SLT: I understand SunGard has been showing a new solution at PASLA that is designed to bring efficiencies to the processing of Japanese market trades. Can you start by describing the specific problem that you are aiming to solve?
Jane Milner: In the Japanese markets the Japan Íø±¬³Ô¹Ï Finance Corporation (JSFC) conducts a daily auction to facilitate shorts position coverage in their markets. In the morning the JSFC publishes details of borrow requirements, and holders of securities have the opportunity to enter an auction process designed to provide the best price for the JSFC. Whilst this activity represents a lending opportunity, at the same time it provides challenges for the lenders as matching the requirements from JSFC with availability is a time consuming, and often manual, process. Combine this with complexities in determining the best rate to be offered by the lenders for each security, and this makes the whole process even more complex. In addition, the auction process is a time critical event and bids have to be submitted at specific times in the morning. Once successful bids are confirmed by JSFC, the need to create those trades in the lender’s securities lending system can also be an effort-intensive and error prone task. Although the JSFC auction plays a critical role in the securities finance markets, the process to participate in the auction, analyse availability, determine rates, and keep securities borrowing and lending systems current with trade activities is very challenging and time consuming.
SLT: So what is it that the solution does?
Milner: Apex JSFC Trade Manager accomplishes three tasks. First it automates the entire process of submitting bids for the JSFC auction. Secondly, and most important is has a set of analytical tools that help the trader determine the best price of the loan. And finally, the JS Trade Manager minimises the manual steps of trade entry, reducing the time spent on processing and ensuring a timely and accurate response to JSFC. The solution also facilities funding/financing trades, where the motivation for carrying out the transaction is one of cash generation, and this too is helpful in that this general collateral type of business can be carried out without taking the time of the traders.
When the daily auction opens the Apex JSFC Trade Manager reads the file of requirements from the JSFC and matches it with the lenders availability automatically. If the inventory is held in different accounts, the Trade Manager will show this. The solution can remove requests for inventory that is not available and auto-fill requests for those that are. Once completed the file is sent back to the JSFC in the correct format. We estimate time savings of 60 to 70 per cent.
SLT: How can it help with the rates?
Milner: Apex JSFC Trade Manager can help with rates in a couple of different ways. It captures the previous five days fee paid for the same security by the JSFC, and it also allows rules to be defined, such as; minimum lending rates, the ability to restrict ‘hard to borrow’ securities, and the option to exclude lending of securities with imminent corporate actions. There are filters that highlight all securities with and ex dividend date on the settlement date since these stocks need special considerations.
SLT: What is the timing on this whole process?
Milner: The auction takes place on a daily basis and it is important for a lender to respond in a timely manner otherwise they will miss a trading opportunity. There are two morning sessions and the Apex JSFC Trade Manager can be used to participate in both sessions.
Once bids have been submitted there is an option for the JSFC Trade Manager to record the potential loans as holds or pending trades in their securities lending system in order to avoid the double-use of securities pending confirmation of whether the bids have been successful.
SLT: So do lenders have to use the full Apex SunGard securities lending solution in order to allow them to benefit from Apex JSFC Trade Manager?
Milner: Good Question! The Apex JSFC Trade Manager is an ASP solution and can be interfaced with any securities lending system. In short, they can use a SunGard solution or any in-house built securities borrowing and lending trade system. Where Global One, Martini or Apex are being used, full STP can be achieved with very minimal internal IT resource requirement.
SLT: What happens once the auction process has been carried out?
Milner: Following the auction process a file of successful bids is provided by the JSFC. This can be viewed within the Apex JSFC Trade Manager and the trader can see a summary of their winning trades, total fees, and a profit and loss (P&L) summary, along with other trading statistics. This successful bids file is converted into qualified trades and, in the case of a downstream SunGard securities lending system, automatically booked to the downstream solution. Where other systems are used, the file is available for upload.
SLT: How does a lender avoid securities being auto-allocated at rates that they would not find attractive?
Milner: The JSFC Trade Manager does have some work flow so that if a trader is unsure of an offered rate, these securities can be analysed or reviewed again before the file is submitted to the JSFC. In addition, we have added a number of filters so that securities can be ranked according to the fee.
SLT: Can you tell us more about the specific complexities around lending securities over ex-Dividend date?
Milner: Yes – where a security would be settled on an ex-date, the JSFC automatically calculates and applies a withholding tax on the dividend payable, thereby affecting the P&L on a potential trade. The Apex JSFC Trade Manager will reference the dividend amount and propose a fee to cover the withholding tax element. This automated process therefore safeguards the profitability of a trade over a dividend period.
SLT: Is there a need for local language support for such a solution for the Japanese market?
Milner: Though traders in the Japanese market will typically be happy to work with an English based user interface, there can be less familiarisation in the Operations areas and therefore the ability to support Kanji characters can be helpful. The Apex JSFC Trade Manager is available in either English or Japanese.
SLT: How easy is it to get this solution up and running?
Milner: Apex JSFC Trade Manager is an ASP solution and uses SunGard’s highest standards for security. Once traders have a user name and password they can begin using the service. If not a SunGard securities lending solution user there will be the requirement to upload a file of availability, however we provide simple file layouts for this file making it, technically, very easy to integrate.
Integration with JSFC is a fundamental part of the solution, and where the customer uses a SunGard securities lending solution the up/downstream integration is out-of-the-box. SunGard has local Tokyo-based support to facilitate this process further.
SLT: Is the problem you have identified and the solution you have created transferable to other markets?
Milner: The solution we have created is certainly specific to Japan, but there are other markets that have issues similar to what we see here - central structures, CCPs and so on. So while we are concentrating on the Japanese market right now, and wouldn’t want to make any claims for any other market, I think it does have the potential to be adapted to become a solution elsewhere.
SLT: So how has this solution been received by those that you have shown it to?
Milner: Very positively. I suppose that any solution designed to increase productivity and at the same time allow you to capture the maximum P&L from a lending opportunity is welcome in today’s tough market conditions.
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