As a fresh-faced graduate who had been in finance for nine months, I was once loaned from the swaps desk to the securities lending desk to assist during the busy dividend season.
Liaising between two trading desks, two trade support teams, and two different settlement teams to ensure that large short positions and derivative hedges were covered, little did I realise then that the relationships formed during those hectic 3 months would go on to sustain my career, or that some 12 years later, I would be approached by ISLA to lead the digital charge in the securities lending industry.
Sticking mostly with derivatives thereafter, via many project and business manager roles, my next serious foray into securities lending was when I was asked to look at SFTR some 3 years ago. Securities lending was about to start its journey of regulation-inspired reformation. Having seen EMIR and CFTC (and to some extent MiFID) have the same impact in other asset classes by forcing an improvement in standards and best practices, my view was that SFTR was a chance to help bring the industry kicking and screaming into the 21st century! Now it is clear that SFTR was just the start of a truly transformational journey into a digital future. It had forced the industry to come together and face mutually the challenges that it presented, and it was exactly that momentum in terms of collaboration which was needed to advance our markets.
In 2019, ISLA published their ‘Agenda for Change’ paper, examining from KYC to Termination the opportunities for automation, standardisation, and digital efficiency across the life cycle of a securities lending transaction. ISLA realised that the industry needed to move beyond conceptualising opportunities and towards making those a reality; a role that the Association was perfectly placed to spearhead on behalf of its members and the broader industry.
So earlier this year, the ISLA Digital working group (DWG) was formed. The DWG, that pulls together protagonists from across the industry such as borrowers, lenders, agents, CCPs, and service providers, has provided the ideal platform to explore some common goals. Furthermore, the level of consensus across this diverse group as to the direction we need to be travelling in, namely standardisation of data and event models and the mutualisation of infrastructure, is truly encouraging. There has also been wide recognition as to the need for collaboration across different asset classes, since they’re all interconnected in the web of financial products. The recent letter sent jointly by a number of trade associations to the BIS, IOSCO and the FSB expressing a shared vision of a digital future across our collective markets, reinforces this point.
Indeed, taking inspiration from work started by other trade associations, notably ISDA, it has become clear that there are two areas of immediate interest – the formation of a Common Domain Model (CDM), and the digitisation of documentation. In layman’s terms, the CDM is quite simply a standardised, digital model for products, transactions and events. A CDM ensures that for the same transactional inputs, events produce the same outputs unambiguously. Every day money, time and energy are wasted on resolving reconciliation breaks, fixing broken data, translating data and performing re-work. The major cause behind this is the differing data models and event interpretations between systems and firms. Building systems and infrastructure using a CDM, removes the cause of these inefficiencies. To this end, ISLA have just begun a pilot with REGnosys to extend the ISDA CDM (for derivatives trade flows), to create the beginnings of an ISLA CDM for securities lending markets. The opportunity presented to me to lead this pilot with some of the brightest business and technical experts in their field, was just too good to turn down!
The second area of interest – document digitisation, had initially been focused on document negotiation platforms, akin to the ISDA Create platform. Upon looking further into the possible paths to a digital future, and from conversations with firms who had experience in dealing with document digitisation in other asset classes, I swiftly formed the idea that it made more sense to begin developing a Clause Library (one that collates clause variants and links them to a standardised set of business outcomes). If such a library were to exist, then true digital document negotiation becomes achievable. Moreover, digitising clauses means that legal documentation could directly be linked with economic and commercial terms on transactions through the CDM, delivering a holistic digital loan product. To this end, ISLA have also begun working with D2 Legal Technology to pilot the formation of a Clause Taxonomy & Library Project.
Building on both of these pillars, we are beginning to shape a high-level roadmap for the next 2-5 years. Making digital standardisation a reality, drilling down into that roadmap, and giving form to the detail are foremost in our sights as we consider upcoming priorities. Look out for further communications as we continue along this journey.
As we begin to move into a fresh new era of altruistic cooperation and digital standards, and our roadmap begins to crystallise, the picture is becoming ever clearer. What I am certain of, is that by the time that journey is completed, never again will a fresh-faced graduate need to perform the kind of manual coordination of communication that I cut my teeth on. Instead, their enthusiasm and fresh ideas can be used to bring true innovative value to the firm that employs them.
David Shone, Regulation & Market Practice – Consultant