A recording of the full interview with Bill Kelly is available in the video above. See below for a transcript of the highlights. 

What are some events this year that you think have shaped the securities finance industry?

It has been an eventful year. We have had the Russia-Ukraine war that stimulated a lot of direction and outcomes.

On a general note, we have seen some strong performances throughout the period, notably coming out of US equities and Asian equities. Corporate bonds in the fixed income space have had an extraordinary run. This is a by-product of some of the events that have affected the macroeconomic environment such as rising interest rates and the possible looming of a recession, and their impact on the high yield bond marketplace. I think exchange-traded funds will also have another good run.

The combination of those events has led to what has been a good first half of the year, as I think many clients have experienced. We have seen data aggregators reporting results for the first half of the year, which have been strong.

What are some lessons that you have learned this year?

I am always learning! But I do have a few things I would like to highlight.

Close collaboration with borrowers and lenders, particularly during periods of volatility, remains key for navigating the markets, capturing opportunities and managing the risks along that continuum.

This has led to continuing to identify opportunities that borrowers need financing for. They have circumstances they want to solve for, like financial resource management for example, which lead to a conversation with an asset owner, in terms of an opportunity set that we can bring to them.

The other area of note is regulation. Last year, we had SFTR. This year, we have had CSDR, and new rules proposed by the SEC with 10c-1, T+1 settlement and 15c-3. All have a potential effect on structural changes to securities lending.

ESG continues to be prominent. Close collaboration and communication between participants in the lending arena and the regulatory landscape are essential. I think we are starting to find our footing with ESG. Where securities finance can aid asset owners, as an example, is by bringing transparency to collateral types and the reinvestment of cash collateral, what collateral in a non-cash arena we are receiving, and how that aligns. Giving clients information around all that activity so that they can align it with their principles, and provide that transparency for governance, are important.

Clearly, there are other elements to ESG other than collateral: corporate stewardship, proxy voting, and continuing to accommodate clients and providing them with tools and utilities so that they can manage their participation. We can continue to enjoy the benefits of the incremental income that securities lending can return, albeit with ESG principles in mind.

I think a final lesson learned is in the repo markets. The US has a bifurcated market. The repo markets have the RRP program: what does it means to a certain select population that is eligible for the RRP, and to those that are not? How is the market going to think about this on the forward: will cleared transactions become more central?

Turning to client feedback. What general comments are you getting nowadays and have these changed significantly in recent times?

Clients have not changed but their demands have evolved. This impacts how we can deliver on these and create new opportunities.

Many clients have compulsory reporting obligations, depending on their jurisdiction or industry, or if they are a mutual fund, UCIT or a public pension fund. This has always been something that we continue to improve as an industry.

One important area is timeliness: information is expected more quickly. Information and transparency are always going to be key. Clients I speak to - asset owners and borrowers – want to know what information everyone has access to and how they can accelerate access to it. Whether it is via portal- or web-based tools, electronic transfers, straight through processing or APIs, delivery mechanisms are changing. These will only facilitate the quicker consumption of information, be it the speed of execution or the delivery.

Another key area is collateral. There are not any wholesale changes in terms of trajectory on collateral and collateral types. We have been on this expansion as an industry, and we continue to try to provide it in a way that is sensible and aligned within the risk parameters of either an agent or a client. They always have the flexibility to entertain certain collateral options. We continue to improve or expand upon those collateral sets, whether it is expanded equity indices, ETF indices, corporate bond types, or diversification stipulation.

We are also on the precipice of UMR, with phase six coming into fruition. Borrowers and broker-dealers have been very active historically on financial resource management and optimization. I think there is going to be a point where asset owners in scope will see this as an opportunity where they are going to have to exercise financial resource management and optimization of those resources across their enterprise, as if they’re in scope and eligible for participation in UMR phase six. For borrowers, their broker-dealer counterparties and their prime broker counterparties, financial resource management will become ever increasingly essential going forward.

If we turn our attention specifically to collateral: have there been any developments that would indicate a move to broader collateral sets?

If you go back to a year ago and the situation with SPACs back then, that has certainly cooled off a bit. If there is another event or financing opportunity like that, we will look at it and make a sensible risk assessment around its potential.

That being said, mainstream equity indices, corporate bonds, including convertible bonds continue to be in demand. This is something that is selective and selective can be contributory.

I think the interesting thing that we recently did around collateral, maybe a bit more locally, is looking at different platforms and the potential that they represent for collateral mobilization. Our recent work with HQLAx is public, as is the transaction that we did as the first agent lender - recognizing there are multiple agents and borrowers involved.

We are excited about the prospects of having what I would consider a DLT type experience and what this means in terms of interoperability and the efficiencies that borrowers can extract. The opportunity for liquidity across that platform is an opportunity for distribution for our clients’ assets that participate in the securities lending transaction. It is early days, but we are excited about the prospects, and very encouraged about having a DLT experience, which we have long coveted. Something like that is representative of the future, not only for securities finance, but certainly for securities transactions more broadly.

Where do you think DLT can have the most impact in the industry?

The great opportunity is really on post-trade, whether that is going to be via straight through processing or leveraging DLT.

When we think about the time periods that are going to get compressed, as we move to T+1, reconciliation activities and lifecycle management that occur to support trades, because they are out there for a period of time, can become time consuming and resource intensive. The industry needs to efficiently chisel these down to reduce the amount of time, risk, effort and friction associated with that lifecycle management.

I think we all recognize that a solution is needed. The industry is working collegially and collaboratively on that opportunity because it is essential on the forward.

Tying back to custody securities processing in general, I think that is something that this entire community and industry will embrace and is trying to seek solutions around. We are just part of that solution in the securities finance space.