Kabin George, director, securities finance product management at IHS Markit, speaks to Global Investor on the firm’s offering and outlook for the global securities finance industry.
IHS Markit’s benchmarking tool continues to add data & coverage depth. What have been the noteworthy enhancements over the past 18 months?
Kabin: IHS Markit continues to expand its data coverage on all instruments. Our lendable assets have crossed the $21 trillion mark, which is an increase of 19% (YOY) and on-loan values now exceed $2.5 trillion, an increase of 15% (YOY). With new regulatory responsibilities to ensure client assets are managed in the most efficient manner, we are seeing more demand for tools that can help market participants optimise their securities lending programmes. In addition to the large increase in inventory, we continue to attract new customers from all industry sectors. At IHS Markit, innovation is the key to our product offerings, and with this in mind, we have enhanced our securities finance benchmarking tool with coverage for individual markets and indices – enabling users to analyse lending performance with single stock and peer group comparisons going back 5 years. In addition, we updated the methodology for our recommended peer group function to deliver benchmarks for client funds with similar dividend requirements.
Which client segments/asset classes/regions are showing strong growth?
Kabin: This year, global securities lending revenue had the best Q2 since 2015, delivering a total of $3.1bn, an increase of 16% over Q2 2017. Adding that to the $2.6bn in Q1 revenues also reveals 2018 had the highest H1 securities lending revenue since the financial crisis. The demand for government bonds has remained near an all-time high, just above $1 trillion. Government bond revenues have also increased proportionally - the more than $900m earned in the first half of 2018 is the highest on record. Despite the rise of fixed income lending, equities still account for more than 75% of global lending revenue.
The growth in equity lending revenue has been driven by Asia in recent years, and Japanese equity owners have enjoyed a 32% revenue increase in Q2 2018 over Q2 2017. Consumer Discretionary is the most borrowed sector globally, bolstered by a sizable Tesla balance, but it would be the most borrowed sector even excluding that. Borrow demand for corporate bonds has increased 32% since the start of 2017 and has bumped up against the $200bn peak in demand at the outset of Q2 (and again in early June). Notably, the balances and revenues associated with specials, defined as fees above 75 bps, have also been trending up. The elevated borrow demand comes from a number of sources, but rising interest rates and related re-financing needs have created trading opportunities amidst the volatility in the first half of the year. While Asian emerging markets rightly attract most of the attention, it’s worth noting that South Africa and Latin America are also seeing increasing demand and revenues. If the current trends persist, emerging market equities will generate over $1bn in 2018 revenue.
What benefits does the product bring to beneficial owners?
Kabin: Our product enables beneficial owners to gain insight on how their securities finance programmes are performing against specified benchmarks, and which funds, counterparts and instruments are contributing to their revenue. Customers can generate customized reports on the consolidated performance of agents, bespoke and standardised compliance obligations,and risk management initiatives. The product can also be used for compliance checks to identify exceptions or potential violations against programme guidelines. Most importantly, it can help identify opportunities to enhance revenue attribution.
What further developments to the securities finance product set are in the pipeline?
Kabin: While innovation is key, we are also keen on enhancing our product usability to ultimately reduce workloads, so customers can focus on alpha generation. We are working closely with our data providers to update the collateral buckets in adherence with current industry practices, while harmonising the approach for data delivery. We are also building consolidated reports which will incorporate the revenue-risk reward ratio across securities lending programmes – while identifying areas of underperformance and quantifying risk (stress test scenarios, expected loss of default, and overall risk exposure). More clients are providing us with intraday and pending trade data, which can help our customers see market movements and re-rate opportunities on a more expedient basis.
How does the wider IHS Markit business support the securities finance segment? Is there greater cross-product strength post the IHS/Markit merger?
Kabin: In the securities finance space, we have a number of unique offerings – for example, our Research Signals solution helps identify potential short squeezes in the market, while our Dividend Forecasting solution provides 5 years of single name history, and our Evaluated Bond Pricing metrics can help denote the liquidity of fixed income instruments. IHS Markit is a complete global source of all publicly-disclosed short disclosures, and we recently introduced the US Public short forecast, which is calculated daily (and prior to the public availability of exchange data) using an IHS Markit proprietary algorithm. On an enterprise basis, IHS Markit certainly has plenty of potential for cross-product synergy.
How do you picture the next generation of securities finance services?
Kabin: The next generation of services will help the securities finance industry create and validate their strategic objectives, apply quantitative and qualitive factors using propriety data and tools, and help analyse what-if scenarios when validating risk and return proposals. With new regulatory requirements impacting most of the securities lending ecosystem, we aim to deliver standardized and bespoke reports for compliance checks, and to flag exceptions or warnings. Key deliverables for us include advanced analytics, which combine datasets across product platforms, while leveraging our natural language processing (NLP) and natural language generation (NLG) technology to help with day-to-day decision making.
IHS Markit has been a frontrunner in creating an SFTR reporting solution. Do you expect the regulation to change the securities finance market at all? If so how and for better or worse?
Kabin: IHS Markit provides an end-to-end, interoperable SFTR reporting solution which accepts data from front-end and back-end systems, and enables industry participants to leverage existing data pipes. We partnered with Pirum, who bring deep expertise in post trade reconciliation, with a matching engine that can generate UTIs mandated by SFTR. Whilst SFTR may seem like a burden in some ways, the end-goal of bringing greater transparency to the securities finance industry is a positive.
Is there appetite for benchmarking in the securities lending market to become more standardised across vendors/participants? Is this achievable?
Kabin: Yes, we are seeing more requests from beneficial owners to bring standardisation to the benchmarking process, and we are working closely with our customers on this. There has been skepticism for many years around benchmarking in general, so we are aiming to create benchmarks that incorporate numerous factors, and ultimately help firms measure the slippage from the optimum.