Securities Finance: Staying Competitive, Keeping Ahead of Market Challenges

Securities Finance: Staying Competitive, Keeping Ahead of Market Challenges

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Securities finance touches all steps processes of the trading cycle, front to back to risk, but the operational processes supporting it remain largely manual, with many interventions from traders through the chain. In this article, Sabine Farhat, head of securities finance at Murex, explores the macro trends impacting securities finance and how both borrowers and lenders need to optimise their collateral and liquidity in a centralised and cross-asset way to stay competitive in this changing market.


Q: What are some of the market trends and drivers that are impacting securities finance in 2023?

A: We are living in a volatile market, not just from a liquidity and interest rate perspective, but also in terms of ongoing regulatory change and standardisation. Market participants always expect the market to stabilise after the impact of each new regulation settles, but there is always more regulatory activity or a new standard coming, putting additional constraints on institutions and impacting securities finance in different ways.

With uncleared margin rules (UMR), phase 6 was supposed to be the last phase, but now, many argue that adaptations to calculation rules are effectively introducing an unofficial seventh phase. This impacts securities finance because it is all about collateral and liquidity. Basel 3.1 is still pending but could change the impact of capital cost and make securities finance transactions (SFT) more costly and potentially less economically rewarding. ECMS for Eurozone, on the other hand, will allow access to wider liquidity pooling, but requires the success of its deployment as a prerequisite.

Today, traders face rising collateral pressure, interest rate changes, long-term liquidity chase for net stable funding ratio (NSFR) struggles, cost reduction and revenue generation, while remaining risk limited. And it will not get easier—at least from a demand and mandate perspective—for the securities finance trader.

Counterparty credit risk management and mandatory internal ratings will become increasingly important, as will optimizing the usage of collateral internally to get the maximum use out of it, and cross-product margining. In the new regulatory context, participants will have to decide at what cost they are willing to provide liquidity and rent, in a secure manner, their collateral to the market. We will watch which variable of this equation will be leveraged and which one will take a hit. Hopefully, it won’t be the risk measures to the economic benefit.


Q: What are the main challenges that financial institutions face when it comes to securities finance, and some potential solutions?

A: One challenge is ensuring firms have the data science available to take well-informed decisions. Traders need the capacity to monitor what is available to them and what their exact mandate is from a holistic point of view on availabilities and from a compliance, credit risk limit perspective. Traders need all the necessary data to be able to calculate capital and liquidity costs to check their real profitability. Firms need to know if providing collateral or liquidity is losing them money along the chain.

Having all the necessary data in one place will help firms operate in an informed way and make the best decisions about whether to trade with a counterparty. The right tool will provide access to legal documentation and real-time information on other negotiations that might be more lucrative, as well as show the cost of borrowing and whether lending certain instruments will help the firm with its liquidity metrics. Crucially, as the industry moves closer to real-time settlement, a centralised system will enable firms to make these decisions much more quickly.

The second challenge is understanding the market. The market is very volatile, and it can be difficult to understand the current availability and cost of liquidity and collateral in real time. Repo rates have risen drastically, but it is uncertain where they will go next, meanwhile interest in repo trading is back. Synthetic products are on the rise, so firms also need synthetic repo capabilities that can scale in order to diversify their funding sources.

Firms need to have a wide range of financing tools in place to accurately service their mandates, enabling them to quickly launch new products and book and operate them within the system. Automation enables firms to monitor their inventory holistically and decide what is the best financing product and to reduce the time needed for decision-making in real time. In addition, automation with the right entry points for decision making will increase STP rates and trader intervention to process SFTs, leading to better time management. For instance, this time can be invested in how to raise, diversify and deploy funding or source and service collateral. Firms need a flexible solution that can adapt to their needs.

The third major challenge is regulation and standards. Regulations have wide-ranging impacts on the selection of products and there needs to be appropriate staffing within the trading desk for credit risk and regulation monitoring in order to operate efficiently.


“Automation enables firms to monitor their inventory holistically and decide what is the best financing product and to reduce the time needed for decision-making.”


Regulations can also have a positive impact. SFTs are used to finance and provide collateral, but they are also used as a hedging tool to cover the exposure of the underlying. Regulations can drive activity in an underlying asset, which drives activity on the repo market. Traders need to understand what is driving the latest liquidity push, including what impact regulations and other drivers are having. The trading desk of today needs team members who monitor regulations for both positive and negative impacts.

Tackling these challenges, managing the cost of liquidity and collateral provision, and maintaining access to these services helps firms ensure their resilience in the face of a potential crisis. Financial institutions need a single system that provides a firm-wide inventory view of securities, liquidity, and availability of assets, provides real-time access to counterparty credit exposure, and tracks credit and liquidity risk. A single system enables traders to know their daily limit and how they can optimise the use of their inventory without taking on unnecessary risk—their job is to fund and collect collateral while monetising their balance sheet. The system should enable a centralised high-level view combined with the ability to drill down into the details of how a position was created.

Credit risk monitoring increasingly needs to happen in real-time in order to make informed securities financing decisions. Traditionally, credit desks were separate from trading, but today we see SFT desks are required to monitor credit risk exposure and limits, and to be compliant during booking. There are more requests for credit valuation adjustment (CVA) or exposure at default (EAD) calculation on physical exchange products, which was unusual a few years ago. We are seeing more credit risk functionality requested for SFTs and more requests for real-time monitoring of credit exposure along with firm-wide inventory and liquidity views.

These tools are already common for derivatives desks, but the securities finance and repo businesses are still largely bilateral. Many institutions are not yet using a system at all, or they are using systems that were built internally to solve a piece of the puzzle and need to be refreshed multiple times a day. Standardisation brought on by Securities Financing Transactions Regulation (SFTR) has led to the increased electronification of the securities financing desks.


“We are seeing more credit risk functionality requested for SFTs and more requests for real-time monitoring of credit exposure along with firm-wide inventory and liquidity views.”


Lastly, there is increased diversification in terms of the assets being used as collateral and in repo. Many historical vendors were focused on one asset class or another and so they might be unsuited for handling a mix of asset classes. Having a system that covers the whole space of potential underlyings—from equities to corporates, credit claims and fixed income to many different types of bonds—is increasingly important with this growing diversification and specially to be able to benefit to the maximum from ECMS liquidity opportunities or fast intraday funding with the new T+1 pressure.


Q: What are the main benefits firms can expect to achieve by adopting these solutions?

A: A centralised space enables financial institutions to manage their securities and liquidity in a holistic manner. The system should provide a high-level macro view of what is in the firm’s inventory and drill down to monitor each position, including what constitutes the position and the cost, haircut or rate. The ability to support all types of underlyings, liquidity and securities, and zoom in on the trades themselves is extremely important as securities finance touches on all processes of the organisation.

Automating post-trade activity reduces the need for manual intervention from settlement, risk and collateral teams, lowering the potential for human error, and makes trading and settlement more efficient. Bidirectional reconciliations become unnecessary if everything is handled within one system.

Having an automated solution with centralised data enables firms to monitor regulations and risk, build relationships and launch new products in line with market trends and updated strategies. It provides a competitive advantage over firms that are managing securities finance in a more manual or piecemeal way.

Continuing to use Excel to manage post-trade activities or using a system that only supports one or two asset classes will not stop a firm from functioning, but it will not be able to reduce costs and operational risks easily and the firm will not have the same ability to rapidly launch new products based on real-time information. This is not just about using a system; it is really a change management process in terms of how the desk operates.


Q: What should securities finance firms be focusing on next?

A: ECMS, T+1 settlement, SEC, Basel 3.1 and other regulations are still pending and will likely come into force in the coming months or years. These will likely drive firms to automate their processes to meet reporting requirements. Firms should start to automate their securities finance operations sooner rather than later to avoid future holds on access to liquidity, optimise the use of the full potential of their availabilities or to avoid operating in the dark without access to all the necessary information.


To learn more about MX.3 for Securities Finance, download the brochure.

Source: Sabine Farhat was interviewed by Julia Schieffer for

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