During your 20+ years in the financial industry, what key transformations have you seen in the securities finance space which has boosted its evolution?
Addressing that question thoroughly would require significantly more time than the length of this article allows. The changes observed over the past 20 years have been nothing short of remarkable. A key starting point for this discussion is regulation; frameworks such as Dodd-Frank, Basel III, MiFID II, and EMIR have profoundly influenced how institutions conduct their business today.
Regulations such as the liquidity coverage ratio (LCR), net stable funding ratio (NSFR), counterparty credit risk (CCR), and the Securities Financing Transactions Regulation (SFTR) were non-existent two decades ago. These regulatory developments have driven considerable evolution in areas such as risk management, transparency, and collateral optimisation. Consequently, technology, infrastructure, and systems have undergone substantial overhauls to meet the enhanced requirements of the current ecosystem.
The rise of the fintech industry has introduced automation and improved data transparency, significantly transforming the trading process. The demand for more detailed data and insights has surged and will likely continue to grow alongside advancements in artificial intelligence and machine-readable data 鈥� fields in which S&P Global Market Intelligence remains a key player.
Having been with (what is now known as) S&P Global since 2005, how have you seen the use of data evolve? How have client demands and regulations impacted this evolution?
You may have encountered the phrase 鈥楧ata is King鈥�, but it is crucial to emphasise that the quality of data and its application are paramount. While there is an abundance of data available, it is essential to conduct appropriate due diligence regarding its security, maintenance, cleansing, aggregation, and point-in-time accuracy. Poor-quality data will inevitably lead to inferior outcomes.
Data is now integral to nearly every stage of the securities lending process, impacting the entire lending chain from beneficial owners to custodians, prime brokers, and hedge funds. The hedge fund industry was an early adopter in utilising data to develop signals and factors; however, this demand for data-driven insights has expanded across the entire sector.
Today, it is possible to monitor intraday trading activity for stocks, assess costs, identify driving factors, and build algorithms to forecast future price movements. The combination of robust infrastructure and data capabilities is particularly powerful, for instance, triparty arrangements and collateral optimisation exemplify this synergy.
Every lending desk utilises daily data, though the sophistication of its application varies. Some firms integrate data throughout the entire trade lifecycle, automating processes such as borrowing, pricing, and reporting, while others use it merely as a reference point. Enhanced data transparency has enabled beneficial owners to broaden their activities, with many now trading their own collateral and reinvestment. Regulatory requirements have also imposed additional governance standards, which can only be fulfilled through transparency.
This trend continues to gain momentum and has recently expanded into the repo space. Approximately 18 months ago, S&P Global Market Intelligence launched its Repo Data Platform (RDA), which allows for the display of repo and securities borrowing and lending data, high-quality liquid asset (HQLA) indicators and liquidity metrics. Given the increasing focus on collateral optimisation and OTC initial margin requirements, having access to this insight is essential.
In your career, you have worked with a number of desks 鈥� including fixed income, repo, equities, data, sales 鈥� what are the notable synergies between these desks? How have you seen this change?
The increased fluidity between equity and fixed income desks represents a significant transformation in the industry. Similarly, the integration of repo and securities lending desks, which have historically operated in isolation often on different floors with minimal interaction, has become more pronounced. A substantial number of firms are dismantling these silos, resulting in enhanced collaboration and operational efficiencies.
A notable concern in the repo markets has been the lack of transparency. However, with the launch of the RDA, we are beginning to witness a positive shift in this regard, accompanied by a growing commitment to transparency. This transition is delicate and requires sustained effort over time; it is unrealistic to expect a leap from minimal data availability to intraday insights overnight. Nevertheless, there is a clear demand for improved transparency.
In the cash equities markets, a wealth of data and signals is readily accessible, while the fixed income space remains relatively limited, primarily concerning pricing data. Given the recent interest rate environment, there has been a surge of interest in fixed income markets, along with inquiries regarding their impact on equity markets and vice versa.
Our Alpha Signals team has produced several papers exploring equity-to-fixed income and equity-to-CDS signals, which have garnered significant attention. They are now also working on reverse signals, as well as developing additional fixed income insights, in response to the high volume of requests in this area.
In terms of South Africa, the regulatory landscape is changing for the securities finance sector. Can you discuss what you are seeing in terms of SFT reporting?
This topic is particularly relevant, as I have just returned from South Africa, where the industry is eagerly anticipating the release of the Conduct of Financial Institutions (COFI) Bill and the confirmation of the first official trade repository. This backdrop led to a compelling panel discussion focused on OTC and securities financing transaction (SFT) reporting, emphasising the critical importance of trade matching, collateral flexibility, optimisation, and the issuance of legal entity identifiers (LEIs). It is widely believed that SFT reporting will soon become a requirement in South Africa. However, several hurdles must be addressed, including the specifics of what will be reported and by whom. My estimate is that we are still about 12 to 18 months away from implementation.
"Given the recent interest rate environment, there has been a surge of interest in fixed income markets, along with inquiries regarding their impact on equity markets."
Your position at S&P Global Market Intelligence encompasses a core focus on the APAC, Middle East and Africa markets. How do you see recent decisions on short selling and securities lending impacting investor participation in Korea and China?
This is a nuanced topic. In markets where entry presents challenges, many investors view these as opportunities, as the potential returns can be more attractive. While some investors prefer less risky, more straightforward routes, and may shy away from complex markets, others are drawn by the potential for higher rewards.
In China, stock lending continues to face various barriers to entry, particularly following the Hong Kong Stock Exchange's decision to stop disclosing real-time turnover data for northbound trading in April of this year. Despite these challenges, alternative data sources remain accessible, but it is crucial for investors to know where to find them.
There has indeed been significant discourse around reducing exposure to China. However, some firms continue to identify and capitalise on valuable opportunities within the market. The number of fund launches in Hong Kong has rebounded to respectable levels this year, with proximity to China serving as a key driver for being based there. While market dynamics have shifted, the appetite for investment remains strong. Where there is a will, there is a way, and I maintain a positive outlook for this market.
Regarding Korea, many countries with mature financial markets, robust systems, and substantial institutional investor bases are generally comfortable with short selling. In contrast, Korea's long-term investment landscape has been dominated by the retail sector, which has a complex relationship with short selling. The current ban on short selling has been officially attributed to concerns over naked short selling and the need for effective control systems. However, many believe the underlying motivation is to appease the retail sector, especially in light of upcoming elections. Regardless, it appears that short selling will continue to be a contentious issue, and investors will need to remain adaptable to navigate potential restrictions.
Can you explore the key trends and movements within the APAC market which you find most interesting for your clients?
Stepping outside the securities borrowing and lending (SBL) space for a moment, one of the most significant trends we are observing is the rise of active exchange traded funds (ETFs), particularly semi-transparent ones. Overall, ETF growth has averaged 24 per cent in compound annual growth rate (CAGR) over the past decade, while the active ETF market has expanded at an impressive 51 per cent CAGR during the same period. Notably, actively managed ETFs captured 34 per cent of flow in the first half of 2024 in the US.
For those unfamiliar with active ETFs, these funds allow portfolio managers to adjust investments as needed, without being constrained by the rules of tracking a specific index. Semi-transparent ETFs, in particular, are not required to disclose their positions daily, enabling many mutual funds to list as ETFs.
As a provider of essential services within the ETF community, S&P Global Market Intelligence calculates portfolio composition files, intraday net asset values (iNAV), and ETF composition data. We have been collaborating closely with clients across APAC to facilitate this growth, achieving notable success in Singapore, Australia, Japan, Hong Kong, and South Africa, with Taiwan set to launch in January 2025.
Linking this growth to the SBL market, the increasing number of traded ETFs has prompted more firms to explore the use of ETFs as collateral. S&P Global Market Intelligence has developed an ETF collateral service to efficiently identify eligible ETFs for collateral between lenders and borrowers, thereby enhancing market efficiency.
The Middle East has garnered a lot of attention in the past 12 months, leading to an increase in the number of funds. How have you seen activity in the region change?
There has been a significant surge of activity in the Middle East, characterised by a positive momentum in the securities lending sector. While the region is familiar with securities lending, as many firms actively lend their international inventory, domestic lending is now emerging as a priority. Saudi Arabia is leading this initiative, with Qatar, Abu Dhabi, and Dubai poised to follow suit. There is a clear commitment from both the market and regulators to expand the securities lending business; however, some patience is necessary as further development of infrastructure and processes is required.
Many countries within the Gulf Cooperation Council (GCC) have expressed a strong interest in diversifying their economies and enhancing their financial markets. As capital flows increase, it is essential to have mechanisms in place for appropriate position hedging. Therefore, the development of the lending space will significantly contribute to this growth. This is an exciting area to monitor, and we look forward to witnessing its continued expansion.
Outside of SBL we see an emerging trend for information in the credit risk space.
There is also a growing emphasis on sustainability in the region, driven by heightened awareness of climate change, government initiatives, corporate commitments, and national sustainability targets. As a result, we anticipate a surge in green bond issuances, as the Middle East emerges as a promising market for green projects, particularly in light of the need to diversify away from reliance on the hydrocarbon sector.
What will be the core focuses for you over the coming 12 months?
We continue to produce and deliver a broad range of solutions to the securities finance community. Our RDA product continues to gain momentum, the value of notional loans is now almost the same as those we see in securities lending. We have been somewhat surprised by the disparities between the securities lending market and repo markets which is really elevating the need for this insight.聽
We have some nice incremental insights coming on our upcoming fixed income interfaces, with interactive visualisations focusing on clarity, accessibility, and ease of use. Our users will be able to view the two markets side by side with supplementary metrics like liquidity scores in the cash market that helps users gauge the liquidity of the asset in the market.
Our onboarding, ALD tool now has a nucleus of participants and volumes are growing and we are seeing improvements in the pre-trade mutual approval process. Our beneficial owner compliance tool is adding additional checks and is helping these clients take some of the heavy lifting from their oversight responsibility.聽
Later this year we are adding new analytics to our intraday service, where our volumes are around 80 per cent of end of day volumes, providing competitive advantage to our users with access to timely data who can act faster on changes in short interest, securities availability, shifts in lending rates, and capturing opportunities in fast-moving markets.聽And lastly, for our hedge fund clients, we have a new transaction analytics feed which breaks down short interest (which is quite different to securities on loan) into different buckets to allow greater understanding and insight to commitment, PnL, momentum and crowding.
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