Consolo
Sarah Nicholson
31 March 2020
As a veteran of the 2008 financial crisis and other industry-defining events, Consolo’s Sarah Nicholson shares her wisdom on how to navigate the current market upheaval, including the COVID-19 pandemic, the delayed SFTR, and the need for in-house expertise
Image: Shutterstock
Pre-corona, what trends were you seeing in the securities finance industry?
The trends in securities lending have been less apparent because of the focus on delivering the Â鶹´«Ã½ Financing Transactions Regulations (SFTR) reporting requirements but there are plenty of developments and initiatives in the background. Having said that, SFTR in itself is driving the search for increased automation, and better connectivity, not just in operational areas but trading too. With the potential cost savings that can be made from peer-to-peer trading, I think we are seeing increasingly innovative routes to access markets and non-traditional counterparties, driven by capital and expense savings and using advanced technology.
Clearly, environmental, social and governance (ESG) is also a significant focus for many entities and how to manage a lending book on an ESG fund. Establishing what the rules of engagement are and how to maintain the integrity of ESG investments whilst accessing the lending markets is a challenge being grappled with by many firms. The growth in ESG investment means this is critical for the supply side in particular to resolve.
As a, excuse the phrase, seasoned veteran, have you ever seen anything affect the market in the way COVID-19 has and is this good or bad for securities lending?
Not sure I like ‘seasoned veteran’ but I haven’t seen anything that’s had the same impact on a global scale that COVID-19 has. I will admit to having seen a few major disruptions to securities lending, but these have generally been local to a market or sector.
The financial crisis in 2008 and the Lehman default specifically had the effect of closing down the industry overnight, but for most firms this was for a short period whilst positions were restored. The COVID-19 impact is going to be for a lot longer and firms will need to find ways not just to manage open positions but of continuing to trade, I understand that remote working has been implemented successfully in most cases but this has mostly been on a DR basis so far and not trying to achieve ‘business as usual’.
It is disappointing to see the negative reactions to short sellers immediately as the markets began to crash, albeit predictable. Although it is understandable that regulators have implemented restrictions in some sectors/markets, short sellers seem to always get implicated whenever a global event creates a stock market fall. It is interesting to see analysis already being published showing that the long holders who are selling are having more of an impact - usually this conclusion is reached after the event when the negative press has already done the damage. Beneficial Owners who are often already uneasy with the relationship between securities lending and short selling inevitably get jittery when they read this, often ill-informed, commentary, and correcting it after the event when markets are improving doesn’t negate all of the potential damage done.
Pension funds will have seen their values obliterated through stock market crashes, will this encourage some to look for the incremental returns securities lending can offer?
Fund values have been obliterated because of the crisis but it’s important to remember that it’s because of the virus, not because of fundamental problems with the underlying investments. Markets will bounce back and whilst this could take a considerable time, current levels are not reflective of the true value. However, interest rates are likely to remain low for some time, through the crisis and whilst the economy begins to recover, which has a more direct and immediate impact on pension funds. Certainly there is a trend that after any financial crisis, more firms become interested in the incremental returns that securities lending can offer, but not until markets have stabilised for a period of time.
We have seen the SFTR deadline moved back to 13 July, what is the main driver behind this and will this postponement be enough?
I think the push back on the deadline has been broadly welcomed and you could almost hear the collective sigh of relief! Firms have had to re-focus IT departments to manage remote working and support the critical business processes. At the same time, project teams are dispersed and unable to fully implement development, testing and other preparations for SFTR. Clearly, the April deadline became unachievable very quickly, especially when you remember that whilst this deadline was for the biggest firms only, the complex network of data transfer required between firms in order to prepare reports was much wider. The European Â鶹´«Ã½ and Markets Authority (ESMA) statement clarifying the backloading confusion was also appreciated across the market. At least now there is some breathing space.
To be honest, I don’t think the delay will be long enough. In the UK, the politicians are talking about 12 weeks to reach the peak of the coronavirus spread and this will take us toward the end of June. Even if we were able to resume normal business in week 13, which of course we won’t, that would give the first tier banks only two or three weeks to get ready. Of course, many of their counterparties will also need to prepare for the timely information flows that will be required - particularly from non-disclosed programmes.
I appreciate this is a UK perspective and the reporting requirements are much wider but across Europe the impact of the virus is apparent. In its statement, ESMA paved the way for further delays, but I am surprised that the first delay wasn’t for longer given the status of the virus when the announcement was made.
Tell us about your involvement with Consolo and what your main area of focus will be?
I have been involved with Consolo since the firm was established about six years ago. I have always focused on business consultancy and training, but last year it became clear we needed to focus on, and further develop our training offerings and we launched the Consolo Academy. Previously, most of our training was provided as in-house bespoke courses on a broad range of subjects, including securities finance, thereby allowing the client to define the agenda and ensure that all their staff gets the same training.
However, it has become obvious that firms also need generic training courses to provide initial and refresher training to individuals, so we decided to launch a series of fundamental courses which are open for anyone to attend. These courses have a different feel to them because there is a mix of firms in the room with different perspectives.
I like to keep courses as interactive as possible so it’s great for attendees to hear how other firms manage aspects of their business. The success of the fundamentals courses leads us to provide some more advanced courses open sessions, focused on particular aspects of securities finance and the broader financial markets which will be announced in the second half of the year.
We understand you are looking at online courses, how will this work?
We are very excited about the online offering, which we are hoping will be launched in April (COVID-19 allowing). We recognise that firms need to be able to provide staff with high quality, CPD-accredited technical training but often struggle to release individuals for a full, or even half a days training. By providing an online option, individuals can choose the relevant training that meets their own needs and attend the course when it’s convenient for the business.
The courses will be modular and individuals can choose a single module or a suite, depending on their personal requirements. Each module will represent around three hours training opportunity, will be fully CPD-accredited and, importantly, can be attended at the students convenience.
We considered longer courses that commit staff for a period of time but decided a menu based offering where the student can select just the subjects that are relevant to them to be a more flexible way of learning. Each module has an expert trainer and questions can be submitted to the trainer on-line at any time.
In response to the COVID-19 crisis we will also be running some online webinar based courses from April so that anyone working from home can spend some time learning the market fundamentals. Dates for these will be announced in the coming weeks.
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