The Â鶹´«Ã½ Lending Journey
23 July 2019
Industry legend Carol Kemm discusses highlights from her career in securities lending, how the industry has changed over the years as well as her predictions for the future
Image: Shutterstock
How has the industry changed since you started your career in 1985?
1985 was a year prior to ‘Big Bang’, and the UK securities lending market was heavily controlled by the Stock Exchange Money Brokers, as they were the only ones permitted to borrow and lend equities and gilts. At the time the market comprised manual processing, physical stock certificates, messengers walking around the city with bills and Certificates of Deposit (CDs), while all stock certificates were kept locked away in ‘the cage’ and taken out to facilitate the stock loans and the collateral provided against them. Talisman was the Stock Exchange system for equities and settlement was on a fortnightly cycle, the Central Gilts Office ran the UK Gilt market and Money Market instruments were managed by a different body.
We sent 1.5 inch computer tapes to the Stock Exchange at the end of each day, and received back the updated details to load up into the internal system the following morning. There was a daily ‘top hat’ walk to the Bank of England for an 11am meeting with representatives of all the banks, market makers and discount houses to discuss liquidity and interest rates. Margins were high for collateral against equities, I remember a margin of 15 percent, and it was principally non-cash collateral, rather than cash. Fee rates were quite often provided as fractions.
Long lunches were enjoyed after the morning borrows and loans had been logged, and the day may well have been finished around 3pm once the daily balancing was complete. There was very little automation, with no package software system available to the Money Brokers, and daily borrow and loan transactions were recorded in a manual ledger, or on an Excel spreadsheet. All fee statements were created manually at the end of each month and sent out to lenders and borrowers.
Big Bang happened in October 1986, when the market was opened up to foreign banks, causing many of the original market makers and stock jobbers to disappear, swallowed up by US, German, Japanese and French banks. This continued over the next few years with many amalgamations happening on a constant basis. The long lunches disappeared as firms needed to manage the Japanese market in the morning and the US market in the afternoon. Most firms had systems available prior to Big Bang or they would have been unable to manage the volume of business that occurred.
Since then the securities finance business has changed enormously, there are no longer any market trading floors, and book entry processing facilitates borrows and loans, with physical certificates being phased out some years ago. Talisman was replaced by CREST eventually, after an abortive attempt to bring Taurus in. Following this, there was a higher emphasis on collateral management, with both cash and non-cash collateral being taken against stock loans, although cash has always been used as collateral for repo trades. The business has become much more global over the years, and has encompassed many other aspects of securities finance, moving away from the pure borrowing and lending of equities and bonds. More international markets were added to the portfolio for lending and borrowing and Bloomberg was used for requesting stocks. There are now a number of options for the processing of automatic borrows, although the market still retains some of the original focus on business relationships between the borrowers and the lenders.
What are your biggest and most memorable career highlights?
For me, the first highlight was probably going live with the Money Broking software we wrote for the Market Maker James Capel, and seeing this being successfully used following Big Bang. The second highlight was when Global One went live at London Global Â鶹´«Ã½ and was then purchased by Nomura, Barings (now ING) and Credit Suisse—all in 1992.
I remember the first RMA conference we took Global One to—it was held in the Swan hotel in Disneyland in Florida—and we were the only vendor booth, so positioned ourselves right outside the entrance to the conference room. Conferences in those days were much more serious than they seem to have become over the last few years and we used to do many demonstrations and give away a lot of sales literature, none of which really happens at conferences now.
We also put BLEND out of business once Lehman Brothers went live on Global One in October 1994. BLEND was the transaction based international securities lending platform started by I.P Sharpe in Canada and then purchased by Reuters. It was the only software option for international lending and borrowing at that time, apart from firms writing and maintaining their own systems.
We were so busy selling and installing Global One in the US, Europe and Asia for the years from 1992 until after 2001, when we became part of SunGard, that there wasn’t much time to reflect on what we had achieved. However, I did sell 12 copies of Global One to a consortium in Kuala Lumpur, Malaysia, against a competitive system in 1996. We had teams from K-Tek going out and installing the systems, only to have the market crash in Asia within three months and Malaysia ban stock lending! The market is now just coming back—slowly—to stock loan once again, after more than 20 years.
You developed Global One as an international securities lending system where K-Tek worked closely with London Global Â鶹´«Ã½ with first clients going live in 1992. Those clients from 1992 are still using Global One today, why do you think this is?
Basically, Global One does ‘what it says on the tin’, and in most cases has been incorporated into internal and external associated systems by many of the clients. Most brokers want to have their own front-end software, to provide their traders with a unique advantage, but are not bothered about the day to day processing or the settlement of the trades, so were happy to see Global One as the engine that managed the middle and back end. Additionally, it is very robust, many clients post millions of activities a day onto Global One and have many hundreds of thousands of outstanding borrows and loans. We recently had a client who had posted more than a billion transactions since installing the system.
I’ve recently heard industry participants say securities lending used to be more of a ‘back-office business’ with less of a regard for optimisation of collateral, what are your thoughts on this?
I agree that collateral optimisation has become much more important than it used to be. In the past, as long as acceptable non-cash collateral—in the form of equities, bonds, CDs, bills, etc—was received to cover the margin required on a loan, then there wasn’t too much concern about how that collateral was used. Tri-party agents weren’t that prevalent in the market, unlike now, where a huge amount of business goes through the tri-party agents and they optimise the collateral on an ongoing basis all through the day. The concern about collateral started to some extent when Lehman failed in 2008 and the collateral wasn’t returned to the underlying giver as efficiently and smoothly as everyone thought would happen in that situation. In fact, we understand, that it took some considerable years for everything to be unwound.
How has technology changed the dynamic of the industry?
It’s totally different to pre-Big Bang days or even the 1990s, as there are so many more algorithms in place now, including automatic order processing, matching, trading, marks, interfaces to tri-party agents and so on.
The improvement in technology allowed a much greater volume to be processed without adding staff. General collateral loans are pretty well automatically processed now, leaving the traders to concentrate on specials and arbitrage positions. As previously mentioned, securities finance is still a relationship business—more so than the repo market—although this is changing as well, as those with the expertise and knowledge leave the market after many years.
What changes do you expect to see in the securities lending industry over the coming years?
It’s definitely going towards even further automation, with the increasing use of robotics, artificial intelligence and so on which will reduce the requirement for human decisions, in cases where they can be made by software.
The other changes that have come about over the last 10 years, and are constantly a growing burden, are the regulatory reporting and capital requirements, such as Agent Lender Disclosure, Basel I, II and III and now the Â鶹´«Ã½ Financing Transactions Reporting initiative which will have a huge impact on Â鶹´«Ã½ Finance processing and profit margins.
In my experience, the industry has lost a lot of what made it unique, as it was previously very much a niche and relationship business. I feel that is a great shame to those of us who have worked in, and really enjoyed, the securities finance business, over the past 30-plus years.
1985 was a year prior to ‘Big Bang’, and the UK securities lending market was heavily controlled by the Stock Exchange Money Brokers, as they were the only ones permitted to borrow and lend equities and gilts. At the time the market comprised manual processing, physical stock certificates, messengers walking around the city with bills and Certificates of Deposit (CDs), while all stock certificates were kept locked away in ‘the cage’ and taken out to facilitate the stock loans and the collateral provided against them. Talisman was the Stock Exchange system for equities and settlement was on a fortnightly cycle, the Central Gilts Office ran the UK Gilt market and Money Market instruments were managed by a different body.
We sent 1.5 inch computer tapes to the Stock Exchange at the end of each day, and received back the updated details to load up into the internal system the following morning. There was a daily ‘top hat’ walk to the Bank of England for an 11am meeting with representatives of all the banks, market makers and discount houses to discuss liquidity and interest rates. Margins were high for collateral against equities, I remember a margin of 15 percent, and it was principally non-cash collateral, rather than cash. Fee rates were quite often provided as fractions.
Long lunches were enjoyed after the morning borrows and loans had been logged, and the day may well have been finished around 3pm once the daily balancing was complete. There was very little automation, with no package software system available to the Money Brokers, and daily borrow and loan transactions were recorded in a manual ledger, or on an Excel spreadsheet. All fee statements were created manually at the end of each month and sent out to lenders and borrowers.
Big Bang happened in October 1986, when the market was opened up to foreign banks, causing many of the original market makers and stock jobbers to disappear, swallowed up by US, German, Japanese and French banks. This continued over the next few years with many amalgamations happening on a constant basis. The long lunches disappeared as firms needed to manage the Japanese market in the morning and the US market in the afternoon. Most firms had systems available prior to Big Bang or they would have been unable to manage the volume of business that occurred.
Since then the securities finance business has changed enormously, there are no longer any market trading floors, and book entry processing facilitates borrows and loans, with physical certificates being phased out some years ago. Talisman was replaced by CREST eventually, after an abortive attempt to bring Taurus in. Following this, there was a higher emphasis on collateral management, with both cash and non-cash collateral being taken against stock loans, although cash has always been used as collateral for repo trades. The business has become much more global over the years, and has encompassed many other aspects of securities finance, moving away from the pure borrowing and lending of equities and bonds. More international markets were added to the portfolio for lending and borrowing and Bloomberg was used for requesting stocks. There are now a number of options for the processing of automatic borrows, although the market still retains some of the original focus on business relationships between the borrowers and the lenders.
What are your biggest and most memorable career highlights?
For me, the first highlight was probably going live with the Money Broking software we wrote for the Market Maker James Capel, and seeing this being successfully used following Big Bang. The second highlight was when Global One went live at London Global Â鶹´«Ã½ and was then purchased by Nomura, Barings (now ING) and Credit Suisse—all in 1992.
I remember the first RMA conference we took Global One to—it was held in the Swan hotel in Disneyland in Florida—and we were the only vendor booth, so positioned ourselves right outside the entrance to the conference room. Conferences in those days were much more serious than they seem to have become over the last few years and we used to do many demonstrations and give away a lot of sales literature, none of which really happens at conferences now.
We also put BLEND out of business once Lehman Brothers went live on Global One in October 1994. BLEND was the transaction based international securities lending platform started by I.P Sharpe in Canada and then purchased by Reuters. It was the only software option for international lending and borrowing at that time, apart from firms writing and maintaining their own systems.
We were so busy selling and installing Global One in the US, Europe and Asia for the years from 1992 until after 2001, when we became part of SunGard, that there wasn’t much time to reflect on what we had achieved. However, I did sell 12 copies of Global One to a consortium in Kuala Lumpur, Malaysia, against a competitive system in 1996. We had teams from K-Tek going out and installing the systems, only to have the market crash in Asia within three months and Malaysia ban stock lending! The market is now just coming back—slowly—to stock loan once again, after more than 20 years.
You developed Global One as an international securities lending system where K-Tek worked closely with London Global Â鶹´«Ã½ with first clients going live in 1992. Those clients from 1992 are still using Global One today, why do you think this is?
Basically, Global One does ‘what it says on the tin’, and in most cases has been incorporated into internal and external associated systems by many of the clients. Most brokers want to have their own front-end software, to provide their traders with a unique advantage, but are not bothered about the day to day processing or the settlement of the trades, so were happy to see Global One as the engine that managed the middle and back end. Additionally, it is very robust, many clients post millions of activities a day onto Global One and have many hundreds of thousands of outstanding borrows and loans. We recently had a client who had posted more than a billion transactions since installing the system.
I’ve recently heard industry participants say securities lending used to be more of a ‘back-office business’ with less of a regard for optimisation of collateral, what are your thoughts on this?
I agree that collateral optimisation has become much more important than it used to be. In the past, as long as acceptable non-cash collateral—in the form of equities, bonds, CDs, bills, etc—was received to cover the margin required on a loan, then there wasn’t too much concern about how that collateral was used. Tri-party agents weren’t that prevalent in the market, unlike now, where a huge amount of business goes through the tri-party agents and they optimise the collateral on an ongoing basis all through the day. The concern about collateral started to some extent when Lehman failed in 2008 and the collateral wasn’t returned to the underlying giver as efficiently and smoothly as everyone thought would happen in that situation. In fact, we understand, that it took some considerable years for everything to be unwound.
How has technology changed the dynamic of the industry?
It’s totally different to pre-Big Bang days or even the 1990s, as there are so many more algorithms in place now, including automatic order processing, matching, trading, marks, interfaces to tri-party agents and so on.
The improvement in technology allowed a much greater volume to be processed without adding staff. General collateral loans are pretty well automatically processed now, leaving the traders to concentrate on specials and arbitrage positions. As previously mentioned, securities finance is still a relationship business—more so than the repo market—although this is changing as well, as those with the expertise and knowledge leave the market after many years.
What changes do you expect to see in the securities lending industry over the coming years?
It’s definitely going towards even further automation, with the increasing use of robotics, artificial intelligence and so on which will reduce the requirement for human decisions, in cases where they can be made by software.
The other changes that have come about over the last 10 years, and are constantly a growing burden, are the regulatory reporting and capital requirements, such as Agent Lender Disclosure, Basel I, II and III and now the Â鶹´«Ã½ Financing Transactions Reporting initiative which will have a huge impact on Â鶹´«Ã½ Finance processing and profit margins.
In my experience, the industry has lost a lot of what made it unique, as it was previously very much a niche and relationship business. I feel that is a great shame to those of us who have worked in, and really enjoyed, the securities finance business, over the past 30-plus years.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Â鶹´«Ã½ Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Â鶹´«Ã½ Finance Times
