Chair: One topic that John touched upon was tech and what the market is working on to reduce fragmentation, lower risks, and promote interconnectedness and more integrated data. Mike, I’m going to turn to you first to answer this question: where do you believe technology can have the most impact and be the most efficient, as well?
Saunders: It’s no secret that for our business, the securities finance business, technology is a great additive product set. What we can do more of with less people, what we can do it faster, how we can do it more efficiently. It’s important certainly for high volume, low spread types of businesses that effectively manage on their own, whether it’s through the current set of vendors that are in the space today, whether it’s an internal developed proprietary system, to distribute inventory, execution recalls, proxy notices, etc.
That is all where we’re focusing our time and attention. In addition to that, where we’ve put a fair amount of capital to work, and a lot of hours and analysis, has been around what I call liquidity discovery. So analyzing, looking at a lot of the various fintechs, or providers in the space, that can bring that liquidity or help discover that liquidity for certain products, whether it’s US Treasury or collateral transformation, distribution of assets globally, or finding new counterparties that historically you haven’t done business with. That’s where, we’re spending a fair amount of both capital and resources to implement that into our lending programme.
Some of it is developed on a proprietary basis. But what we found is utilizing a hybrid approach, coupling vendors that exist today - some only for a year or two - with the proprietary development internally, so that all of our systems throughout the bank can talk to one another, we can give our clients the reporting and offer the transparency that many require. So that’s really what what’s going on and what we’re seeing from our client base here at BNP.
Fox: I think lending agents on the panel are challenged with making decisions around capital, and where we can lead digital disruption within what is a voice-driven industry as it relates to trading capabilities. We make short-term decisions on where capital is deployed, recognizing that we may pivot from that if market conditions dictate this. We try to make our best educated guess on where to deploy that capital. I think something that’s become increasingly important, and Mike made mention of this, is when you think about client experience: Traditionally we have focused on the what and who – what we lend, who borrows what. I think we’ll see greater focus in the future on trying to answer the question of why certain securities are being borrowed. I think we’ll put a fair amount of intellectual capital into trying to answer those questions going forward for clients as it relates to the types of arbitrage that may be driving particular demand in certain security types. That’s pretty exciting, because it creates some additional color for a beneficial owner that may be applicable elsewhere, as they manage their pension, their mutual fund, whatever type of client they are.
Goobie: On the topic of technology, there is a necessity to shift and dedicate capital and resources to innovation and technology to manage ongoing market developments. We enhanced our in-house collateral management system, Funding and Liquidity Asset Servicing at HOOPP (FLASH), to deal with the uncleared margin rules that went live in September 2021. Some buy-side organizations chose to outsource their technology, but we decided to build internally.
FLASH is built on a simple premise. Every position tells a story, and the system tells that story. Which position is it? Where can it be used? How and when? Execution of a trade from the front end is not complicated, but the advancement of technology that helps create efficient workflows between the front office, back office and custodian banks is an important focus for us.
We also focus on building websites and technology where we can connect directly with our market participants by providing access to our portal. This makes the process seamless. Technologies that focus on straight-through-processing are one of our key mandates right now as well.
The traditional financial industry could learn from the technological developments taking place in Decentralized Finance (DeFi). There is an intrinsic connection between the two. In two to five years, we may start moving away from the more traditional technological space and into a modern blockchain-type environment. Once we move to that type of environment, we will gain more operational efficiencies.
Damas-Shaw: From our side, we continue to spend and invest in creating solutions to increase transparency and help clients with the governance aspect of their programmes. We recently developed a loan evaluation report to provide more clarity on the loan with upcoming AGMs.
We take our securities finance data, as well as data from other businesses within S&P (corporate actions data and ESG data) to create this report. What the report does is provide details on a loan position which includes lendable, value on loan, utilization, lendable as a percentage of the market outstanding, including the revenue currently being generated in that position. It will also calculate the recall risk (based on the number of days it would take a security being recalled to be returned v the number of days to an upcoming meeting date). And will also include the ESG score, which is based on our ESG data.
The purpose of the report is to give the clients a full picture of the loan position and enough transparency to assist with their decision of when, and if to recall a security in order to vote.
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