Securities Finance
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Deja Vu in the Securities Finance Back Office
Yet another asset class calls for the STP treatment--and just in time
August 20, 2007
An explosion in global volume of securities on loan is prompting borrowers and lenders to automate not only the negotiation of their deals, but also post-trade processing that encompasses a range of middle- and back-
office functions. Some of this operational multitasking is now being accomplished electronically--through proprietary or third-party software or a combination of both. But, market players note, far too many remain paper-intensive and error-prone--and potentially disastrous in a high-volume shop.
"With volumes spiking and the number of transactions increasing for the same value of securities loaned, we are under a lot of pressure to reengineer our middle and back offices," says David DiNardo, director of product development for the securities lending department of Bank of New York Mellon Corp. in Boston.
The U.S. portion of the estimated $4.8 trillion securities lending market is bigger and, in an automation sense, more mature than that of Europe, with Loanet, a 25-year product of SunGard Securities Finance, used by many broker-dealers to maintain their books and records. Many institutional lenders also favor SunGard's Global One, WorldLend or in-house systems to create and digest the data that goes to and from Depository Trust Co. (DTC) and other market participants.
Best known as a securities lending negotiation and auction platform, the six-year-old, consortium-owned EquiLend has also picked up steam in the post-trade area of low-touch, message-based trade negotiation, contract comparison, mark-to-market valuation, collateral management, billing and loan recalls. "The majority of our users rely on our middle- and back-office services," says Brian Lamb, CEO of the New York-based firm, which has 42 clients executing over 14,000 trades a day. The "overwhelming majority" use the post-trade processing services, he adds.
There are errors in the life cycles of only a fraction of securities lending transactions--5 percent by some estimates. But that is enough to get Wall Street firms to assign the chore of correcting them to a dedicated reconciliation department--often designated middle office--or a corporate action department within the securities finance area. Settlement errors--the return of the securities from the borrower to the lender--are typically delegated to a generalist operations officer.
"Cleaning up any breaks in the process often requires fax or phone communications between trading desks and middle- and back-office executives, not to mention further discussions between borrower and lender that could take anywhere from a few hours to a few weeks to resolve," says Mark McKinnon, North American support manager for Edinburgh, U.K.'s 4Sight Financial Software.
Complex By Comparison
The processing of securities lending and borrowing transactions--once lenders and borrowers come to a financial agreement on the terms of their relationship--is far more complicated than settling a fixed-income or equities trade where securities and cash are exchanged on a defined date. That is because securities lending transactions are open-ended--the borrower can hold on to the securities as long as it wants to, with the lender's permission. The lender can also recall the securities at any time to trade them, exercise voting rights or lend the securities to another borrower. Also, borrowers will return securities when they no longer need them.
