Melissa Gow
IHS Markit

The US needs to pay attention to SFTR, says Melissa Gow of IHS Markit

Do you feel that the North American markets are suitably aware of the challenges posed by SFTR?

Initially, the Securities Financing Transactions Regulation (SFTR) was seen as something that only Europe had to contend with and there wasn’t an understanding that the rules can apply to non-EU entities as well.

IHS Markit has done a tremendous amount of outreach here in North America with all the different market segments to make them aware of their reporting obligations, as well as highlighting how we are best placed to help them meet these requirements.

We’ve built our way up from the most basic understanding of what the regulation means and we are now fielding much more sophisticated questions on unique trade identifier generation and legal entity identifiers. The conversation has advanced significantly and that shows us that the North American market is actively educating itself on the potential effects of SFTR.

There is a chance that an SFTR-style regulation may be drafted in the US. Are you anticipating this?

We don’t yet know how the current administration will influence existing or future regulation but the solution that we’re building with Pirum will be flexible enough to accommodate any future regulation. It will be structured in such a way as to incorporate any regional variations in the reporting rules.

Is there anything North American market participants can learn from their European peers on this score?

To steal a page from the Girl Scouts’s guide book, it’s best to ‘be prepared’. We in North America have the advantage of being able to learn from and leverage the efforts that European market participants are putting into managing SFTR.

In North America, we are focused on educating the industry by replicating the SFTR workshops that we held in Europe, starting in Toronto and New York. These events are a great way to learn about the regulation and how it will affect non-EU entities.

Furthermore, for those that are part of a global business, which is most of our industry in one way or another, you really need to ensure you’re connected to what your firm is doing elsewhere to meet these regulatory challenges. Some regulations have a potentially global reach and therefore it’s logical when developing a solution that it can work in all the markets your firm is active in.

Beyond regulation, another area of change in the market is the increasing demand for benchmarking services by beneficial owners. What’s driving this?

We have seen a big increase in the number of beneficial owners interested in benchmarking services and there are a couple of reasons behind that. Firstly, as revenues compress, as they did in the first quarter of this year, we see beneficial owners taking a more active interest in how their lending programmes are performing, so that they know every possible revenue opportunity is being taken advantage of. At the same time, there are increasing requests for risk analysis-related data. The demand is coming from beneficial owners who want to understand the risks of their lending programme and the collateral that goes along with it.

IHS Markit is able to address this demand through some of our other data sets, including our bond liquidity scores, to enrich that analysis. Counterparty concentration and collateral profiles are other areas where we see greater demand.

Beyond the traditional data sets you associate with securities lending, the broad spectrum of markets that IHS Markit is tapped into means we can provide less obvious data that allows for effective risk analysis associated with arbitrage trades in markets that might otherwise be quite opaque. For example, if you take corporate actions, which the IHS Markit Quarterly Review showed to be an area where more active lenders can earn additional revenue, the ability to understand and take those opportunities requires access to the relevant data to make the value of that trade apparent.

IHS Markit tracks oil firms that may be refinancing debt, which leads to arbitrage trade opportunities. As a lender, if you want to benchmark and partake in these trade-types, you need to understand the risks and the dynamics in order to effectively incorporate it into your securities lending programme—and all this requires access to reliable and usable data.
How can greater access to data help maintain strong revenue in a shifting market landscape?

Access to more widespread and also more granular data is advantageous when identifying where the new revenue opportunities are coming from effectively. At the moment that could mean focusing on corporate bond lending or understanding the components of a cash collateral programme.

Lenders that are able to best leverage good market data will be rewarded for it. However, simply being able to identify the revenue opportunities is not enough. A beneficial owner must possess the flexibility in their programme to facilitate changes that may be outside the typical market conventions and opportunities we see day-to-day.

How does IHS Markit approach sharing this type of market data with beneficial owners?

IHS Markit is independent and a third party so we do not necessarily advocate a strategy or offer opinions on what changes lenders might make to their programmes. All our analysis is data driven, meaning we’re able to spot missed opportunities and quantify certain scenarios where, if a lender had more flexibility, they might earn additional revenue. The rest is up to them.

Some beneficial owners have such strict lending rules set down by their own clients and boards that they will never be able to fully utilise their assets, but other are beginning to see these opportunities and make changes to meet them. It’s only a small portion of lenders that are active and flexible enough with their programmes to utilise this data effectively, but it’s a growth area.

Are there other revenue opportunities in the North American lending market that are not being
fully acknowledged?

Our data shows there are some good trends in corporate bond lending and cash collateral, from a revenue standpoint. IHS Markit has also issued a research paper that shows how using our fixed income data in conjunction with equity data can lead to stronger returns. At the same time, we’re in the process of writing a whitepaper on trends in term trading. This analysis will be available this year, along with our next quarterly review, and will shed further light on these areas.

Also, once SFTR is rolled out, this may be the catalyst for US regulators to finally loosen up collateral parameters to allow for equities and other securities to be used as collateral.

Although not necessarily a revenue opportunity, this change would provide benefits and efficiencies related to capital usage. We’ve got our eye on this as well.

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