It is a new era for the securities lending space, led by the ever-growing technological advancements in the industry, allowing for increased collateral optimisation, faster transaction settlements, and new market participants. As huge events such as T+1 creep ever closer, it is technology that will carry the brunt of the workload and ensure that the market is accessible to new players so nobody gets left behind.
Discussing collateral optimisation, the journey to T+1, the rise of technology, and new market participants, Roy Zimmerhansl, head of Capital Markets at WTS Hansuke, was joined by managing partner, Ali Kazimi, and head of delivery in Capital Markets, Jonathan Adams.
Zimmerhansl transitioned to WTS Hansuke eight months ago following a long-standing relationship with Kazimi. According to Zimmerhansl, there has been much collaboration within the firm with securities lending and taxation being so closely intertwined.
鈥淲e saw the opportunity to combine the businesses on both the securities finance side and also on the tax side and put it together. We're unique in having that sort of combined capability. I don't think there's any other advisors that offer that full end-to-end support,鈥� Zimmerhansl continues.
Kazimi adds: 鈥淭ax and market structure can鈥檛 be separated. Every transaction, whether in securities lending, repo, or derivatives, lives in both worlds. The firms that truly understand both sides are the ones that can deliver real value from end to end.鈥�
By bringing Adams onboard, the delivery side of the business has been solidified due to the firm鈥檚 ability to cover all aspects of trade end-to-end.
Expanding on recent market trends, Zimmerhansl says there is a renaissance happening in the securities finance space, with more new market participants joining in the last couple of years than he can ever recall.
While the space has opened up hugely, Zimmerhansl notes that 鈥減eople can't just join and hope for the best, there is a benchmark of capability that you need to bring to the market. If you're already in the market, you have to focus on strategy, technology, and 鈥� at the core 鈥� people鈥�.
For Kazimi, the framing of WTS Hansuke as a specialist financial services advisory firm is driven by clients鈥� needs. With clients demanding expert advice from those who 鈥渒now the market inside-out鈥�, the team was formed to leverage their expertise 鈥� Kazimi says it is this expertise that differentiates WTS Hansuke in the marketplace. 鈥淐lients do not want their business models shaped by former regulators or lifelong consultants. They want advisors who combine insight with real market experience 鈥� who understand markets from the inside out.鈥�
Making assets work harder
Moving on to discuss changes in collateral optimisation strategies, Zimmerhansl highlights that collateral has shaped everything he has done throughout his career.
鈥淧eople have been talking about collateral optimisation for years, and this is where technology will become critical,鈥� he explains.
鈥淥ptimisation is often the path of least resistance, usually putting all of the collateral into a triparty, and letting those providers optimise within their platforms.鈥�
From Zimmerhansl鈥檚 perspective, everyone is properly collateralised when everything is optimised and finished, with the best utilisation happening within a silo, but the next challenge is crossing silos 鈥� something that is reliant on another layer of technology.
He adds: 鈥淲e鈥檙e starting to see the early days of the application of AI, but it鈥檚 still learning, and no one can afford to make mistakes on collateral.鈥� To ensure minimal mistakes, he says that a human will always double-check what the AI proposes. Despite the technology still being developed, he describes it as 鈥渢ransformational鈥�.
Adams adds: 鈥淐ollateral management has become a significant demand driver for securities lending as collateral transformation enables firms to leverage ineligible assets to borrow eligible assets to meet collateral obligations.
"The phased rollout of the uncleared margin rules requiring all market participants to post initial margin in the form of securities, introduced a new wave of market participants having to bring technology and expertise to efficiently use securities as collateral.
"A firm-wide holistic approach to collateral is still a utopia for many companies, and AI will play its part in giving firms time to transition from the struggle to simply getting collateral obligations met to bringing firm-wide collateral efficiency.鈥�
The operational challenge
No discussion would be complete without addressing T+1 and the ways in which WTS Hansuke is supporting firms in meeting their settlement timelines.
Zimmerhansl notes that given the reduction in transaction processing time, moving from T+2 to T+1 is an 鈥渆ntire reimagining鈥� of the settlement process, end-to-end.
Adams reiterates that to replace the old manual areas involved in the settlement process, 鈥渇irms have got to invest in automation and artificial intelligence. Technology needs to be put in place to make sure that transactions are input correctly (e.g. digital trade confirmations) and error remediation of lifecycle events is close to immediate using AI and automation鈥�.
Due to the ever-increasing reliance on new technologies, Zimmerhansl indicates that a large part of WTS Hansuke鈥檚 preparation for T+1 is communicating with technology providers to review the available solutions for clients.
The new face of market influence
Moving the conversation forward to discuss the future outlook of the shareholder space, Zimmerhansl first mentions the growth of retail investors and participation.
He highlights that retail investors are seen as major catalysts for growth in the lending market, firstly by participants making their assets available for lending, and secondly by potentially participating in short selling 鈥� traditionally an area in the sole remit of institutional players.
鈥淲e couldn't have retail without technology,鈥� states Zimmerhansl, highlighting the demands brought on by the number of unique clients. Tax, for example, is a binding constraint. Unless there is some method of taxing investors at the individual level, problems will arise from the government鈥檚 perspective, in some cases to the point of not allowing retail participation. Once again, technology will be a key enabler of this.
Kazimi explains: 鈥淭rue retail participation requires look-through, not just to counterparties, but to the ultimate beneficial owners. Each comes with different tax entitlements, exemptions, and treaty positions. Unless tax infrastructure can identify and apply those different treatments efficiently, access will remain limited no matter how advanced the trading technology becomes.鈥�
A look to the future
Anticipating what lies ahead, Zimmerhansl first discusses the past, looking at how stock exchanges have evolved to be streamlined and computerised. He foresees a future that is so efficient, that it will enable new trading strategies that we can not yet undertake, or perhaps even conceive of.
He also believes that the more the silos between securities lending, repo, swaps, and derivatives are broken down, the more cross-asset trading will take place. Due to the barriers this currently faces, the potential for those that can trade across these assets is likely to be highly profitable.
Another of Zimmerhansl鈥檚 predictions is the application of distributed ledger technology (DLT) to post-trade. He does not see crypto or digital assets making a significant difference in the next five years, due to the small percentage of the market it currently makes up 鈥� about US$4-5 trillion. Even if 20 per cent of assets become digitalised, 80 per cent of traditional asset problems will remain.
One benefit he does note, is the chance for technological developments to drive down costs and inefficiencies, as well as enabling new trading strategies and reducing barriers between different financial market segments.
鈥淭he two biggest opportunities are retail and the application of digital technology to traditional assets.鈥�
A major challenge in the market at the moment is cost, with Zimmerhansl saying that post-trade and securities finance has to be so cheap that it can not only compete with derivatives, but also ensure that as supply grows, costs come down.
It seems as though technological advancements are key in driving the market forwards towards regulatory changes while allowing participation to grow without compromise.
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