2008 vs 2020: Where is the rubber hitting the road in securities lending?

In every crisis, there’s a point of contact: a collision between day-to-day activity and the swirling hurricane of forces beyond our control.

For securities lending, 2008 certainly saw this collision. It sparked a chain reaction which set the industry on the path it’s taken today.

COVID-19 has brought the same collision. But this time, the point of collision has been the infrastructure and processes the industry relies on.

Now, we can start to imagine what the industry should look like in COVID-19’s wake: it should work so well our clients take it for granted. This future has to be digital. It has to be geo- and custody-agnostic. But most importantly, it has to be user-friendly.

Crises have always generated good outcomes for securities lending

Before ‘08, securities lending was a black box. Brokers held the keys and clients had no real view on how their securities were lent or how their collateral was managed.

The Financial Crisis cracked that box open. Transparency and risk management became the focuses for the sector. We saw a massive shift towards non-cash collateral, which now makes up 67 per cent of all lending business globally, according to the International Securities Lending Association (ISLA).

As a result, collateral quality has increased immensely and we’ve addressed the risks involved in cash-collateral reinvestment. That’s been a boon for tri-party collateral agents as the industry looked to de-risk and optimise collateral management.

Now fast-forward to 2020. Another collision. But this time, the issues that the crisis flushed out were completely different. The light of day revealed systems and infrastructure that are painfully reliant on legacy systems and human involvement. It’s this point of friction that will spur on the next generation of successful firms in our industry.

So what will the sector look like in 2023? Well, it’s not going to be science fiction. In fact, we just need to look at another part of the Financial Services sector to get a glimpse: payments.

What can securities lending learn from the payments industry?

If you want to see what securities lending will look like in three years, you’ll find out in the payments sector. It’s been at the sharp end of the digital revolution for some time now. APIs are the norm and the sector’s BAU operations run without a human in sight.

That meant when COVID-19 struck, payments were unaffected. The global payments system continues to run without so much as a hiccup. The user experience is so seamless, we take for granted just how impressive the functionality is.

It’s even more impressive when you consider many payment start-ups hadn’t faced a crisis of this magnitude before. It didn’t matter. People assumed these digital platforms worked, and they did.

In securities lending, we aren’t there yet. But we will get there. It’s no surprise ISLA has launched a digital working group to tackle this very issue.

The sector has to be seamless, transparent, geo-agnostic and custody-agnostic. Our clients have to be able to see all their lending activity in real time. Securities lending has to run so smoothly that our clients take it for granted, even in a crisis.

So here we are. The rubber’s hitting the road. Speed, agility and safety are the qualities that will win this race. The question to ask now is; are you driving a Tesla? Or a Lada?

Boaz Yaari of SharegainBoaz Yaari is CEO and co-Founder of Sharegain.