Global Investor spoke with Christophe Roupie, Head of Europe and Asia for MarketAxess Europe and Trax, on the securities finance industry, SFTR and future growth areas for the business.
What does the securities finance market do well and where does it need to improve?
Lending, borrowing and pledging securities, cash or collateral has helped financial markets become more efficient, more liquid and operationally more secure. It does provide beneficial owners with additional revenues and liquidity providers with access to securities actively managed by investors or warehoused by custodians. The securities finance ecosystem has managed to transition successfully to better support more global, more automated and of course more regulated markets. Additional transparency regimes such as SFTR will continue to improve best practice and support market growth.
This leads me into some of the main themes for financial markets as a whole, and the securities financing industry in particular. Namely automation of the lifecycle, liquidity and data, all within a well-defined and diversified risk framework that leads to a better management of fails and therefore market efficiency. Technology will continue to transform and improve the pre- and post-trade lifecycle by adding new protocols, from matching trades to optimising the use of collateral and safe guarding of assets. Accessing and analysing securities financing data will also support the decision-making process which feeds trading algorithms globally. Alternative liquidity providers have been investing heavily in building new systems as the asset management industry is looking to also benefit from automation and technology. The shift in paradigm has long started, and the challenge for the securities finance industry, beyond fees and performance, is to keep pace with innovation and make markets even more efficient and more liquid.
In what ways (if any) do you expect SFTR reporting to impact trading and settlement processes and flows?
SFTR should help to facilitate greater transparency for the securities finance industry, which can be seen as a major positive for both market participants and regulators.
A potential fallout, though, of SFTR could be that a small number of beneficial owners could pull out of the securities lending business - due to the regulatory risk of non-compliance and the need to share vast amounts of data.
The industry may also see certain client types re-evaluate their securities financing processes – for example, asset managers may look to bring such activities back in-house given the multiple service providers they use which in turn exposes them to multiple vendors.
There are a handful of SFTR reporting systems available to the market – what’s unique about the Trax-EquiLend platform?
Unlike most, the solution with EquiLend is a complete front-to-back offering, supporting clients across trading, matching, reporting and monitoring.
Two of the main issues that have been identified by market participants ahead of the go-live date are the generation, sharing and management of unique transaction identifiers (UTIs) throughout the trade lifecycle, and the importance of early user acceptance testing (UAT).
To address the first issue, we created the Trax UTI portal. It serves as a centralised storage for UTIs, regardless of their source. UTIs can be generated at any point throughout our solution, including; at the point-of-trade via EquiLend’s Next Generation Trading (NGT); during the matching process via either Trax Repo or EquiLend’s Unified Comparison; via the UTI portal itself; and finally, via Trax Insight. The Trax UTI Portal most importantly provides our clients with a means to share UTI’s with their counterparties without the need to be a part of the EquiLend / Trax ecosystem or have any legal agreements in place with us.
Regarding UAT, our test environment is now live (making it possibly the first to be so) and available for firms to begin testing with. This includes, eligibility, enrichment and validation of transaction data; preparation of reports; testing report outputs; and monitoring of report statuses. We are participating in the well-publicised industry testing made up of a consortium of major buy- and sell-side firms.
What stage is the system at considering we now have an April 2020 reporting deadline?
Our solution with EquiLend began development in 2017 and our test environment is now live for firms to begin UAT. The test environment allows for eligibility, enrichment and validation of transaction data; preparation of reports; testing report outputs; and monitoring of report statuses.
How can firms use SFTR reporting to their advantage?
SFTR reporting will allow some standardisation across the industry. It also means a lot more data will be available to participants. This is seen as a positive throughout, however the challenges of intellectual property being kept confidential may become a point of contention.
Although not mandated by the regulator, SFTR forces the issue of pre-matching, which can be a huge positive for the industry and should lead to better settlement rates.
SFTR reporting has also started the interoperability requirements, highlighting how transactions can be seamless between two firms.
What are the key strategic objectives for 2020 in your role as head of EMEA and APAC for both MarketAxess and Trax?
The MarketAxess business has never been stronger – particularly in Europe. In the first quarter of 2019 our European client volume increased 23% year-on-year to $141bn, reflecting significant increases in volume for both Eurobonds and Emerging Markets in particular.
We are seeing an evolution in credit trading with automation becoming ever more prominent, as well as more flexible ways to trade. One of our key focuses will be around “smarter trading” which will incorporate our automated trading protocols, all-to-all trading, and how we can help to improve liquidity provision and data products.
Beyond trading, we will continue to push our post-trade business to provide the industry with market leading regulatory reporting solutions. This has been typified by our SFTR solution with EquiLend, which can help solve several issues market participants are dealing with.
In which areas (products and regions) do you see growth?
Asia and China will continue to be a big focus for us in the future as the growth potential in the region is massive.
We are seeing major gains in our Emerging Markets business and it will be one of our most important areas growth over the next few years in both local and hard currency markets.
We expect to continue the growth trajectory we have seen in our other core products, namely Eurobonds, US High-Yield and US High-Grade.
We are also investing in new products, such as Municipal Bonds and ETFs.
Finally, we fully expect the drive for automation to continue and the adaptation of our trading protocols which can help facilitate this.