The ten trends SunGard has identified as currently shaping securities finance are:
1. Industry dynamics are changing: hedge funds are sitting long, traditional long-only asset holders are creating hedge funds, and proprietary trading desks are being spun off. As a result, market participants are seeking ways to service these âmorphedâ entities more effectively.
2. The introduction of more stringent regulation through Dodd-Frank, Basel III, EMIR, Solvency II and others will result in demands for increased transparency, tighter controls over short selling, the need for higher capital allocation (and therefore justification) for each business line, and more visible contingency planning for times of increased stress.
3. In addition to the greater scrutiny from regulators, clients are demanding more visibility of risk versus reward, backed by hard numbers. As a result, firms have significantly increased their focus on demonstrating risk mitigation in local and global markets.
4. Securities finance is becoming a liquidity management tool. Banks and asset managers can leverage their available inventory in order to generate the cash or high quality assets needed to meet new, more strenuous OTC derivatives collateral demands.
5. Collateral management is taking center stage as a tool to help mitigate risk and manage liquidity. Firms are recognizing the additional revenue generation opportunities that this provides both for their own organizations and their clients.
6. In order to replace lost revenues and achieve growth, firms are seeking access to new markets such as China, Brazil, Russia and India. This brings an increased demand for synthetic products and the need to support the nuances of these new markets.
7. The increasing emphasis on transparency is leading large global players to demand cross-geography, cross-product and cross-organizational views of key data in order to better manage their risk and leverage assets.
8. The industry is becoming more cost sensitive, which is driving firms to focus on system consolidation, centralization and optimization in trade execution and operations.
9. As they look to assess the capital needs and true profitability of individual product lines, firms are trying to minimize capital requirements through activities such as cross netting and central clearing, while at the same time seeking to ensure best use of âcheaperâ internal assets. They are also seeking ways to accurately allocate and measure the true cost of each underlying business.
10. There is an increased appetite for service-on-demand, from both a technology and an operations perspective, in order to better manage costs and to allow market players to focus on what they do best.
Josh Galper, managing principal at Finadium, said: âRegulations such as Basel III, Dodd Frank and Solvency II have begun to create deep rooted change in securities lending and collateral management. Banks, asset managers, insurance companies and other firms need to be sure that they have the right collateral to post at the right time for a variety of trading purposes and are taking the right collateral for their securities loans. The answer is collateral optimization, and the only way to do that is through technology. Firms that evaluate their collateral needs now will be best positioned to manage regulatory change both now and in the future.â