Â鶹´«Ã½ lending messaging: has the industry reached a tipping point?
10 June 2024
Market participants are working to align and future-proof technology adoption, with methods to exchange message data also becoming ripe for change. Trading Apps’ Stefan Bates and Matthew Phillips explore the benefits of investing in a bilateral messaging SaaS platform
Image: stock.adobe.com/3dartists
Unlike the repo world, securities lending has staunchly remained a bilateral business, and for good reason. Smaller deal size, lower volume, the complexity of sourcing from beneficial owners via agent lenders or directly, collateral requirements, buffers, the management of exposure to undisclosed beneficial owners, clearing membership costs…the list goes on.
As a consequence, the business still transacts either directly or via a few select platforms, with the dominant platform provider being a less economically viable option for lower volume participants. Indeed, there are some markets that still rely purely on direct borrower and lender relationships.
Similarly, while the deal capture and the books and records technology has kept pace to meet the evolution and geographical diversity of the business, platform and in-house books and records have remained, for the most part, on premise, with software-as-a-solution (SaaS) installations being in the minority. Moreover, connections to platforms and post-trade service providers have required each user firm to build interfaces to the service provider.
The tipping point
A market served by limited infrastructure diversification was recently triggered into action, acknowledging the risks associated with the concentration of activity with a single provider. Indeed, lenders are revisiting in-house provision by increasing the sophistication of internal web-based distribution platforms and, more generally, there has been some exploration into possible collaborations and investment opportunities to assist new providers in accelerating their time to market.
Likewise, the community, through its trade associations, is gathering to align and future-proof technology adoption by the development of the Common Domain Model (CDM), championing features such as a shared vocabulary, a unified model, domain driven design and consistency, so that market participants and their technology have a unified approach to how they exchange data in the course of transacting business.
The method in which firms exchange message data is ripe for change too. In other use cases outside of the industry, SaaS message platforms are now commonplace, enabling organisations and individuals to connect to all other users via a trusted provider. These platforms outsource infrastructure to third party cloud computing providers, benefiting from resilience and top-tier security capabilities, so providers can focus on functionality. For software vendors and their customers, the need for servers and network infrastructure is eliminated, significantly reducing the hardware and maintenance overhead. In turn, software vendors pass those savings on to their business customers who then provide their end clients with reliable, cost-effective services.
How could this approach apply to securities lending?
Â鶹´«Ã½ lending requires the exchange of multiple message types (eg distribution of availability, borrow requests, trade negotiation, trade execution, re-rates, recalls and returns). These are exchanged via multiple transport types (eg email, chat applications, FTP). What if all of these could be exchanged via a single transport protocol irrespective of message type, with each participant only required to connect once to this transport mechanism. This is entirely possible with a bilateral messaging SaaS platform hosted by a cloud services provider.
What features make this possible?
Microservices — a software design that structures an application as a set of services designed to perform specific business functions.
Auto-scaling allows the organisation providing the service to automatically increase or decrease computing resources according to the demands of the user base. A global messaging service will have peaks and troughs of demand during a 24-hour cycle, as each individual market increases its activity during peak trading periods, or sees increased activity when there is an operating overlap between time zones.
Serverless cloud provider managed services for message queues and data storage — the outsourced provider’s managed service enables applications to seamlessly process requests, manage workloads, handle complex workflows, and store the resulting data for access by users. Messages are stored in the cloud allowing users to access them on demand (borrow requests, availability, trades, re-rates, recalls, returns).
It is therefore possible for lenders to easily update availability throughout the business day so that borrowers can have near real-time data. Typically, borrowers are required to re-check availability with the lender before executing a borrow trade.
Using a container orchestrator — a container orchestrator is a platform used to automate the deployment, management, scaling and networking of containerised applications. Container orchestrators provide functions such as scheduling, load balancing, service recovery, and automated rollouts and rollbacks.
Immutable infrastructure is a deployment approach that allows for upgrades to be released as a server deployment, rather than installing and updating application software itself. This drives consistency across the platform services and facilitates rollback if necessary.
A Service Mesh is a software layer that handles all communication between services in applications. Common features provided by a service mesh include service discovery and load balancing. They can make service-to-service communication fast, reliable and secure.
Open API — an industry standard way to describe web service application programming interfaces (APIs), speeding up the development process by allowing developers to quickly get up to speed with the interface definition.
With the above foundation, a cloud-based messaging platform can provide a community of users a way of communicating that is not limited to securities finance messages. This type of message connectivity could be used for any online contract negotiation and other tradeable products with lifecycle management such as derivatives.
The main advantage to the user community is that while messaging remains between two parties, this technology stack allows that to happen for a limitless set of eligible users of all types, such as lenders, borrowers, trading platforms with matching and chaining functionality, and central counterparties.
Trading Apps and TA.Link
To automate deal capture, the original Trading Apps tools relied upon extracting borrow requests from emails and messages from chat services, as well as connecting to existing messaging services.
Trading Apps then developed TA.Link, initially to be a dedicated channel for its lender and borrower clients to directly exchange a suite of standardised messages, bringing efficiency and consolidating the way data flowed between the counterparties. From a post-trade perspective, it will be a real-time channel for rate optimisation, recalls management, and returns management, all of which could be generated automatically.
The next step was to explore how this could be fully democratised to provide the same capability to non-Trading Apps customers. This was achieved by exposing an OpenAPI-based interface into the messaging platform, enabling firms to build their own TA.Link integration services.
Trading Apps took the concept a step further by developing TA.Link web portals, for both borrowers and lenders. Being web-based, the portals provide users with instant access to counterparties connected via Trading Apps tools, the OpenAPI or other portal users. Portal users can upload borrow requests and availability and conduct trade negotiation and execution. Completed transactions can then be transferred to a trade uploader in their proprietary system.
Being a cloud-based SaaS platform using the technology and architectures described above, TA.Link can eliminate many of the costly challenges and operating risks that organisations take into account when connecting to external parties, instead providing a low-cost, subscription-based service to the securities finance industry.
As a consequence, the business still transacts either directly or via a few select platforms, with the dominant platform provider being a less economically viable option for lower volume participants. Indeed, there are some markets that still rely purely on direct borrower and lender relationships.
Similarly, while the deal capture and the books and records technology has kept pace to meet the evolution and geographical diversity of the business, platform and in-house books and records have remained, for the most part, on premise, with software-as-a-solution (SaaS) installations being in the minority. Moreover, connections to platforms and post-trade service providers have required each user firm to build interfaces to the service provider.
The tipping point
A market served by limited infrastructure diversification was recently triggered into action, acknowledging the risks associated with the concentration of activity with a single provider. Indeed, lenders are revisiting in-house provision by increasing the sophistication of internal web-based distribution platforms and, more generally, there has been some exploration into possible collaborations and investment opportunities to assist new providers in accelerating their time to market.
Likewise, the community, through its trade associations, is gathering to align and future-proof technology adoption by the development of the Common Domain Model (CDM), championing features such as a shared vocabulary, a unified model, domain driven design and consistency, so that market participants and their technology have a unified approach to how they exchange data in the course of transacting business.
The method in which firms exchange message data is ripe for change too. In other use cases outside of the industry, SaaS message platforms are now commonplace, enabling organisations and individuals to connect to all other users via a trusted provider. These platforms outsource infrastructure to third party cloud computing providers, benefiting from resilience and top-tier security capabilities, so providers can focus on functionality. For software vendors and their customers, the need for servers and network infrastructure is eliminated, significantly reducing the hardware and maintenance overhead. In turn, software vendors pass those savings on to their business customers who then provide their end clients with reliable, cost-effective services.
How could this approach apply to securities lending?
Â鶹´«Ã½ lending requires the exchange of multiple message types (eg distribution of availability, borrow requests, trade negotiation, trade execution, re-rates, recalls and returns). These are exchanged via multiple transport types (eg email, chat applications, FTP). What if all of these could be exchanged via a single transport protocol irrespective of message type, with each participant only required to connect once to this transport mechanism. This is entirely possible with a bilateral messaging SaaS platform hosted by a cloud services provider.
What features make this possible?
Microservices — a software design that structures an application as a set of services designed to perform specific business functions.
Auto-scaling allows the organisation providing the service to automatically increase or decrease computing resources according to the demands of the user base. A global messaging service will have peaks and troughs of demand during a 24-hour cycle, as each individual market increases its activity during peak trading periods, or sees increased activity when there is an operating overlap between time zones.
Serverless cloud provider managed services for message queues and data storage — the outsourced provider’s managed service enables applications to seamlessly process requests, manage workloads, handle complex workflows, and store the resulting data for access by users. Messages are stored in the cloud allowing users to access them on demand (borrow requests, availability, trades, re-rates, recalls, returns).
It is therefore possible for lenders to easily update availability throughout the business day so that borrowers can have near real-time data. Typically, borrowers are required to re-check availability with the lender before executing a borrow trade.
Using a container orchestrator — a container orchestrator is a platform used to automate the deployment, management, scaling and networking of containerised applications. Container orchestrators provide functions such as scheduling, load balancing, service recovery, and automated rollouts and rollbacks.
Immutable infrastructure is a deployment approach that allows for upgrades to be released as a server deployment, rather than installing and updating application software itself. This drives consistency across the platform services and facilitates rollback if necessary.
A Service Mesh is a software layer that handles all communication between services in applications. Common features provided by a service mesh include service discovery and load balancing. They can make service-to-service communication fast, reliable and secure.
Open API — an industry standard way to describe web service application programming interfaces (APIs), speeding up the development process by allowing developers to quickly get up to speed with the interface definition.
With the above foundation, a cloud-based messaging platform can provide a community of users a way of communicating that is not limited to securities finance messages. This type of message connectivity could be used for any online contract negotiation and other tradeable products with lifecycle management such as derivatives.
The main advantage to the user community is that while messaging remains between two parties, this technology stack allows that to happen for a limitless set of eligible users of all types, such as lenders, borrowers, trading platforms with matching and chaining functionality, and central counterparties.
Trading Apps and TA.Link
To automate deal capture, the original Trading Apps tools relied upon extracting borrow requests from emails and messages from chat services, as well as connecting to existing messaging services.
Trading Apps then developed TA.Link, initially to be a dedicated channel for its lender and borrower clients to directly exchange a suite of standardised messages, bringing efficiency and consolidating the way data flowed between the counterparties. From a post-trade perspective, it will be a real-time channel for rate optimisation, recalls management, and returns management, all of which could be generated automatically.
The next step was to explore how this could be fully democratised to provide the same capability to non-Trading Apps customers. This was achieved by exposing an OpenAPI-based interface into the messaging platform, enabling firms to build their own TA.Link integration services.
Trading Apps took the concept a step further by developing TA.Link web portals, for both borrowers and lenders. Being web-based, the portals provide users with instant access to counterparties connected via Trading Apps tools, the OpenAPI or other portal users. Portal users can upload borrow requests and availability and conduct trade negotiation and execution. Completed transactions can then be transferred to a trade uploader in their proprietary system.
Being a cloud-based SaaS platform using the technology and architectures described above, TA.Link can eliminate many of the costly challenges and operating risks that organisations take into account when connecting to external parties, instead providing a low-cost, subscription-based service to the securities finance industry.
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