The convergence of securities finance and collateral: one business, two systems?
20 February 2018
Coming off the back of a record year in 2015 in terms of revenues, the last two years have been more restrained in the Hong Kong securities lending market. Madalin Prout of FIS Global explains more
Image: Shutterstock
Hong Kong has long been one of the Asia Pacific鈥檚 most established lending and borrowing markets. As the region鈥檚 second-largest market by volume, after Japan, expectations are often high for desks here. Coming off the back of a record year in 2015 in terms of revenues, the last two years have been more restrained in the Hong Kong market, with a lack of market volatility curbing demand to borrow securities combined with uncertainty over the impact of new regulatory requirements and an unstable political environment, globally, all taking their toll. But in the last three months, Hong Kong has been bucking this trend. On loan balances are rising at a rate that surpasses all the other Asian markets and many in Hong Kong have had a very busy start to 2018. Some of that rise can, of course, be attributed to the rise in share prices generally, but the 51 percent rise in lending in Hong Kong (see figure 1) far outstrips the 22 percent rise in the Hang Seng over the same period.
With increased activity comes an increased demand for collateral. Firms in Asia are not immune to today鈥檚 margin pressures and regulatory requirements鈥攊ncluding second Markets in Financial Instruments Directive (MiFID II)鈥攚hich means that firms need to be smarter about the assets allocated to securities lending and collateral programmes in order to reduce the impact on their balance sheets. Doing so requires some fundamental changes to internal organisations and workflows. The historical separation of securities lending, repo and synthetics desks is already disappearing in many organisations, but this now needs to be extended to incorporate the collateral and even treasury functions. To be as efficient as possible in the use of the inventory for funding, yield enhancement, and compliance with regulatory capital requirements and collateral management, firms need to bring together all their asset pools for the securities finance business and collateral requirements across business lines, and, indeed, across the whole enterprise.
Optimising collateral management across the enterprise can reduce the capital requirements on the balance sheet. In fact, by some estimates, the savings can be between five and 15 basis points. And that鈥檚 not the only benefit of converging the business units.
Firms that make this move can increase yields by making smarter decisions around what assets they allocate to their lending programme and collateral requirements. Second, with global optimisation, they can use their assets to cover exposures in one jurisdiction with excess balances from elsewhere. Third, they can mobilise assets across functions, transforming them into higher quality assets when needed to meet the ever-increasing regulatory demands for collateral.
For many established market participants, the restructuring of their business is undoubtedly a daunting prospect, but the benefits of doing so are clear. Technology providers are responding to the requirements of integrating collateral systems with the multitude of platforms used within the organisation in order to provide a truly enterprise-wide view of assets and how to optimise their use across all business functions. Integration and efficiency are key. What is becoming clear is that in both the business and technology worlds, the days of segregation and disparate, siloed functions are over for efficient organisations.
One interesting paradox emerging within Asia, and the Hong Kong market, in particular, is the advantage that new market entrants have in this area. Whether setting up an entirely new business, or restructuring desks following a merger or acquisition, many of the domestic firms find themselves in a position to take a more holistic view of securities lending and borrowing, repo, synthetics, collateral and treasury functions from the outset. They are able to define and structure their businesses and technology platforms based on the new requirements, rather than retrofit the existing pieces together. Of course, these firms also face their own challenges; not least being that budgets often only grow in proportion to the size of a business and hence face limitations around what is and isn鈥檛 feasible on day one.
Again, technology providers are adapting their offerings to these new models, with integrated solution packages that cater for these firms鈥� requirements with innovative new models aimed at minimising operational costs and reducing barriers to entry. Hosted and managed solutions that are scalable to meet a growing firm鈥檚 demands are increasingly popular among new entrants, eliminating the need for upfront investment that has previously been prohibitive for these firms investing in technology platforms.
Whatever stage a firm is at in terms of building, expanding or optimising its securities lending and collateral business, the challenge is on to ensure the most efficient operating model is deployed. The mindset has changed, securities finance and collateral are no longer viewed as separate, unrelated functions but as two facets of a single, unified business. The alignment of technology and seamless integration with core systems is key. Firms require an efficient, enterprise-level view of their positions, available assets and the best way to utilise inventories.
The complexity of achieving this is now outweighed by the significant benefits of substantial savings on capital requirements, increased yields and the more efficient use of assets across the entire enterprise.
Even in the profitable markets of Asia, the benefits of convergence cannot be ignored any longer
With increased activity comes an increased demand for collateral. Firms in Asia are not immune to today鈥檚 margin pressures and regulatory requirements鈥攊ncluding second Markets in Financial Instruments Directive (MiFID II)鈥攚hich means that firms need to be smarter about the assets allocated to securities lending and collateral programmes in order to reduce the impact on their balance sheets. Doing so requires some fundamental changes to internal organisations and workflows. The historical separation of securities lending, repo and synthetics desks is already disappearing in many organisations, but this now needs to be extended to incorporate the collateral and even treasury functions. To be as efficient as possible in the use of the inventory for funding, yield enhancement, and compliance with regulatory capital requirements and collateral management, firms need to bring together all their asset pools for the securities finance business and collateral requirements across business lines, and, indeed, across the whole enterprise.
Optimising collateral management across the enterprise can reduce the capital requirements on the balance sheet. In fact, by some estimates, the savings can be between five and 15 basis points. And that鈥檚 not the only benefit of converging the business units.
Firms that make this move can increase yields by making smarter decisions around what assets they allocate to their lending programme and collateral requirements. Second, with global optimisation, they can use their assets to cover exposures in one jurisdiction with excess balances from elsewhere. Third, they can mobilise assets across functions, transforming them into higher quality assets when needed to meet the ever-increasing regulatory demands for collateral.
For many established market participants, the restructuring of their business is undoubtedly a daunting prospect, but the benefits of doing so are clear. Technology providers are responding to the requirements of integrating collateral systems with the multitude of platforms used within the organisation in order to provide a truly enterprise-wide view of assets and how to optimise their use across all business functions. Integration and efficiency are key. What is becoming clear is that in both the business and technology worlds, the days of segregation and disparate, siloed functions are over for efficient organisations.
One interesting paradox emerging within Asia, and the Hong Kong market, in particular, is the advantage that new market entrants have in this area. Whether setting up an entirely new business, or restructuring desks following a merger or acquisition, many of the domestic firms find themselves in a position to take a more holistic view of securities lending and borrowing, repo, synthetics, collateral and treasury functions from the outset. They are able to define and structure their businesses and technology platforms based on the new requirements, rather than retrofit the existing pieces together. Of course, these firms also face their own challenges; not least being that budgets often only grow in proportion to the size of a business and hence face limitations around what is and isn鈥檛 feasible on day one.
Again, technology providers are adapting their offerings to these new models, with integrated solution packages that cater for these firms鈥� requirements with innovative new models aimed at minimising operational costs and reducing barriers to entry. Hosted and managed solutions that are scalable to meet a growing firm鈥檚 demands are increasingly popular among new entrants, eliminating the need for upfront investment that has previously been prohibitive for these firms investing in technology platforms.
Whatever stage a firm is at in terms of building, expanding or optimising its securities lending and collateral business, the challenge is on to ensure the most efficient operating model is deployed. The mindset has changed, securities finance and collateral are no longer viewed as separate, unrelated functions but as two facets of a single, unified business. The alignment of technology and seamless integration with core systems is key. Firms require an efficient, enterprise-level view of their positions, available assets and the best way to utilise inventories.
The complexity of achieving this is now outweighed by the significant benefits of substantial savings on capital requirements, increased yields and the more efficient use of assets across the entire enterprise.
Even in the profitable markets of Asia, the benefits of convergence cannot be ignored any longer
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