Cash & Liquidity ManagementInvestment & FundingSOFR acceptance and technology help lift securities lending market

SOFR acceptance and technology help lift securities lending market

The historically rigid, inflexible, and fragmented securities financing market is undergoing a much-needed transformation thanks to rapid digitisation and growing confidence in US dollar replacement SOFR, says Glenn Havlicek, CEO of GLMX

Growing confidence in SOFR, the replacement for US dollar Libor, combined with a new wave of digitisation across securities financing markets, have played a key role in a surge in securities lending recently, according to Glenn Havlicek, CEO, and co-founder of repo trading platform GLMX and former head of global liquidity management at JP Morgan.

Pointing to a 32%year-on-year jump in securities finance revenue to $1.06bn in April as a notable recent example of the healthy activity in the market in the recent months, Havlicek says: “People trade things that move and when things move the opportunistic players get active, bringing more players on to the scene. That has undoubtedly played a big role with the securities lending market recently, but you also have to consider the role of SOFR in that. It is clearly surging ahead, the transition is going well, and people are becoming more and more comfortable with it.”

SOFR: ‘Social acceptability’

Havlicek, who spent 22 years heading up global liquidity management at JP Morgan, adds: “I’ve been in the markets for 40 years and in my experience much of what goes on in markets, despite the technology, despite the sophistication and brilliant minds that apply themselves to these markets, is that there are a lot of social compacts in there too, a consideration of what’s socially acceptable or not. SOFR has achieved the required level of social acceptability. There were people who completely panicked about the cutover early on. We’ve gotten over that hump now.”

With Libor tied to more than $300trn of contracts globally and nearly $200trn of US dollar contracts, the transition away from it amounts to one of biggest ever challenges for the financial services industry.

“It’s a massive transition, you can’t overstate how big this is,” says Havlicek. “People stand to lose a lot of money if they don’t get it right with their strategy.

“There is the pressure of knowing we are getting closer and closer to Libor cut-off next June but also people realising that complete anarchy and confusion, a disorderly cut-over would be a very bad outcome. At some point they have to choose and they’re choosing SOFR and that is being reflected in securities lending now.”

Need for technology

Historically, securities lending markets have, by and large, been manually intensive and characterised by a rigid and inflexible infrastructure. A landmark 2019 report by The International Securities Lending Association (ISLA) and law firm Linklaters warned that such an inefficient operating environment for the market was “looking increasingly less sustainable”.

The report, The Future of the Securities Lending Market: An Agenda for Change, warned the market was at a crossroads: “It is becoming increasingly complex, and regulation increasingly onerous. As a result, processes and systems that have until now served the market well are proving increasingly cost- and time-intensive, given the degree of fragmentation and reliance on manual processes.

“Regulatory and technological catalysts provide the market with an opportunity to reconsider how loans are managed and how processes can be adapted and streamlined. The ultimate vision is a market that is automated, streamlined, and interconnected – across events and market participants- in a way which is scalable and future-proof, so it can be adapted as the environment, whether legal, regulatory or practical, changes over time.”

Digital transformation

As a vital part of the financial plumbing that helps ensure efficient operation of global capital markets, the importance of the security lending market cannot be underestimated. It brings greater liquidity and efficiency to the market and plays a critical role in derivatives trading, certain hedging activities and trading strategies that involve short selling.

According to IHS Markit, the market operates with a lendable securities inventory of $37trn featuring 220,000 equity and fixed income instruments with more than $3.1trn on loan.

Havlicek believes three years on from the ISLA report, this important but complex market is responding to the need to embrace technology. His team at GLMX has suspected for a while now that major changes were taking place in the way participants were engaging with the market – the GLMX platform had been growing by 150%-175% a year but in recent months it’s been close to 500%.

Havlicek is convinced that, alongside SOFR, another key development now driving securities lending is a new wave of digitisation sweeping across the market.

“Securities lending has traditionally been very mysterious, prosecuted by people deep in the basement of big financial firms, as it were, and very few people understood it,” he says. “Digitisation across fixed income and equity markets has advanced a lot in recent years but on the securities lending and repo sides its lagged heavily.

“We believe digitisation is now, finally, beginning to bring speed, efficiency, and transparency to bear on the securities lending market. I think we have now reached what I believe is a tipping point with automation and electronification of these markets. Complex flow that was previously unmanageable in a manual world using spreadsheets has rapidly become possible.”

 

 

 

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