing capabilities while outsourcing clearing and settlement allows broker-dealers to maintain strategic flexibility in their risk management approach. By decoupling these functions, broker-dealers can focus on managing market risk, credit risk, and liquidity risk directly, while outsourcing operational risk to a specialised provider.
This separation of responsibilities can lead to a more focused and effective risk management strategy, as broker-dealers can allocate resources to the areas that have the greatest impact on their financial stability and performance.
Flexible Financing: A balanced approach to modernisation
2025 will see an important new chapter in the market’s evolution with BNY’s new Flexible Financing solution, combining the operational efficiencies of outsourcing with the financial control of self-financing.
The integration of our outsourced clearing, collateral management and securities finance businesses allows us to offer this solution to the market, giving our clients the tools to manage the efficient movement of securities across the outsourced clearing service and our securities finance and collateral management platforms, to optimise the most efficient use of assets enabled by our collateral optimisation service.
Whether it be a delivery to a broker-dealer’s counterparty using our fungible box of securities and back office operations, the facilitation of self-financing corporate bonds in the triparty repo market, or generating liquidity for your Fed-eligible portfolio via our Fixed Income Clearing Corporation (FICC) Agency Clearing Model and Sponsored Repo solutions, we provide the connectivity to market infrastructure, and enable the workflow to automate business process and optimise liquidity.
Our market-neutral business model means that we do not compete for balance sheet with our clients in times of volatility, so clients can rely on the consistency of our proprietary financing through our margin lending, short coverage, and fully paid securities lending products.
By outsourcing clearing and settlement, broker-dealers can reduce operational risk, gain access to advanced technology, and ensure compliance with complex regulatory requirements, all while maintaining direct control over and improving the utility of their liquidity and counterparty relationships.
As the securities finance industry continues to evolve, market participants that leverage the tools and scalability of agent clearing platforms can focus on their core competencies of managing liquidity, credit and market risks more seamlessly through a flexible and efficient resource management capability.
Firms who embrace this balanced approach may be better equipped to navigate the challenges and opportunities of the modern market. By strategically decoupling self-clearing from self-financing, market participants can optimise their operations, enhance risk management, and position themselves for long-term success in a rapidly changing environment.
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Scott Kaffl
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