Securities Lending Times Issue 218

The primary source of global securities finance news and analysis ISSUE 218 08 January 2019
MACHINE LEARNING
Stephanie Lo and Jian Wu
of State Street explore
the potential market
segmentation of AI
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limitation any administrative, valuation, trade execution or other service, shall be determined by the definitive agreement relating to such product or service and subject to the relevant disclaimer for
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before agreeing to use the various services referenced herein. ©2016 The Bank of New York Mellon Corporation. All rights reserved.
Lead News Story
EC adopts conditional equivalence for no-deal Brexit

The European Commission has adopted UK CSDs to be recognised so that they can 12 months to ensure that there will be no
conditional equivalence for central clearing continue providing notary and settlement immediate disruption in the central clearing
counterparties (CCPs) and central security services for securities issued under EU law.” of derivatives.
depositories (CSDs) post-Brexit, as part of its
no deal contingency action plan. In the UK, HM Treasury and the Bank Measures also include a temporary and
of England have already put in place a conditional equivalence decision for a fixed,
The commission has considered it “essential temporary recognition regime for non-UK limited period of 24 months to ensure that
and urgent” to adopt these measures to ensure CCPs and a transitional regime for non-UK there will be no disruption in the central
that the necessary contingency measures can CSDs. The Bank of England explained that depositories services for EU operators
enter into application on 30 March in order to these will enable EU CCPs and CSDs to currently using UK operators.
“limit the most significant damage” caused by continue to provide services in the UK in a
a “no-deal” scenario in these areas. no-deal Brexit scenario. Additionally, the commission adopted two
This recognition would allow UK CCPs to delegated regulations facilitating novation,
continue to provide clearing services to their As part of the commission’s contingency for a fixed period of 12 months, of certain
EU members, and EU banks to meet their measures, it found that only a limited number over-the-counter derivatives contracts,
obligations to UK CCPs. are necessary to safeguard financial stability where a contract is transferred from a UK to
in the EU27. an EU27 counterparty.
The Bank of England stated that the
announcement is “a crucial and positive step”. As part of those measures, various acts will According to a statement from the
apply from the withdrawal date if an exit deal commission, it will continue to “implement its
It said: “It provides the necessary clarity is not ratified. contingency action plan in the weeks to come
and addresses one of the most important and will monitor the need for additional action,
financial stability risks associated with the The acts include a temporary and conditional as well as continue to support member states
UK’s withdrawal from the EU. It also enables equivalence for a fixed, limited period of in their preparedness work”.
www.securitieslendingtimes.com 3
Inside SLT
Publisher: Justin Lawson

[email protected] Country Profile 2019 Outlook
+44 (0) 203 750 6028 Luxembourg continues to record large net Industry participants suggest SFTR,
inflows into UCITS, and growth is expected to CSDR and Brexit will all be hot topics for
Editor: Becky Butcher continue this year the securities lending industry this year
[email protected] page 20 page 24
+44 (0) 203 750 6019
Deputy Editor: Barney Dixon

[email protected]
+44 (0) 203 750 6026
Reporter: Jenna Lomax

[email protected]
+44 (0) 203 750 6018
Junior Reporter: Maddie Saghir

[email protected] Eurex Update Technology Overview
+44 (0) 203 750 6019 Matthias Graulich and Frank Gast discuss the Jerry Friedhoff of Broadridge discusses
success of Eurex’s Partnership Programme regulatory changes, emerging technologies
Creative Director: Steven Lafferty and the expansion into the repo segment and more
[email protected] page 28 page 36
+44 (0) 7843 811 240
www.securitieslendingtimes.com
Twitter: @SLTimes_
Office fax: +44 (0) 20 8711 5985

Published by Black Knight Media Ltd
Copyright © 2018 All rights reserved Machine Learning Regulation Update
Stephanie Lo and Jian Wu of State Street discuss Michael Huertas, partner at Dentons,
the intersection of machine learning applications discusses the uncertainty and challenges
and equity markets in portfolio management around Brexit
page 32 page 36
4 Securities Lending Times

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News Round-Up
SEBI moves to physical settlement

for all derivatives
The Securities and Exchange Board of India

(SEBI) has notified that all derivatives will be
settled physically as part of an initiative to help
promote securities borrowing and lending.
Accordingly, stock derivatives which are

currently being cash settled will move to
physical settlement.
Physical settlement of stock derivatives will

be made mandatory in a phased, calibrated
BNY Mellon purchases securities finance software manner in descending order. The first 50
and associated intellectual property of Trading Apps stocks will move to physical settlement from
April this year onwards, followed by 50 more
BNY Mellon has purchased the agency Matthew Harrison and Jeff Lloyd along in July, and the remaining stocks will move
securities finance software and with eight other Trading Apps staff by October.
associated intellectual property of members will be joining BNY Mellon, all of
Trading Apps. whom will be based in the UK. Exchanges have been directed to put in
place proper systems and procedures
According to BNY Mellon, the transaction Laura Allen has taken over from Harrison to ensure a smooth implementation of
will deliver benefits to its agency securities as CEO of Trading Apps. Harrison will physical settlement.
lending business and its clients. now serve as a non-executive director of
Trading Apps. This decision comes after SEBI published
These benefits will include enhanced discussion papers in 2017, requesting
price discovery as well as reporting James Slater, global head of securities stakeholders to provide their comments,
and analytics through the integration finance and collateral management at BNY with a view to improve market integrity
of securities finance market data and Mellon, said: “This acquisition represents a and provide better alignment of cash and
automated algorithmic execution. compelling strategic opportunity for BNY derivatives segment.
Mellon. The combination of Trading Apps’
Trading Apps will continue to operate as world-class technology and specialists with In the paper, SEBI stated: “A prerequisite
an independent entity, primarily servicing our unrivalled agency lending franchise will for the successful introduction of physical
the securities finance community beyond deliver our clients unprecedented speed, settlement of derivatives is efficient
agent lenders, including broker-dealers automation and trading efficiencies in this and transparent lending and borrowing
and borrowers. highly competitive marketplace.” mechanism in cash segment.”

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News Round-Up
The board added that a “vibrant mechanism” for

securities lending and borrowing is essential to
avoid a short squeeze in India’s financial markets.
OCC hits record highs for 2018
OCC has set a new annual cleared contract

volume record for the US exchange-listed
options and futures industry, clearing 5.24
billion total contracts and 5.14 billion
options contracts.
These figures surpass the previous records

of 4.60 billion total contracts and 4.56 billion
options contracts, set in 2011.
Compared to 2017, OCC had a 21.1 percent

increase in total contracts cleared as
well as a 22.6 percent increase in options
BME Clearing clears first repo trades contracts cleared.
BME Clearing has cleared its first repo clearing services in Spain. It provides Meanwhile, OCC’s securities lending central
trades executed on the anonymous dealer- equities, public debt repos, financial counterparty activity was up 3.9 percent in
to-dealer trading platform BrokerTec, derivatives, energy derivatives and interest new loans from December 2017 with 107,214
owned by NEX Markets. rate swaps. transactions last month.
The clearing of these transactions follows Ignacio Solloa, managing director of For the year, stock loan activity increased
the announcement of an agreement last July BME Clearing, said: “By clearing the first 17.2 percent from 2017, with 1,374,319
between BME Clearing and NEX Markets. transactions on BrokerTec, BME Clearing new loan transactions in 2018. The average
has brought a wider choice for clients daily loan value at OCC in December
This involved the provision by the BME operating on this platform.” was $70,160,856,931.
Clearing of repo clearing services to
participants connected to BrokerTec. Solloa added: “We are delighted that Total cleared contract volume, which proved the
BrokerTec offers our CCP services to be the most active December to date for OCC,
As an authorised European Securitas their clients, which will benefit from the reached 436,771,941 contracts in December,
Markets Authority central clearing efficiency, transparency and reliability of up 26.2 percent compared to the December
counterparty (CCP), BME Clearing provides BME Clearing.” 2017 volume of 346,006,092 contracts.
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News Round-Up
Equity options volumes reached a total of The basket of securities from the Bank of DTCC and Xceptor work together on
376,883,978 contracts, a 27.7 percent increase Russia’s Lombard List will be used as collateral SFTR solution
from December 2017. for repos with CMS.
The Depository Trust & Clearing Corporation
Futures cleared by OCC reached 7,693,725 The CMS allows market participants to select (DTCC) has partnered with Xceptor to
contracts in December, down 23.4 percent collateral automatically, to replace bonds in enable clients to leverage Xceptor’s data
from December 2017. OCC’s average daily the basket, and to process corporate actions transformation capabilities within DTCC’s
cleared futures volume for 2018 was 417,882 on securities involved in transactions. global trade repository for Securities Financing
contracts, 24.0 percent less than 2017. Transactions Regulation (SFTR).
The NSD also revealed that Slavneft has been
John Davidson, OCC president and COO, added to its Transit 2.0 platform, which allows According to DTCC, the partnership will
commented: “Throughout 2018, OCC delivered companies to optimise their expenses for “significantly lessen” firms’ operational
operational and capital efficiencies to our interacting with settlement banks, with regard to burden by enabling them to enrich, normalise
participating exchanges, clearing firms, and receiving and transmitting payment documents. and validate data before submitting it to a
market users in our role as a systemically trade repository.
important financial market utility.” The Transit 2.0 is a new system for financial
message exchange between banks and Firms will be able to enrich reporting with
“As we look forward to 2019, my OCC corporations developed by NSD on the basis both internal and external reference data,
colleagues remain committed to strengthening of the previous Transit platform version. The manage exceptions leveraging native
our resiliency and risk management capabilities system automatically exchanges payment and workflows, and benefit from real-time gap
to ensure confidence in the financial markets other documents. analysis and testing.
and the broader economy, and to continue
to clear the path for growth in the US equity Stanislav Popkov, head of corporate finance Val Wotton, managing director, product
options and futures industry.” department at Slavneft, said: “The Transit 2.0 development and strategy, derivatives and
platform provides our company with efficient collateral management at DTCC, said: “With
SPCEX launches exchange-traded interactions with banks via a single channel. data being one of the main challenges of the
repos with Bank of Russia It will allow us to save time and increase SFTR obligations, DTCC provides clients with
transaction reliability. The new instrument the ability to capture and normalise any data
The St. Petersburg Currency Exchange gives clear advantages to market players who format from any channel and intelligently
(SPCEX) has launched exchange-traded repos hold many settlement accounts.” connect the right data, in the right format, at
with the Bank of Russia, using The National the right time.”
Settlement Depository’s (NSD) collateral Alexander Nam, managing director for
management system (CMS). technological services development at NSD, “Our partnership with Xceptor will enable
said: “We continue to expand the number of firms to significantly streamline their
The initiative, which started on 25 December clients connected to the platform, regardless operational processes and help simplify
2018, will give participants the option of of their profiles. The Transit 2.0 platform is the SFTR compliance process. We look
concluding exchange-traded repos with the already appreciated by market participants, forward to helping the industry prepare for
Bank of Russia. and we plan to improve its capabilities.” SFTR in 2020.”

News Round-Up
Andrew Kouloumbrides, CEO of Xceptor, opportunities with Xceptor to leverage its they are still some way from reaching a new
added: “SFTR places a huge importance capabilities across our platform.” normality, with regional markets at different
on data quality and, with low reporting stages of that evolution reflecting divergent
tolerances, the self-serving capabilities of Post-crisis regulation could be implementation of regulatory reforms on
the DTCC service, powered by Xceptor, will ‘detrimental’ for repo and sec lending different timelines.
enable firms to get their data into shape
while also being able to use existing trade Post-crisis regulation requires further evaluation Further findings from the report showed
file formats.” as it could be detrimental for repo and securities that securities lenders may have to accept
lending markets, according to a Global Financial significantly lower returns for their portfolios
“DTCC will maintain the rules engine, the Markets Association (GFMA) and International due to lower demands.
platform itself will be operated by DTCC, so Capital Market Association (ICMA) report.
DTCC will deploy Xceptor within the DTCC Meanwhile, short sellers may need to seek
infrastructure and will run that platform The report explained that regulation is a key alternative ways to short securities and
operationally. This is the start of a partnership driver of change for the way the repo and improve the price discovery process.
between Xceptor and DTCC that we hope will broader securities finance transactions (SFT)
evolve to mutual benefit.” markets operate today and how they will Additionally, the report found that increased
evolve in the near future. costs and reduced capacity for transacting
Also commenting, Marisol Collazo, managing with regulated counterparties could ultimately
director, business development and global It found that regulatory reforms have had a lead to increased costs for investors in
head of strategic partnerships at DTCC, profound effect on banks’ SFT businesses, pension funds and mutual funds. The report
explained: “DTCC is excited to be partnering with a significant increase in capital recommends that the Financial Stability Board
with Xceptor to simplify the SFTR reporting requirements. While the markets have so far and Basel Committee on Banking Standards
process. We will continue to explore other proved to be resilient, the report suggested that should review the coherence and calibration
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News Round-Up
of the post-crisis regulatory framework, prudential standards, without sacrificing safety impacts the repo market, and to ensure that
particularly pertaining to how it impacts the and soundness, to ensure better functioning any proposed further reforms are subjected
repo market. of the repo and broader SFT markets for the to robust impact analysis.”
benefit of the wider global economy.”
The treatment of repo transactions backed EquiLend stake sold to NBC
by the highest quality government bonds Godfried De Vidts, chair of the ICMA
should be reviewed in order to ensure that European Repo and Collateral Council, J.P. Morgan is selling one of its two stakes in
the private sector market has the capacity commented: “It is clear that regulation is a EquiLend to the National Bank of Canada (NBC).
to absorb quantitative easing unwind and key driver of changes in the way the repo
to operate without significant reliance on and broader SFT markets operate today and Commenting on the sale, Brian Lamb,
central banks during normal and stressed how they will evolve in the near future. While CEO of EquiLend, said he was “thrilled” to
market conditions. the markets have thus far proved resilient, welcome NBC to its ownership group and
they are still some way from reaching a new board of directors.
Kenneth Bentsen, CEO of GFMA, said: “Repos normality, with regional markets at different
and other SFTs play a critical role in the global stages of that evolution reflecting divergent Lamb said: “NBC is a strong supporter of
financial system and support the real economy implementation of regulatory reforms on fintech and automation in the securities
in many different ways. Therefore, it is essential different timelines, and the impact of future finance market, and as such we couldn’t ask
that the SFT markets function smoothly during regulatory reforms remains a key concern.” for a more fitting partner.”
both normal and stressed times.”
De Vidts added: “Hence it is important to He added: “We look forward to working with
“Our report’s findings suggest the need for conduct a review of the coherence and all of our owners and 130 other clients in the
several policy revisions and that further work calibration of the post-crisis regulatory global securities finance market as we continue
needs to be conducted in recalibrating the global framework, particularly pertaining to how it to deliver innovative new technology solutions.”
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SFTR Update
Get ready to report

With the EC adopting seven delegated regulations comprising SFTR level II
legislation in December, the industry needs to ramp up preparations
and publication of data on SFTs by trade (CCPs) and central securities depositories (CSDs)
Becky Butcher reports repositories, RTS on the details of the application have 15 months, pension funds, insurance/
for registration and extension of registration as reinsurance companies, alternative investment
The Securities Financing Transactions a trade repository, and RTS on access to details funds, UCITS have 18 months and non-financial
Regulation (SFTR) has been the biggest and of SFTs held in trade repositories. counterparties have 21 months. According to
probably most important regulation to hit the Lee, reporting will start in April 2020 for banks,
securities finance industry. Seb Malik of Market FinReg said: “After with others to follow in three-month increments.
an inordinate 18-month delay the market He emphasised that “now is the time to start
SFTR was published in January 2016 by the can breathe a collective sigh of relief. The SFTR budgeting, hiring, planning, building and
European Commission following the Financial legislation will now be scrutinised by the thinking about testing, controls and governance if
Stability Board and the European Systemic Risk European Parliament and Council.” your project has not already kicked off”.
Board’s recommendation to mitigate the inherent
risks in shadow banking and increase transparency During the three-month period, the European Also commenting on the adoption, Val Wotton,
in the use of securities lending and repo. Parliament or the European Council “may object managing director, product development
to an RTS within a period of three months from and strategy, derivatives and collateral
As part of the regulation, firms will be required the date of notification of the RTS adopted management at DTCC, said that “the approval
to report their securities financing transactions by the commission. At the initiative of the of the technical standards for the reporting
to a trade repository registered by the European European Parliament or the council that period rules of SFTR fires the starting gun on the
Securities Market Authority (ESMA). On 31 shall be extended by three months”. countdown to the implementation of this new
March 2017, ESMA submitted the draft level II regulation which we expect to take place in just
legislation to the European Commission. Andrew Dyson, CEO of the International over a year’s time”.
Securities Lending Association, commented:
On 24 July last year, the European Commission “After considerable and detailed preparatory Wotton suggested that in order to be ready in
sent a letter to ESMA confirming their “intention to work across the industry in recent months it time, the securities financing industry has a
endorse with amendments” the draft regulatory is good to get clarity around the dates we are “significant amount of work to do, particularly
technical standards (RTS) and implementing all now working towards.” around data availability and workflows”.
technical standards (ITS) submitted by ESMA.
However, on 4 September, ESMA formally Dyson exaggerates how important the first He added: “We know that large broker-dealers
rejected the European Commission’s request to six months of this year will be “in terms and agent lenders have kicked off their
make minor amendments to its draft SFTR level of developing a consistent and pragmatic preparations, however, many of the smaller
II legislation. framework to ensure that the industry banks and buy-side firms have not yet initiated
is able to comply with the Article 4 daily their response to the regulation and we would
But the big announcement was made on 13 reporting requirements”. recommend that they begin these preparations
December, when the European Commission as soon as possible.”
revealed it had adopted seven delegated Jonathan Lee, senior regulatory reporting
regulations comprising SFTR level II legislation. specialist at Kaizen Reporting, describes Wotton concluded: “Further, as market
the decision to adopt the RTS and the ITS participants start to prepare, we urge them
The seven delegated regulations included: the for SFTR as “the final piece in the puzzle to take a more strategic approach to address
RTS specifying the details of the application for of certainty around the Article 4 regulatory the SFTR requirements, rather than viewing
registration as a trade repository, regulation on reporting obligation go-live”. Lee explained them as a compliance exercise. In doing so,
access to the data held in trade repositories, that the decision “dictates the timeline they will have an opportunity to gain wider
RTS specifying the details of securities to implementation”. advantages such as increased levels of pre-
financing transactions (SFTs) to be reported to trade matching, reducing trade fails and
trade repositories, regulation on fees charged Once the regulation comes into force, credit creating greater collateral efficiencies, which
by ESMA to trade repositories, RTS on the institutions and investment firms have 12 months will result in significant benefits such as
collection, verification, aggregation, comparison to implement reporting central counterparties balance sheet optimisation.” SLT

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Malik’s Memo
Brexit, clearing and equivalence

A spectre is haunting Europe, the spectre of notwithstanding a proposed temporary worth of centrally cleared derivative contracts
Brexit. Despite the Bank of England forecasting a regime for certain firms. are affected. John Glen, the economic secretary
severe recession—4.75 to 7.75 percent reduction to the UK Treasury said: “The key issues for
in GDP—in a no-deal, disorderly Brexit scenario, Equivalence CCPs are that when the UK leaves the EU, EU
only two-thirds of firms have a mitigation action CCPs will not be recognised to provide their
plan. As Brexit enters its final act, statements The day after the UK leaves the EU, it will clearing services to UK firms, and vice versa.”
and counter-statements abound. be considered a ‘third-country’. Equivalence
is on a per issue/law basis not a broad “Secondly, there is legal uncertainty about
Predicting the outcome of Brexit is the work of sweep designation of an entire country. whether EU clearing members can continue to
horoscopes but understanding the underlying The statement “the UK has been deemed meet their contractual obligations to UK CCPs.
framework is essential for enacting effective equivalent” holds no meaning. This disruption is particularly acute for EU
mitigating measures. As the possibility of a firms using UK CCPs […] UK CCPs—principally
no-deal or minimalistic deal Brexit increases, The European Commission has stated that LCH—clear approximately 90 percent of Euro-
firms must have a clear understanding of the equivalence decisions fulfil the following denominated interest rate swaps used by
framework that any deal must abide by. objective: they balance the needs of financial Euro area banks. The only industry mitigant
stability and investor protection in the EU available would be to close out or transfer the
Passporting with the benefits of maintaining an open and contracts that EU clearing members have with
globally integrated EU financial markets; and UK CCPs before March 2019.”
The starting point has to be passporting, they are pivotal to promoting global regulatory
while in common currency, the term is not convergence. Its overarching objective is to Clearly, unwinding trillions of Euros worth
fully understood. oblige “third-country jurisdictions [to] adhere of derivative contracts is unfeasible. So, the
to, implement and enforce rigorously the same Bank of England is accepting non-UK CCPs to
As Andrew Bailey, head of the Financial high standards of prudential rules as the EU”. apply for temporary permission before Brexit,
Conduct Authority (FCA), explained: “A with the EU reciprocating.
passport is a mechanism through which firms In order to be deemed “equivalent” for different
may exercise their right to provide services and aspects, the UK would have to remain very Relocate to the EU?
their right to establishment. With a passport, closely aligned to EU laws.
an entity’s authorisation to do business in Many EU firms are setting up entities in the
one EU Member State [...] is recognised by all The equivalence regime is unsuitable for the UK UK and vice versa. For example, Regis-TR, the
other member states as an authorisation to do because firstly, it is patchy, not covering large European trade repository, is setting up a UK
business in their territory as well. As such, a aspects of financial services and secondly, entity. The European Banking Authority has
passport obviates the need to obtain separate equivalence status can be unilaterally made clear that token brass-plate shells will
authorisations from other member states.” withdrawn by the European Commission at not be acceptable—a meaningful presence with
short notice, thereby creating permanent infrastructure and staff will be expected. Now
It is a common misunderstanding that there business uncertainty. The commission has we’re in 2019, a practical action plan is now
is a single passport—there are many. The made clear it will not engage in equivalence critical. Brexit’s worst effects can be mitigated,
FCA handles notifications (authorisation) discussions at this stage. albeit at a significant cost.
for seven passporting regimes, while the
Prudential Regulation Authority (PRA) handles Short of a formal cancellation of Brexit—
authorisations for two. In total, around 8,000 withdrawal of Article 50 notification or effective
EU firms use various passports to operate cancellation (remain in the European Economic
into the UK and approximately 5,500 UK firms Area) some form of equivalence (so-called
utilise passports to operate in the EU. enhanced equivalence) will be the only realistic
solution. This will necessarily mean the UK
Head of financial law
These include banks, pensions funds, the indefinitely staying aligned to EU law. On this
second Markets in Financial Instruments point, Theresa May has my sympathies.
Market FinReg
Directive (MiFID II) investment firms,

UCITS, alternative investment funds, Clearing
Seb Malik
trade repositories, authorised reporting

mechanisms and clearing houses. After The one exception to the UK-EU impasse is
Brexit, all passporting rights will be lost, clearing. It’s not hard to see why £69 trillion-

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Luxembourg Insight
UCITS on the up
Luxembourg continues to record large net inflows into UCITS, and growth
is expected to continue this year as more Luxembourg-domiciled funds
commence lending programmes for the first time
to implement a framework for the highly-regulated fund-type back
Maddie Saghir reports
in 1988.
Amidst the busy EU marketplace, Luxembourg holds its own in the Back then, the country attracted a large number of promoters
niche area of financial services as it remains the largest market from outside the EU who still use Luxembourg as a gateway to the
for UCITS in Europe. UCITS are synonymous with Luxembourg’s European market. However, there is fierce competition from other
financial market, primarily because it was the first EU member state European securities lending markets, most notably Ireland and

Luxembourg Insight
Germany, who rival Luxembourg in terms of volumes of assets In terms of the focus of clients, Kzsenzova noted that clients are
under management. paying close attention to their programmes, using it as a revenue
optimisation strategy, and engaging closely with providers to adapt
Discussing the current state of Luxembourg’s securities lending their programmes to the dynamic environment.
market, Joanna Kzsenzova, associate, securities lending finance,
treasury and market services, RBC Investor & Treasury Services She highlights that it is now more important than ever to have close
Luxembourg, says: “We continue to see relatively stable growth in relationships and an open dialogue with experienced providers who
lendable assets, utilisation and returns year-on-year, although the understand the landscape.
regulatory environment remains increasingly complex.”
As asset management becomes more complex, Kzsenzova notes
Kzsenzova adds: “In recent years, providers have spent a considerable that “regulatory requirements have an increasing impact on securities
effort on automation and efficient integration of lending processes lending activity. The continued need for transparency from asset
with custody and necessary depository controls.” managers and investors all require tailored solutions”.
“However, we are also working proactively with our counterparties She adds: “There is an increasing demand to have securities lending
to develop new lending strategies and build new relationships. In integrated and connected with custody, fund accounting, trading and other
the current environment, innovation and solutions become real services to minimise involvement from asset managers and have a fully
differentiators versus traditional lending.” optimised package to ensure that risk and costs are jointly addressed.”
Luxembourg Insight
Meanwhile, reflecting on 2018, Simon Lee, managing director of party lender much of eSecLending’s growth this year in Europe has
Business Development, Europe, the Middle East and Africa (EMEA) been from Luxembourg domiciled funds.”
and the Asia Pacific, explains: “Over the course of 2018 we saw
continued expansion in the number of Luxembourg-domiciled fund He continues: “While custody lending continues to play its part for
structures participating in securities lending programmes.” many Luxembourg entities, we are also seeing some of the larger fund
management companies bring their securities lending programmes
Driving the growth in-house, further signifying the value securities lending can provide as
an investment management product.”
Indeed, Luxembourg has experienced a high degree of success
and growth in the area of UCITS. By the end of Q2 2017, the largest Kzsenzova cites: “The fact that securities lending requirements
net inflows into UCITS were recorded in Luxembourg (€70 billion). defined by the Commission de Surveillance du Secteur Financier
Luxembourg also recorded the third largest net asset growth of 0.9 (CSSF) are clear to Luxembourg UCITS enables structures to continue
percent for the same period. to provide liquidity to the market.”
Additionally, out of twenty registered countries, Luxembourg recorded She explains that it also benefits asset managers globally, for example,
the largest inflows (€76.1 billion) during the first three quarters of with greater disclosure requirements, which provides comfort to
2018. This was followed by Ireland with €49.5 billion and France €19.7 global investors and makes this product broadly acceptable.
billion. The figures show that Luxembourg is well ahead of the mark in
this area. In Q3 2018, among the major domiciles, Luxembourg once “Historically in several markets, investors still remain restrictive to
again ranked as the third largest asset growth with 0.9 percent. securities lending, but securities lending is being seen more often
as an essential element for management companies and the quality
Discussing the growth and success that Luxembourg has seen, Chris and reputation of the lending programme plays an important role”,
Chancellor, senior director, EMEA Insights at Broadridge, comments: Kzsenzova adds.
“Luxembourg remains the largest market for UCITS in Europe with
over 40 percent of the UCITS assets in Europe (Broadridge GMI as at Focusing on the future
October 2018).”
Focusing on the future, Lee comments: “Looking at this year and
“Despite a tough year for sales flows and markets generally in 2018, beyond we see this growth story continuing as more Luxembourg
Luxembourg has actually moved this share up from 41 percent domiciled funds commence lending programmes for the first time,
(December 2017) to 42 percent. Luxembourg UCITS funds gathered €13 and established lenders look to enhance performance through
billion, this was around half the flows of rival Dublin but Luxembourg programme expansion, be that lending in new markets, broadening
remains the leader with almost triple the assets of Dublin.” collateral schedules, or accessing alternative routes to market.”
Luxembourg continues to grow for a variety of reasons, Chancellor “As always there will be a focus on regulation over the coming
explains: “As a pan European distribution hub it attracts managers period, particularly surrounding Securities Financing Transactions
who have interesting strategies that are often not replicated in local Regulation and Central Securities Depository Regulation, and
markets while at the same time attracting investors not just from of course Brexit will be discussed at length, though accurately
Europe but globally—especially from Asia and Latin America.” predicting how the impact of that shows itself in the securities
lending industry is challenging to say the least.”
He adds: “In 2018, we also saw some Brexit related growth as some
groups which were selling UK vehicles across the continent future- In terms of opportunities and trends that the industry is expected
proofed their business by creating funds in Luxembourg.” to face, Kzsenzova notes that one of the current trends is increased
corporate governance activity and environmental, social and
Lee comments: “Similar to other jurisdictions there are a number of governance focus.
factors driving this growth, firstly an increase in passively managed
funds, for whom securities lending is often a key component of Kzsenzova explains: “RBC Investor & Treasury Services’ focus
the funds’ investment strategy. Secondly, a downward pressure is to balance those requirements and find the most optimal
on investment management fees, which may be offset in part by solution for investors’ interests with lending and capture
securities lending revenue, and thirdly rising levels of comfort around benefits from all activities.”
securities lending brought on by increased transparency, education,
and regulation.” “Another trend is the increasing automation of the securities lending
market. Cost-efficient lending via automated platforms increases
“Luxembourg domiciled lenders continue to utilise a variety of routes the importance of engagement with clients to deliver value added
to market, including third-party agent programmes, indeed as a third- trades and provide stable returns to beneficial owners.” SLT

The year of preparation
SFTR will continue to be a hot topic this year as the deadline date draws closer,
as well as CSDR and Brexit, meanwhile, a cautious eye should be kept on flows
in and out of hedge funds which experienced performance challenges in 2018
2019 Outlook
ensure they are optimising revenue generation. This is considered

Maddie Saghir reports
best practice in any event, but we think especially so this year.
The hot topics for 2019 include Securities Financing Transactions
Regulation (SFTR) preparation, legal challenges around Brexit, Central We are hearing a lot of talk and discussion around best execution and
Securities Depository Regulation (CSDR), macro and geo-political transaction cost analysis for securities finance, and while this may have
factors leading to market volatility, new entries of participants into been addressed to some degree with the advent of MiFID II, our sense is
securities, as well as challenges around creating innovation. that the thought process and approach are continuing to evolve.
The securities finance industry kicked off last year with the introduction
of the second Markets in Financial Instruments Directive (MiFID II) Central clearing will continue
implementation. The securities lending market was largely ready for
MiFID II but perhaps the same cannot be said for the imminent, and
its onward march and
most important regulation for the securities finance industry, SFTR. become even more important
There was much discussion last year on the complexity of SFTR,
however, some industry participants have argued that this is in fact a
to the market. Central
blessing in disguise, which will encourage better practices. clearing leads to greater
safety and integrity in the
Market participants provide their predictions on hot topics,
opportunities and challenges for the year ahead.
financial markets
Matthias Graulich
What are your predictions for the securities lending market Member of the Eurex Clearing
this year? And what do you think the hot topics will be? executive board
Paul Wilson: This year will inevitably be dominated by the build up Lastly, it is inevitable that macro and geo-political factors will be
to the implementation of SFTR in Europe. This regulation is having a dominant this year, which will lead to continued market volatility that
fundamental impact on market participants, but it is also a catalyst creates an uplift in borrow demand. This also translates into the
for change and the way participants think about their business continued positive income generation and profitability from securities
and activities. SFTR is arguably one of the most complex (and finance experienced last year, especially in emerging markets with trade
technologically difficult) challenges that the industry has faced since tensions, and also from corporate bonds (partly driven by exchange
the financial crisis, and so it is difficult to see beyond this being anything traded funds creation needs as concerns about the credit markets
other than front and centre for all impacted market participants. continues and have been voiced by many senior market participants).
A cautious eye should be kept on flows in and out of hedge funds that
experienced performance challenges last year.
This year will inevitably be Matthias Graulich: I believe last years’ topics will still be hot. These
dominated by the build up to include everything that drives and impacts the transformation of the
the implementation of SFTR in securities lending market from a non-standard, bilateral over the counter
model towards a more progressive and sustainable operating model.
Europe. This regulation is having
a fundamental impact on All items shaping the market globally this year will be centred
around the four key areas: legal, legislation, regulatory, as well
market participants as infrastructure and technology. More precisely, collateral
optimisation, the legal challenges surrounding Brexit, the
Paul Wilson introduction of central securities depository and SFTR as well as
Managing director, securities finance the demand for the enhanced use of technology solutions across
IHS Markit the entire securities lending process.
Furthermore, central clearing will continue its onward march and

This will inevitably lead to drop outs from some lenders where the become even more important to the market. Central clearing leads
additional overhead outweighs revenue generation. We think this will to greater safety and integrity in the financial markets. As safety
lead many participants, especially beneficial owners, to review their and integrity are also objectives that buy-side and sell-side market
lending framework and parameters in order to validate that lending participants have in common, I think demand for the Lending Central
activities are consistent with their investment objectives, and to Counterparty (CCP) service of Eurex Clearing will also continue.
2019 Outlook
a decent profitability of their securities finance activities even in a

low margin environment.
The challenge is to bring
committed participants Flexible digital IT platform strategies with high connectivity to other
competing systems are key to support this trend, and guarantee a true
together to identify and low cost straight through processing and trade matching between all
form the next steps towards market participants and market service providers (for example, CCPs,
building an improved tri-party agents).
securities lending market In terms of products, the trend away from event driven lending
activities towards general financing transactions in high-quality liquid
assets (HQLA) securities will continue. There is also a clear shift
Marcel Naas
Head of product design, funding and financing towards term transactions such as ‘evergreen’ and ‘pledge’ structures
Eurex for balance sheet and liquidity management purposes as well as
collateral upgrades in every market.
Mark Steadman: We will see the securities lending market spend
this year ramping up preparations for SFTR implementation. A A special market situation is about to occur in Spain, where—after a
significant number of industry participants have already started to decade of debate—a law change is on the way to allow Spanish mutual
mobilise efforts by addressing the regulation’s data requirements, and pension funds to conduct securities lending transactions other
which are far more demanding than firms have previously than for short cover purposes only. This will create a significant amount
experienced. As such, this year we will see firms continuing to of supply of mainly European assets available for securities lending.
examine their workflows to ascertain how that data will be obtained
and sourced, if not already available, in order to comply with the Finally, the upcoming of Brexit will move business in general away
reporting mandate. from London into various continental European financial hubs such as
Frankfurt, Paris and Amsterdam.
Walter Kraushaar: Continuing a trend which can be followed already
since 2017, there will be an increased return and new entries of What are the main challenges and opportunities for the
participants into the securities lending market. year ahead?
This upsurge in interest in lending may be driven by a more passive Marcel Naas: The challenge is to bring committed participants together to
asset management, where an add on of a lending programme will identify and form the next steps towards building an improved securities
provide significant bottom line alpha to the fund performance without lending market. At the end of last year, Eurex Clearing initiated a lending
a parallel increase of inherent market risks. CCP think tank group to encourage dialogue, strategy and initiatives to
drive the delivery of a new phase of market access for securities lending
At the same time, digitalisation helps even smaller asset with the aim of shaping the growth of Lending CCP utilisation.
managers, banks, beneficial owners and other lenders to build a
robust infrastructure for their business at a cost which guarantees A key focus for this year will be to continue our collaboration with
clients to bring innovation to the market. At Eurex Clearing, we believe
that our clients and key market players are fundamental to drive
the growth and transformation of central clearing for the securities
SFTR’s data reporting lending market.
requirements are more stringent
than previous mandates As far as the Lending CCP is concerned, Eurex Clearing looks forward
to maintaining its role as a leading market infrastructure provider
and firms will need to report and partner to our clients. The Lending CCP signed up a number of
significantly more data than major buy-side clients and agent lenders last year. This year we will
have the opportunity to extend the range of clients, markets, and
they have done in the past assets into our offering. As a result, we expect the daily average on-
loan volume to steadily increase over the next year for both equity
and fixed income segments.
Mark Steadman
Executive director, European head of product
development and change management for Steadman: SFTR’s data reporting requirements are more stringent
global trade repository than previous mandates and firms will need to report significantly more
DTCC data than they have done in the past. In addition, inter-trade repository
2019 Outlook
reconciliation will present a challenge for market participants this year

as it did under European Markets Infrastructure Regulation (EMIR). To
overcome this, firms should prioritise the four fields required to pair The main challenges this year
a trade: unique trade identifiers (UTIs), reporting counterparty, other will most probably not be
counterparty and master agreement type. Ensuring consistency will at
a minimum allow matching to take place.
driven by market events but by
significant (IT-) infrastructural
While a large number of firms are already putting preparations in
challenges caused by those
place, many others, such as tier two banks and buy-side firms, have
adopted a ‘wait and see’ approach to the regulation to gain clarity on regulatory requirements
the technical standards which have only just been published, however
delaying preparations will create challenges in achieving compliance.
Walter Kraushaar
If SFTR preparations are approached correctly, the regulation will Head of advisory services, Frankfurt
deliver multiple benefits such as data transparency which, in turn, will
Comyno
result in more accurate pricing, as well as contributing to the creation
of greater transparency in the global financial system overall and the alternative collateral types (for example, main index equities), they
mitigation of systemic risk. could see a continued deterioration in both market share and lending
revenue. Market demand for many borrowers is shifting from USD
Kraushaar: Combined with the immense infrastructural efforts which cash collateral to non-cash collateral, and we anticipate this trend will
have to be made by those market participants which will be affected by especially be pronounced for general collateral loans going forward.
Brexit, the main challenges this year will most probably not be driven
by market events but by significant (IT-) infrastructural challenges Optimistically, the markets are setting up for sustained volatility and wildly
caused by those events and regulatory requirements. However, the fluctuating equity market values. Trade wars, Brexit, credit pressures and
mentioned challenges are a great opportunity at the same time as other global macro uncertainties are beginning to build a ‘base’ in Q4 that
they push all market participants towards market transparency and to could lead to more two-way risk in the markets for this year.
radically rethink their business strategy. This provides a big opportunity
to upgrade and/or change the current aging IT infrastructure into modern We are starting to see green shoots that could be indicative of better
digital platform technology, which will allow tailor-made solutions for days ahead for short players and thus securities lenders. Initial public
every market participant at a significant lower cost basis. It will also offerings are again trading special for many weeks at a time and
help especially smaller and more specialised market participants to single name shorting and borrowing is beginning to pick up around
enter or re-enter the securities lending markets. the globe. Similarly, mergers and acquisitions arbitrage has been more
active of late, which gives further hope to lenders looking for a shift in
James Moroney: The industry challenges this year will be similar to momentum next year.
the challenges faced in last year, however, we anticipate the market
will yield an improved environment for generating revenue through Lastly, there are also significant opportunities for lenders looking to
lending securities. Market participants will need to focus on collateral expand lending into emerging markets such as Taiwan, South Korea
transformation and regulatory compliance, which will once again drain and Russia, as well as anticipated new lending markets, such as the
resources. Last year these hurdles, along with low volatility and steady Philippines, which is poised to open for lending late in 2019. SLT
upward trending equity markets, contributed to annual returns that
were well-below historic averages for asset owners.
Hard to borrow securities, as a percentage of overall on-loan

Market participants will
securities in the marketplace, has steadily declined over the last 12 need to focus on collateral
months as short-side participants appeared to throw in the towel and transformation and
ride the ‘long wave’. Tax harmonisation also muted securities lending
performance last year and we expect it will continue to have an
regulatory compliance,
impact on the market this year. Poland, Belgium and possibly France which will once again
are markets that are considering tax changes that could have similar
outcomes to the rule changes seen in Germany early last year.
drain resources
James Moroney
If asset owners are willing to broaden their acceptable collateral sets, Managing director, head of global equities
they should continue to maintain as well as grow their slice of market and corporate bonds trading
share in securities lending. However, for lenders not able to accept eSecLending
Securities Lending Times 218 www.securitieslendingtimes.com

Reaping the benefits
Matthias Graulich and Frank Gast discuss the success of Eurex’s Partnership
Program and the reasons behind the expansion into the repo segment
programme. We always had plans within the initial programme terms for
Becky Butcher reports
the partnership programme to expand. We started the programme with
one product group, as we wanted to test the water and see whether the
What is the aim of the Eurex Partnership Programme? programme would be successful and would receive support within the
major market participants, which was successful. Then we had to find
Matthias Graulich: The aim of the partnership programme is to establish the right timing from a business and product perspective. We felt that the
a true partnership with major market participants by aligning interests right timing is now—there is dynamic in the market, for example, Brexit
and achieving certain objectives. As a market infrastructure provider, we is triggering some thoughts around moving the Euro-denominated repo
can come up with a new product or a new service but we always need business from London to the continent for a number of reasons like
the market participants to support the roll-out and, ultimately, the adoption regulatory uncertainty, TARGET2-Securities and netting efficiencies.
of these products and services. That is why we decided to go ahead with
the programme, we want to develop our provider/client relationship into a Why is the repo market an important element of the
partnership and reward those who contribute most to making our projects partnership programme?
a success.
Frank Gast: Currently, we have a very broad client base for both
The reward has two elements: one is economic, and the other is trading and clearing repos with about 140 banks and a number of
governance as we now include the best-performing partners into the buy-side firms, who are all connected to Eurex Clearing and Eurex
governance of Eurex Clearing. You could also call this setup “virtual Repo. There are two strategic elements and objectives within the
equity” as it has both an economic and a governance element. partnership programme for repo. One is focused on the interbank repo
market for government bond of general collateral and specials where
What were your motivations behind the extension to a very significant portion is currently cleared in London. The other is to
cover repo and OTC foreign exchange segments? build up a cleared repo service for the dealer-to-client business, which
today is not cleared to any significant degree. But this is a huge market
Graulich: We started off with over-the-counter (OTC) interest rates where people are faced with balance sheet constraints. Bringing this
derivatives in October 2017 and this was the start of the partnership business onto a central counterparty (CCP) has significant benefits
Eurex Insight
but it is also a challenge to get buy-side firms like pension funds over this period and fix the revenue shares into perpetuity. Therefore, if
and asset managers directly connected to a CCP where we need the someone did a great job during those four years, they will benefit from
support of clearing brokers and the major dealers in order to facilitate this indefinitely in the future.
access and provide a solution.
Gast: There is another benefit, one that is very important: balance
There is also a link between the OTC interest rate derivative (IRD) and sheet netting. In the context of T2S and the positioning of Eurex and
the repo programme. The debate in Brussels about bringing pension Clearstream, our clients will benefit from increased balance sheet
funds into central clearing for interest rate swaps is still ongoing; netting opportunities. Within T2S, customers will be able to centralise the
so far they have been exempted. In case there is a steep increase in settlement of their entire Euro repo activity against central bank money.
interest rates they are faced with a significant cash requirement to For centrally cleared repos we will connect the liquidity-driven general
fund variation margin. The question then would be where to source collateral pooling market with the securities driven special/general
this cash in a relatively short period of time? And here, the solution collateral market and additional balance sheet netting can be achieved.
is the cleared repo market because in the past it has proven that it is
very robust in stress and crisis situations; it even has seen liquidity Do you have any plans to further expand the partnership
increases in contrast to non-cleared repo, where you could see in programme into other segments?
certain scenarios an immediate drying up of liquidity.
Graulich: Repo has been rolled out now. We have announced to include
Since the expansion announcement, what kind of the OTC FX business. Further products may be added this year, but it is
interest have you seen? And are you happy with the too early to be more concrete.
interest you have seen? What is your expectation until
the programme effectively starts in February 2019? Right now, we want to make the repo expansion a success and you
can’t do it all at once. What we currently have on the radar is already
Graulich: We got a lot of support from the market, with a total of 25 significant and OTC IRD is still at an early stage and requires a lot of
participants and key players in the market who have signed up in the attention, dedication, and focus. SLT
early registration phase. We had a sign-up phase for early registration
where you benefit from being an early mover. The 25 participants are
from across Europe, with seven or eight countries covered. We are
very happy with the number that have signed up in the first month and
see this as a very good start to the programme.
We are convinced that we will reach a similar level to the OTC

partnership programme, where we currently have 34 participants. We
see a significant overlap in both programmes. It was a successful
start and the next step will be to generate volume within the early
volume phase, which started at the beginning of December and which
will hopefully kick-start a volume increase similar to the developments
Matthias Graulich
in the OTC IRD programme.
Member of the executive
board, Eurex Clearing
What are the benefits of market participants joining
the programme?
Graulich: By participating in the programme, you have the opportunity

to get a revenue share and be part of Eurex. If you registered early,
you can boost your performance throughout the next year by an
additional multiplier 0.25. The performance measurement concept
consists of two factors, one is a volume dimension, so the more
volume you put through Eurex on the trading and clearing layer the
better your performance is. You can enhance the volume performance
through a multiplier, meaning you can triple your volume performance
by fulfilling certain conditions like early registration, early volumes or
supporting our dealer-to-client access models for repo. Frank Gast
Head of sales Continental
Europe, fixed income
We do the monthly performance-based revenue sharing for a period of derivatives, funding and
four years. After year four, we look back at the average performance financing, Eurex Repo
Securities Lending Times 218 www.securitieslendingtimes.com

Technology takeover
Jerry Friedhoff, managing director of securities finance and collateral
management of Broadridge, talks regulatory changes and emerging technologies
What regulatory changes are currently impacting need to exchange bilateral initial margin. The amount of additional
the industry? collateral required could, therefore, vary widely if this is successful.
The Securities Financing Transactions Regulation (SFTR) is currently In the repo markets, firms are evaluating their front-office trading
high up on priority lists, along with Central Securities Depositories tools to manage the complexity of increasing electronic trading
Regulation (CSDR) and Brexit in Europe. We also expect to see and fragmented liquidity. This is linked to a broader role for repo in
additional securities finance trade reporting mandates in other regions managing balance sheet, liquidity and capital, along with centralising
once SFTR is behind us. In the US, Regulation Rule SHO204 is a real the sources and uses of collateral across financing and margin-
concern that many brokers are seeking to address. based activities.
A recent International Securities Lending Association (ISLA) market Are you seeing new or different types of market
report suggests that high-quality liquid assets (HQLA) driven trades participants, services and routes to market emerging
remain prevalent due to liquidity coverage ratio needs and the slowing in the industry?
of quantitative easing (QE). As more firms fall under the uncleared
margin rules in 2020, the role of securities finance in sourcing On the buy side, more beneficial owners are recognising the benefits
larger quantities of high-quality collateral should also become more of securities finance. We are seeing a trend for some of the more
prominent. The International Swaps and Derivatives Association active participants to consider lending directly and in some cases,
(ISDA) is currently lobbying to reduce the number of firms that will setting up in-house stock loan and repo desks.
Technology Overview
This is largely driven by a growing awareness of the alpha generation In terms of the buy side, we recently implemented our front to back
opportunities provided by financing their assets. A desire for greater office securities lending solution at both a large European investment
control over collateral and the value of central collateral desks is also manager and a sovereign wealth fund that both set up internal lending
a key factor for the buy side, as firms look at how to adapt to central desks. We are seeing interest in this model from others, although
clearing of derivatives and uncleared margin reform. it is not for everyone. Many beneficial owners continue to place a
high value on the services provided by their lending agents and the
We are also seeing new sources of supply coming to market through indemnification they receive.
clients engaging in fully paid lending in North America to unlock retail
inventory in brokerage accounts. Likewise, in Europe, the provision of In the US, a large broker-dealer went live with our RegSHO 204 solution
lending services to a wider market of investors is a trend to watch. last month. This resulted in reduced regulatory risk and significantly
More firms are seeking to add new revenue streams to their securities less manual effort required to maintain RegSHO 204 compliance for
lending activities by reaching further into their relationships with the client.
retail/institutional clients and the assets they control.
In the repo space, we are seeing an uptake in our repo order quote
How will new technologies affect the industry? market aggregation and execution solution. One of Europe’s top
15 largest banks recently went live with the product, and more are
The impact of disruptive technologies such as blockchain and artificial in the pipeline as firms seek to maximise trading opportunities
intelligence (AI) is a topic for discussion at every industry conference and make sense of increasingly complex data with the latest
right now. There is a growing understanding of these technologies trading tools.
in the market and various pilots, use cases and production ready
systems are also emerging. However, we have not yet reached a What’s next for Broadridge in terms of emerging
tipping point in terms of widespread adoption. Electronic peer to peer/ technologies such as blockchain and AI?
all to all markets and, in some cases based on blockchain platforms,
are another area where innovation in market structure and technology Broadridge has been actively investing in emerging technologies.
is taking place. We recently conducted a blockchain pilot with Natixis and
Societe Generale to transact bilateral repo and found the
There is a more general trend for firms to look at ways to reduce their solution resulted in several operational efficiencies and a more
IT costs. They’re evaluating existing technology stacks and replacing streamlined process. In the securities finance industry, there is
ageing legacy solutions with a more modern front to back single system still widespread debate over the benefits of blockchain versus
approach. This allows them to meet the new demands of the market the current market infrastructure and there are pros and cons to
environment while lowering total cost of ownership. This includes either side of the argument. While there are a number of hurdles
an increasing preference for vendor-hosted solutions as cloud and that must be overcome, we expect to see more blockchain-based
software as a service (SaaS) models become more widely accepted. platforms appear over time.
How are you helping clients adapt to regulatory trends? With regards to AI, there are myriad use cases for these technologies
such as trading automation and decision support, collateral
The acquisition of 4sight and Anetics in 2016 has greatly enhanced optimisation and streamlining back-office processes. We believe
Broadridge’s global front to back securities lending, repo and collateral AI has the potential to greatly benefit the industry and our clients
solutions and increased our ability to help clients adapt to the in the long term. We are therefore actively investing in AI, including
changing environment. machine learning (ML) and robotic process automation (RPA) to
assess where we can combine ML and RPA to drive benefits for
Firstly, in Europe, we are working closely with customers to help our clients.
them prepare for SFTR. Broadridge has in-depth expertise in both
securities finance and trade reporting regimes such as European All of this means it is an exciting time for the industry. While we may
Market Infrastructure Regulation (EMIR), the first and second not see a radical change in the next two years, in 10 years’ time the
Markets in Financial Instruments Directive (MiFID I/II), and the US market and technology landscape could look surprisingly different
Commodity Futures Trading Commission (CFTC). This will enable than what it looks like today.
clients to adapt to SFTR smoothly while minimising operational
disruption and reducing the resource impact of complying with In 2008, Google started its self-driving car project and the iPhone
multiple concurrent reporting mandates. had recently launched. By 2018, Google’s self-driving cars have
clocked over two million miles and are being tested on the streets
From a CSDR perspective, helping clients to minimise the impact of of major cities across the US and there are around two and a half
settlement fails and mandatory buy-ins through the use of technology billion smartphone users globally. Perhaps we will see similar leaps
is also a key priority for Broadridge. forward in the securities finance industry. SLT
Technology Insight
Machine learning in equity markets

Stephanie Lo and Jian Wu of State Street discuss the intersection of machine
learning applications and equity markets in portfolio management, exploring
the potential market segmentation that will arise
Artificial intelligence (AI) and machine learning (ML) are poised to • Lack of historical data: An estimated 90 percent of data in
change the way financial institutions operate. Yet the transformation existence today—much of it alternative data—was created in the
will not impact all market players equally. In this piece, we examine past two years; without crisis-relevant data, ML might not behave in
the intersection of ML applications and equity markets in portfolio a suitable way if another Great Recession were to happen. Indeed,
management and explore the potential market segmentation that will many researchers cannot wait for full validation, as it could require
arise due to different adoption strategies of ML driven by each players’ decades of data to develop confidence that an algorithm is robust
mandates and goals. in a statistical sense. Several factors, such as regime shifts, higher-
order interactions, and changing sources of data mean that there
The potential use cases for ML in portfolio management are broad, can be a leap of faith for researchers leveraging these methods.
and in our view, likely segmented across different types of portfolio • Algorithm aversion: People tend to prefer human forecasters
managers, with some representative considerations shown in over statistical algorithms, and more quickly lose confidence in
figure one. algorithms than human forecasters after seeing them make the
same mistake. Interestingly, giving individuals some control of
Factors driving resistance to machine learning in the algorithm’s forecasts—even if extremely restricted—helps
institutional investors people overcome this “algorithm aversion”.
• Mismatch of talent and needs: As quantitative methods have
For most institutional investors, ML may be used in the research evolved quickly, many institutional investors may not have the
stages of portfolio construction, but are unlikely to enter the decision- necessary talent in-house to build or maintain ML models.
making function. This is driven by several factors:
• Transparency: Industry surveys have found that respondents view Case study
communication/transparency as one of the top considerations
for hedge fund allocation decisions. State Street Global Advisors has introduced three exchange-traded
• Overfitting: With fast-changing financial markets, overfitting is funds (ETFs) built with proprietary index methodologies developed
often a concern, particularly for investors that do not develop the by Kensho Technologies. The ETFs track companies that provide AI-
underlying models themselves. relevant products and services; natural language processing (NLP)
Figure one: Potential use case of machine learning equity inputs/factors, by group
Group Primary driver Potential use case
Quant/systematic hedge funds Reach for alpha Develop ML-driven factors that drive
systematic long-short strategies
Fundamental/discretionary hedge funds Process new and alternative large Use ML algorithms to process novel data
datasets to enhance company-relevant metrics
and contribute to earnings predictions
Institutional investor (pension, endowment) Transparency and simplicity Use ML to guide backtesting and portfolio
construction, e.g. use of shrinkage methods
such as LASSO to guide the choice of input
variables in regression models
Machine Learning
is used to parse through regulatory filings to understand company strategies, which is pretty significant given that market is mature
exposure to AI technologies. and most gains are viewed to have been arbitraged away.
• Corporate debt: Unlike in equity trading, where electronic trading
Matthew Bartolini, head of SPDR Americas research at State Street is nearly universal, most corporate debt transactions are still
Global Advisors, said: “The indices are constructed themselves using carried out via phone or messaging. There have been some
the very advanced technologies that the ETFs are trying to invest in.” steps toward trying algorithmic trading in corporate debt, with
UBS testing a computer programme to price and trade bonds as
He added: “The ETFs are built around the fact that algorithms can of early last year. ING has also taken a step toward adopting ML,
dissect information in a very systematic way, processing data in 45 with its adoption of AI-driven bond trading tool Katana. Going
seconds that would take a human a full day to understand. In this forward, we anticipate that ML will be increasingly adopted in
case, AI is doing exactly what an investor would expect an intelligent the corporate bond space as the entire space moves toward
human would do—while being highly efficient.” increased implementation of electronic trading.
Opportunities in ML for quant-driven hedge funds As with all new technologies, the adoption curve for ML may be
steep. As storage becomes cheaper, calculations become faster
Equities-focused hedge fund usage of ML has been substantial. One (for example, via graphics processing units, field programmable
estimate is that pure ML players have about $10 billion in assets under gate arrays, quantum computing, and so on), and data sources
management; this number would not include “commingled” strategies, become increasingly diverse—and as ML becomes part of a standard
in which ML methods are used to inform trades but there is still some academic curriculum—we anticipate that ML will become more
discretion involved. Some drivers include: commonplace in financial analysis. We are already starting to see
• Increased hedge fund investor comfort with algorithms: Multiple more widespread adoption of ML in equity trading, and anticipate
quant funds use AI-based models. For some of these funds, assets other financial markets—such as corporate bonds and treasuries—to
have grown rapidly as investors have flocked to algorithmic traders. follow. Until that future state, early adopters may benefit from the lack
• High barriers to entry: Many asset managers are not willing to enter of widespread adoption to find alpha in differentiated strategies. SLT
the ML space, posing an opportunity for those willing to make the
investment. Multiple industry surveys have found that the toughest Click here for more research into machine learning in equity markets.
obstacles that financial executives see in introducing ML technology
are the cost of systems and adoption, shortage of relevant specialised
skills, and senior management buy-in. State Street’s head of trading
and algorithmic strategies, Nick Delikaris said: “There are still a lot of
barriers to the adoption of ML and other newer quantitative methods,
including lack of transparency, expensive hardware and data needs,
and the shortage of talent. Those willing to make the investment
may benefit from opportunities others are not seeing from more
conventional techniques.”
Outlook for ML in beyond equities Stephanie Lo

State Street Associates
and Securities
In this piece, we have focused on ML in equity markets. While equity Finance Quantitative
managers have taken some time to embrace ML technologies, it Driven Research
appears that interest is nearing the steep part of the curve, with usage
expanding fairly rapidly. Looking at other parts of finance, we see
multiple opportunities for ML:
• Research: Rajeev Bhargava, head of investor behaviour research
at State Street Associates, noted the growth in alternative data
and ML in the financial research space. Bhargava explained:
“There has been a massive increase in interest in leveraging alt
data in financial research. Driven by this interest and increased
computing power, alternative data will become increasingly
accessible to the masses.”
• Treasuries: Despite the fairly mature nature of the market, there Jian Wu
State Street Global Markets
may be room for investors to leverage ML to shape their trading
and Securities Finance
strategies. For example, some studies have found that off-the-shelf Trading and Algorithmic
ML programmes were a value-add in predictive 10-year treasuries Strategies
The material presented is for informational purposes only. The views expressed in this material are the views of the Authors, Stephanie Lo and Jian Wu, and are subject to change based on market
and other conditions and factors, moreover, they do not necessarily represent the official views of State Street Global MarketsSM and/or State Street Corporation and its affiliates.
Back to
the future
and beyond
Michael Huertas of Dentons discusses the
uncertainty and challenges around Brexit
Regulation Update
Looking back in time, 1986 was not only a remarkable a year for document new post-Brexit transactions on the first day of
an evolving European securities lending market but also for Great trading and notably from where.
Britain as the UK leader on European integration. Skip forward
30 years to 2016, and the Brexit referendum started what has for While there is talk of the ESAs and/or the ECB potentially getting
some time now been the UK’s rather difficult journey of leaving the powers to issue no-action relief letters or similar measures, the
European Union. Almost 1,000 days since that referendum and with mood is—as with SFTR-compliance—that firms need to prepare
less than 100 days until exit date, time is rather tight. and work towards compliance by a specific date that is set by the
supervisor and do so in a manner that meets the SPoRs.
What’s ahead?
Any equivalence measures granted to permit access from the UK’s
As the EU faces a tough year of Brexit challenges, it also faces a new status as a third-country are very much conditional and can
shift in the EU political executive and supervisory policymakers. A be withdrawn.
new first-time Romanian presidency of the Consilium, representing
the helm of EU executive governments, took up its role on 1 January Work still to be done
2019 and will contribute to the debate on deciding on Brexit. A
new set of members of the European Parliament will be voted in An area where further action is required is still around
following the May EU Parliamentary elections, and a new European contractual continuity for existing contracts as well as the
Commission will guide financial services regulatory policy as well documentation terms for future financial market transactions—
as a possible Capital Markets Union 2.0 reboot and finalisation of and thus securities financing transactions. The term ‘contractual
Banking Union, Pillar III. continuity’ in itself encompasses many concepts as well as
concerns under one hat. Chief among them is the risk that,
That sense of change is also being at the level of EU financial post-Brexit contracts, and obligations thereunder, will not be
services supervisory authorities, who started the year by able to be performed or disputes enforced without amendment
strengthening calls for greater supervisory convergence in the to existing terms or documentation architecture. Some of that
EU27. As the UK begins to diverge, greater powers for the ECB may be alleviated by moving contracts to the new and expanded
and the European Supervisory Authorities (ESAs) will focus on the EU27 legal entities from contractual counterparties historically
conduct of business supervision and on-site inspection as well as in the UK or other third-countries, but other issues also present
greater and direct oversight in respect of financial services firms as themselves in need of a solution.
well as market infrastructure providers.
On the assumption that existing contracts will not benefit from
Moreover, many non-bank financial services providers grandfathering, there is no panacea to contractual continuity and
undertaking ‘bank-like activity’ may find they are under greater the resulting repapering that would be needed to move potentially
scrutiny as shadow banking and increased reporting is back on multiple millions of terms and conditions. Concerns remain
the agenda. of how to deal with optionality that exists in various master
agreements across asset classes and transaction types. Add
Reporting is likely to be a familiar topic for most firms affected by to that the bespoke nature of bilateral contracts, cross-default
the Securities Financing Transactions Regulation (SFTR), which provisions and the paper headache becomes clearly in need of
itself has been partly delayed by Brexit. This is partly due to technical operational heavy-lifting. Solutions may start with a document/
discussions on revisions to European Market Infrastructure risk exposure analysis, involve novation or other permitted means
Regulation (EMIR). The European Commission has now set out of transfers but will require perhaps greater and more frequent
the final seven commission delegated regulations, which include inter-institutional cooperation amongst market participants and
clarity around regulatory reporting start dates and clearer timelines dialogue with supervisors.
so firms can focus on other forward-proofing of arrangements as
phased reporting obligations come in place. Securities lending documentation is certainly not spared. While
the International Swaps and Derivatives Association (ISDA)
For many, that has also meant picking up the pace on Brexit- has moved ahead of other industry associations to publish
proofing legal entity structures as well as documentation. updated guides on model clauses in arbitration and new master
This trend is likely to continue, not only due to supervisory agreements that are subject to governing law of an EU Member
pressure from the European Central Bank (ECB) and the State and/or enforcement in the EU27 Member States, some
ESAs, who each published further updates to prescriptive association are yet to respond. The absence from standardisation
Supervisory Principles on Relocations (SPoRs), but also is worrying as firms may come up with their own solutions, some
because the securities lending market, not having fully found of which may not be interoperable across the market or suitable
a consensus on whether the bulk of pre-crisis documented for existing arrangements. Existing documentation also needs
financial transactions need to be repapered and how to to be revised to see if it suits firms’ new post-Brexit operating
Regulation Update
models, the SPoRs or other supervisory expectations and Reporting Standards are on the agenda for most EU financial
priorities of the relevant EU27 authorities. EU-level and national services. Other more recent reforms such as the second Markets
supervisors can easily police compliance by reference to existing in Financial Instruments Directive/Markets in Financial Instruments
as well as new post-Brexit contractual documentation on top of Regulation, the Benchmark Regulation, as well as the Short Selling
policies and procedures. Regulation, are all in supervisors sights.
All of this has a potential impact on liquidity as well as pricing What is more, 2019 might mark 30 years since the fall of
during what many predict, including the International Securities Communism in Eastern Europe and 20 years since the introduction
Lending Association, to be markets of ongoing heightened of the Euro, but Brexit’s culmination has been a further catalyst. It
volatility. This may not cause a repeat of the 1968 Paper Crisis, has united the EU27 while dividing Britain. What this could mean
but settlement failure or digital deadlock is a concern and there is that within the EU27 the amount of goodwill for Whitehall’s
is no indication how market supervisors might or even would warring factions is growing ever less regardless of who might be
coordinate (temporary) market suspensions or trading restriction. in Number 10.
The ECB has already announced that 2019 will be a year of
increased on-site inspections, market-wide liquidity stress tests, So too is the likelihood of the EU providing the UK with further
a deep dive focus on liquidity models and generally testing of assurances or interpretations of the current withdrawal agreement,
the resilience of market-based financing channels as well as the which the EU has already approved, let alone an indication on the
quality of collateral arrangements. future state of financial services deal, which can only be discussed if
Westminster approves the withdrawal agreement. If you thought the
ISDA has exercised first-mover advantage in ensuring that the negotiations till now have been tough, any discussion on the future
new French and Irish Master Agreements work without completely financial services deal could be a whole lot tougher and certainly
overhauling a sound and trusted architecture. The agreements different—why would the EU need to do a deal if larger businesses
also work on the premise of collateral being located in the EU27 (including those from outside of the UK) are already moving of have
and interoperable with legally robust and enforceable security plans to move?
interests. The association has communicated standardised
concepts for designated replacement entities and other fallbacks. Furthermore, if the UK does somehow decide to stop the clock on
In terms of immediate pressures, beyond what may sound like the 29 March’s exit date and/or go a step further and withdraw the
a broken record to some, many firms need to do more and do Article 50 Notice and, thus, somehow stay, then all the spent efforts
so quickly. Repapering exercises take time and even longer and extended assistance from the EU27 to the UK may still pose
without appropriate legal and operational support. If industry a problem. This could be met with a renegotiation of some legacy
associations are silent or not leading on certain issues then terms that Thatcher secured in the early 1980s, including the cash-
repapering also needs extensive coordination with peers beyond back rebate.
wider contractual counterparties.
Irrespective of whether Brexit does eventually materialise into
The only constant certainty is uncertainty what some hope is a Big Bang two for a global island nation. In
the meantime, all of this presents the potential for even greater
SFTR compliance, Capital Requirements Directive V/Capital uncertainty, especially as the EU could have a very different
Requirements Regulation and a range of International Financial parliament and commission in place during this year. SLT
All of this presents the potential for even

greater uncertainty, especially as the EU
could have a very different parliament
and commission in place during this year
Michael Huertas
Partner
Dentons
Securities Finance Forum
BAFTA 195 Piccadilly, London | 20 March 2019
The Securities Finance Forum, now in its 22nd year, returns to London on 20 March 2019.
Join us for a thought-provoking discussion and engaging debate on the key industry
drivers and trends shaping the securities finance industry. Gain valuable insight from
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Event Highlights
‒ Opening remarks with Lance Uggla, CEO IHS Markit
‒ Current market dynamics and outlook for 2019
‒ A Regulators View
‒ Debate: The Securities finance industry has continuously
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Data Analysis
EU equities underperform in Q4
Sam Pierson of IHS Markit explains that the revenue picture for EU assets is less
upbeat than expected, however, there have been some pockets of opportunity
With EU equity returns suffering in Q4 last year it is surprising to see demand by short sellers. For example, Sweden saw a $20 million
no rebound in lending revenue. The $377 million in revenue is the revenue uptick in Q4, with three stocks contributing 58 percent
lowest for EU equities in Q4 since 2013. of the $63.4 million in revenue. Those three stocks were Intrum,
Mycronic and H&M.
While the market declines partly explain the lower balances, the
percentage of total market cap on loan relating to short sales has The special rates for the first two drove the increase in the country’s
declined by four basis points in Q4, meaning that short balances fell Q4 weighted average borrow fee to 1.5 percent, up from 0.9 percent
more in absolute terms than the overall market. Despite these positive in Q3. The increase in fees pushed up revenues, making Sweden the
returns for short sellers, demand has been limited, following on a second most revenue generating EU equity market, leapfrogging over
trend from earlier this year. the UK and Germany.
While overall revenues have dipped, there have been some France was the most revenue generating EU country with $90.6 million
opportunities to achieve returns by lending out stocks in in Q4 revenues, an increase of 11 percent compared with Q4 2017. The

Data Analysis
revenue uptick was aided by special lending fees for Casino Guichard Casino Guichard Perrachon Sa equity short demand & share price
Perrrachon (and parent company Rallye), along with Vallourec and
Bourbon Corporation.
UK equities turned in a lacklustre Q4, with $47 million in lending

revenues, the least since Q1 2017. Declining fees drove down
returns, with balances slightly higher in Q4 versus Q3. The
most revenue generating UK equity, IQE, saw surging lending
fees in Q4, which appeared to dampen demand from short
sellers, despite the 24.9 percent decline in share price during
the quarter.
While equity shorts haven’t maintained exposure to EU issuers,

credit shorts actively increased borrowing of EUR denominated
corporate bonds. The total EUR denominated corporate issues on
loan at the end of 2018, €41.7 billion reflects an increase of 3.6
percent in Q4. The IEAC exchange-traded fund which tracks an
EUR denominated corporate debt borrowing
index of EUR denominated corporate debt declined in value by 0.7
percent in H2. Taken together, the implication is increasing short
positioning, which was sufficient to more than offset the decline
in market value.
The revenue picture for EU assets is less upbeat than one might
hope as an offset to market declines, however, there have been some
pockets of opportunity which lenders have seized on. The 9 percent
decline in balances in 2018 is less than the 19 percent decline in EU
equity share prices, suggesting that while shorts didn’t add enough to
positions to offset market declines, they did increase some positions.
Whether equity short sellers will increase bets on a further market
decline, and potentially allocate short exposure from emerging
markets (which reached a post-crisis peak in June 2018) to the EU,
remains to be seen. SLT
Iqe Plc equity short demand & share price
Sam Pierson
Director of securities finance
IHS Markit
Industry Appoinments
Comings and goings at Digital Asset, Caceis, OCC and more

Digital Asset CEO Blythe Masters has Gangadhar said: “Blythe Masters has built while Scot Warren, the current executive
requested to step down for personal reasons. an impressive foundation with incredible vice president and chief administrative
progress to date, helping the company officer, has been promoted to COO.
AG Gangadhar, who joined the company’s emerge as an industry leader. I’m honoured
board of directors in April, has been appointed to lead Digital Asset and work alongside As CEO, Davidson will report to the OCC
the board chairman and will serve as acting the talented management team during this board of directors and will have oversight
CEO until a permanent CEO is named. transition until a new CEO is appointed, at responsibilities for OCC’s information
which point I will focus on my responsibilities technology. He will also have oversight
Masters, who has served in the role since 2015, to lead the board.” responsibilities for financial risk management,
will remain involved in the company as a board corporate risk management, as well as legal
member, strategic adviser and shareholder. Mike Bodson, president and CEO of DTCC, and compliance functions.
added: “On behalf of the Digital Asset
Masters commented: “Digital Asset has board, I would like to thank Masters for her Davidson joined OCC last year as president
evolved from an ambitious idea to a truly global leadership and vision, which has propelled and COO where he was responsible for OCC’s
software engineering firm. We are fortunate the company from a promising startup to technology and operations functions. Prior
to have a deep bench of accomplished a globally recognised leader in distributed to OCC, he served in several key leadership
executives on the management team and ledger technology.” roles at Citigroup.
board, including Gangadhar, who have the
requisite experience to take the company to John Davidson, current president and He also held senior leadership roles at
the next level.” COO of OCC, has been promoted to CEO, Morgan Stanley and CME Clearing.

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Industry Appoinments
As COO, Warren will report to Davidson. He and Scot Warren have played in helping us financing services. Hainsby joins Xconnect
will have oversight responsibilities for OCC’s achieve these results, and the importance of with experience in sales, trading and
operations, project management, business leveraging their skills and experience as we operational experience with securities finance,
process optimisation functions, finance, undertake our ambitious new ‘Renaissance’ prime services and delta one products.
business development, and human resources. initiative to replace our core clearing,
settlement and risk management systems, Citi has appointed Nikola Todorovic as
Warren joined OCC in 2015 as executive the board of directors has unanimously director of Securities Services Sales and
vice president of business and accepted my recommendation to promote client coverage.
product development. Davidson to CEO and Scot Warren to executive
vice president and COO.” Todorovic, who started the role in December,
In this role, he was responsible for OCC’s is based in Switzerland.
business and new products development as Davidson said: “I am proud of the progress
well as strategic and corporate planning. and momentum we have created at OCC, Previously, he served as head of sales and
and I look forward to serving our clearing relationship management securities finance
Before joining OCC, he held senior roles at members, exchanges, market participants and collateral management at SIX.
CME Group and Goldman Sachs. and the investing public as we continue our
transformation to a best-in-class provider.” Todorovic also served as senior sales
Meanwhile, Craig Donohue, currently manager at SIX where he was involved
executive chairman and CEO, will remain at Warren added: “I look forward to continuing to in clearing, cash equities clearing, global
OCC as executive chairman. work with Donohue and Davidson to strengthen custody, securities lending, CCP securities
OCC and ensure its secure foundation for the lending, securities finance, collateral
Donohue, who joined OCC in 2014 as future. Replacing our core clearing and risk management, tri-party repo, tri-party
executive chairman after serving as CEO management systems is fundamental to services, carbon trading, electronic trading/
of CME Group from 2004 to 2012, will OCC’s vital role as a systemically important execution/connectivity.
continue to facilitate board leadership and financial market utility, and I am eager to lead
management oversight on behalf of the this initiative with Davidson.” He has also worked at NYSE Euronext, Aramid
board of directors. Capital Partners and ABN Amro Mellon.
In addition, the firm has appointed Vishal
As well as this, he will focus on strategic Thakkar and Timothy Dwyer as senior leaders. Securities finance trader Aurélien Manson
issues and OCC’s industry leadership has left Caceis.
role, including OCC’s engagement with Thakkar, formerly first vice president
policymakers in Washington, DC. of financial risk management and risk Manson’s role included developing a
advisory services, has been promoted to stock loan rate pricer using machine
Additionally, he will have oversight senior vice president and head of enterprise learning and linked to a tailor-made
responsibilities for OCC’s government risk management. auto-response robot.
relations, communications, Options Industry
Council and internal audit functions. In his previous role, Thakkar oversaw a As part of his role, he was responsible for
transformation roadmap that enhanced pricing revenues from stock lending activities
According to the OCC, these changes will OCC’s process effectiveness while meeting and cash reinvestment (bond and equity
become effective upon receipt of regulatory stringent regulatory requirements. portfolios), handling liquidity requirement,
approval of by-law and rule changes capital requirement and leverage ratio for
necessary to effectuate this structure. Dwyer was appointed senior vice the desk.
presidents of strategic systems, a new
Donohue commented: “In 2016, at the position at OCC. Yip Wong has been appointed as director of
request of the board of directors, I took on TR Expert Services.
the combined role of executive chairman and Xconnect Trading has appointed Ray Hainsby
CEO to drive toward accomplishing our goals to a securities finance flow role. TR Expert Services helps investment firms with
and to assemble an accomplished leadership their transaction and trade reporting obligations.
team capable of ensuring that OCC remains As part of his new role, Hainsby will work on Most recently, Wong worked for KPMG and prior
the preeminent global derivatives clearing enhancing liquidity in hard-to-borrow, illiquid or to this, he served as vice president of Morgan
house well into the future.” low-grade securities across Asia and Europe. Stanley for almost five years.
“Given our strong track record of progress Previously, Hainsby served as director at Wong has also served as senior consultant
since then, the critical role that John Davidson Jessannell, which specialised in secured at Detica. SLT

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The primary source of global securities finance news and analysis ISSUE 218 08 January 2019

Visit www.securitieslendingtimes.com for the latest daily news updates

IS YOUR SFTR SOLUTION

FINANCING | LIQUIDITY | COLLATERAL

EC adopts conditional equivalence for no-deal Brexit

Publisher: Justin Lawson

Deputy Editor: Barney Dixon

Reporter: Jenna Lomax

Junior Reporter: Maddie Saghir

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Furthermore, central clearing will continue its onward march and

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