Pirum Systems: unblurring the lines

Tonia Noschese offers an insight into automation in the lending industry and ISLA’s current rules surrounding billing, payments and exposure

The securities financing industry has seen an increasing blurring of lines between functional groups within organisations. Front- and back-office distinctions and divisions between product groups are gradually becoming less relevant. The requirement to do more with less in an efficient manner has never been more prevalent when viewed against the backdrop of continually challenged margins.

Additionally, recent media and thought leadership content within the industry, suggests we may be on the cusp of a new technology revolution with the possible introduction of ground breaking and disruptive solutions into the ecosystem, such as artificial intelligence and machine learning and distributed ledger technology, commonly referred to as Blockchain.

As a technology company and innovator, we embrace these new opportunities, however, what is remarkable is the extent to which inefficiencies are abound in the current process model.

The recent best practice paper published by the International Securities Lending Association (ISLA) in October 2017, highlights these areas of inefficiency and looks to suggest a standardised approach to these operational challenges. These are not aspirational or ethereal ambitions for the industry, but rather areas that demand and require collective review and attention. This revised paper looks to offer a road map for the industry and goes way beyond just the comparison of contracts. It is a practical guide that looks to accelerate market efficiency including the suggestion of employing vendors to assist in achieving connectivity and straight-through processing (STP) of the post trade lifecycle.

Although steered by the high-level principles of conduct set out by the Bank of England’s UK Money Markets Code, ISLA’s guide offers a blueprint for risk mitigation and process improvement across the global securities finance ecosystem.

As offshoring and outsourcing increases, securities finance services become increasingly fragmented, both geographically and functionally. This emphasises the need for unified standards for process management.
The best practice paper promotes procedures to help mitigate these challenges and looks to improve processes in:
Trade reconciliation
Exposure management
Payments and notifications
Billing process
Corporate action events

In the following piece, we look to summarise the proposals and provide a guide to adherence.

Trade reconciliation and confirmations

Systemic post trade reconciliation, on a batch basis, has been available to the market for over a decade, with initial focus on contract comparison for key economic fields, for example, fee and dividend rates. In the intervening years, this has moved into real-time pre-and post-trade matching of up to 32 fields and will evolve in the coming years to up to 97 fields with the onset of the Securities Finance Transactions Regulation (SFTR).

Although we have seen a marked increase in the adoption of pre-settlement and real time matching services, it is surprising to learn that many prominent market participants still do not use this robust and efficient service to improve controls, matching and settlement rates.

Market vendors can provide a standard settlement instruction (SSI) repository with trade comparison. Further enhancements to STP can be achieved through intra-day loan release, linking the release of new loan instructions to real time required collateral valuations.

Thus, instructions are released earlier to the market, SWIFT network costs reduced and risk mitigated by automating the release of loans. Intraday matching and automated returns are further encouraged by ISLA and the reporting timeframes under SFTR and shorter settlement cycles under Target2-Securities (T2S) will make faster communication across market participants a necessity.

Furthermore, European Securities and Markets Authority’s Central Securities Depository Regulation (CSDR) will introduce penalties for failed trades. This will mandate timely tZero automated matching solutions as firms look to reduce risk in advance of the settlement regime.
The ISLA best practice paper reiterates “It is strongly encouraged that a robust trade matching and post trade contract compare process is in place between parties in order to mitigate risk.”


The best practice paper states “ISLA continues to support the use of automated vendor solutions as best practice for billing delivery and reconciliation”. The market standards expect bills to be issued within the first seven days of the month, with identification of disputes completed by the 14th day and many participants will be working towards even shorter timeframes, particularly where their billable income is needed for onward distribution to their clients.

Vendor solutions can systematically send month-end fee and rebate statements, automatically identifying accrual discrepancies within moments of receiving the counterparties bills. Existing automation reconciles the previous calendar month’s statements matching the industry’s bill payment lifecycle. This enables the borrower and lender to agree in advance of the stringent 10 working day turnaround for a bill payment, with less manual effort. Furthermore, daily use of the contract comparison tools will identify discrepancies impacting billing before month-end, preventing costly profit and loss write-offs for the desk.

The increase in bond borrow activity has led to new operational challenges for the fixed income community. The billing file content listed in the best practice paper was not accessible as a month end statement due to historic infrastructure for fixed income rebate collection being centred on cash repos, where interest is typically moved on term or collected during the daily mark-to-market process in the US.

This year, the value of bonds on loan matched the value of equities, at 45 percent of global on loan balance for the first time and has therefore become a key area of focus. As month-end unpaid fees represents an uncollateralised risk for the lender as well as an operational and trading risk for the borrowers, embracing automation to improve workflows has never been so important.

Exposure management and collateralisation

Regulatory frameworks from Basel III and the Dodd-Frank Act continue to shape the trends within the securities lending industry including the rise in use and demand for collateralised transactions. These forces combined with commercial demands have added routes to market, expanded transaction venues and increased the complexity of day-to-day trading. This diversity of settlement, counterparty and operational infrastructure has led to a highly complex collateral landscape.


For the securities lending and repo markets, the ISLA Best Practice paper states “matching required collateral to cover a loan should be done via an automated reconciliation platform”. Where US equities make up almost 56 percent of all equities on-loan, automation is already a mature offering in this region which is required to allow for scalability and correct collateralisation. The automated mark-to-market process through a vendor enables the borrower to match the lender price (within tolerance) and post this marked value into both counterparties systems in order to match the cash-equivalent value on the loan. Vendor tools provide visibility to any exceptions and highlight valuation differences, for example price, foreign exchange and margin which results in faster dispute resolution.


The ISLA best practice paper references the efficient management of daylight or intraday exposure with respect to the settlement lifecycle and billing payments. Market participants in the US predominately move USD cash between their Depository Trust and Clearing Corporation (DTCC) accounts via special payment orders (SPO’s). Automated workflows enable SPO charges to be calculated from reconciled mark-to-market positions and executed directly in DTCC. This reduces processing times, removes the risk of human error and seamlessly links underlying trade activity with free of payment cash processing.


Managing daylight exposure also forms part of the ISLA best practice paper with a particular focus on non-cash collateralisation and pre-pay management. For securities lending and repo, the non-cash transactions form a large part of the current market (60 percent globally, 82 percent to 93 percent Europe for equity/government bond). This large and rising use of non-cash collateral, coupled with an increasing desire to collateralise on a same-day basis has increased the demand for tri-party collateral agents to manage the diverse collateral profiles.

Triparty collateral management is where the parties to a bilateral non-cash loan transaction pass responsibility for the management of the agreed collateral to a specialist collateral management service provider. The triparty agent then maintains the required collateral value, including any eligibility requirements, for the collateral over the life of the loan.

Despite advances with technological capabilities in the last two years, a lot of the exposure management processes remain manual and time-consuming. This has driven the industry to look at automation to provide a scalable low-cost solution, simplifying the management of the increasing number of separate exposures with the same resources.

Automation from vendors empowers operational teams by providing a near real-time global view of exposures, and a platform by which to identify, and agree margin requirements and to ensure they have an accurate portfolio reconciled with counterparties. As well as linking together the borrowers and lenders, vendors have formed partnerships with tri-party providers to allow the automation of communicating daily required values (RQVs) whilst obtaining visibility to intra-day collateralisation including details of the allocated collateral.

Enterprise wide

In addition, vendors are now looking at tools to enable end-to-end, enterprise-wide collateral management which centre on the efficient and optimal use of collateral in terms of managing margin exposures, utilising eligible inventory and covering requirements through collateral mobilisation. As such, providers are attempting to enable a more holistic approach to exposure management, better mitigate risk, more efficiently processes collateral movements and help to promote compliance with new regulations. Real-time exposure and inventory views can now provide projections, looking at future dated transactions to ensure accuracy from the point of booking. This is not only more efficient with anticipating funding requirements but also less resource intensive by allowing prioritisation of breaks to be resolved in advance of the collateralisation date.

Corporate actions

Managing corporate events, including both on loan and collateral positions, remains one of the most manually intensive and most risky of operational tasks. The lack of critical mass and collective desire for an automated platform has hindered automation levels and there seems limited consensus on the direction of automation.

The lack of standardisation of messaging between beneficial owner, custodian, agent lender and borrower often leads to missed or incorrect elections or claims, disagreement on event details and entitlements, and late elections because of inconsistent cut-offs due to the changing nature of a stock loan and the fact that a single election must be passed on multiple times. Often, that single election can also take multiple forms through the chain starting, for example, as a SWIFT, then transferred into a spreadsheet, then onto an email and even then, as a fax.

The late payment of dividend entitlements is also becoming an increasing challenge for the industry as lenders are required to set aside capital for the unsecured credit risk exposure whereby a lender has paid the dividend entitlement to their beneficial owner, but not yet been paid by the borrower. If there is a discrepancy on the underlying entitlement, these claims can sometimes take several days or even weeks to be settled fully.

Some advancements have been seen with the advent of cleared activity, however, this remains a very small proportion of the overall population. When a central counterparty (CCP) is used in conjunction with a gateway service that can manage downstream events, processing of voluntary corporate actions and dividends is dramatically improved as the CCP will ensure all entitlements are paid on pay date. The best practice paper covers mandatory and voluntary events, from preliminary checks approaching event announcement, to actions on pay date and suggests this should be a key area of industry focus.


Although the securities finance industry is evolving, there still seems a commonality of issue in terms of the processing ecosystem. The ISLA best practice paper highlights these areas of post trade inefficiency and suggests that they should demand our collective attention for resolution.

Technology continues to challenge and potentially revolutionise our approach to process delivery in this and every industry. Whilst institutions can build in-house to resolve areas of concerns, increasingly service providers are seen as an efficient and robust solution to non-differentiating problems, providing it is done in a connected and interoperable fashion.

In addition to consolidating data feeds from the borrower and lender, technology now allows unprecedented levels of transparency beyond comparison of contracts. Near real-time instructions for returns, marks, visibility of collateral with triparty vendors, and trade repository links, have improved audit of activity bringing additional controls and management oversight.

Automated solutions can be introduced with very little technical build, allowing clients to implement rapidly with less cost. However, as not all market participants have yet to embrace automation, ISLA provide standardised data sets in the best practice document to illustrate the minimum levels of information required to transact effectively.

Technology can be a catalyst to accelerated decision making whilst providing a scalable controlled solution to inefficiencies. Increased automation will be a significant step to improving market efficiency allowing straight-through, exception-based processes and in turn enabling effective deployment of resource to more value additive functions.

Recommended next steps

Review the ISLA best practice paper
Speak with your counterparties to discuss efficiency and process optimisation
Review service providers to determine opportunities leverage existing solutions to achieve greater connectivity and higher levels of automation
If you are not connected to a market vendor ask them how automation can help you

Join the debate with market practitioners to increase effectiveness of how we all interact in the industry.
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