Nathaniel Lindsay: In January, EquiLend, a securities lending technology provider, identified a cybersecurity incident affecting functionality of certain services they offer to their clients. EquiLend’s NGT platform, an electronic trading venue for the securities borrowing and lending (SBL) industry, was one solution affected by the cyber incident. As a result of the subsequent outage, market participants were unable to use NGT. Features that NGT provides to participants include publishing executable quotes to borrowers, receiving unsolicited bids from borrowers, and agreeing to trades on-venue. NGT has played a central role in supporting the electronification and automation of trade execution in SBL markets. The recent cybersecurity incident at EquiLend reminded market participants of the benefits lost in the absence of transacting on-venue.

One impact of the cyber incident was increased potential for operational risk. Transactions done on-venue innately generate a shared, auditable, digital record of each trade, ensuring the integrity of the deal and helping to avoid contract breaks. Combined with straight-through-processing (STP), trading on-venue reduces the risk of traders incorrectly re-entering details into their respective internal systems, further mitigating operational risk.

Additionally, the efficiency gained from automation was reduced as a result of the cyber incident. At State Street, our Agency Lending business leverages algorithmic trading and STP to automate a majority of our electronic trading activities. Automation allows our voice trading desks to focus more of their time on value-added activities such as deepening relationships with our counterparties, engaging as subject-matter experts with our clients, and handling high-touch deals or bespoke trade structures. Given the reduction in automation, the business became notably less efficient during the EquiLend outage.

Finally, throughout the securities lending market, agent lender inventory is shown on-venue – enabling liquidity discovery for connected participants. Market color from agent lenders plays an important role in allowing principle intermediaries to serve their end-user clients through manually or systematically providing locates and sourcing securities to cover client short sales, or as an efficient means to refinance existing loans. Because of the increasingly connected, data-driven nature of SBL trading, it is critical that lenders possess electronic distribution mechanisms and data-driven pricing to effectively commercialize client inventory. In instances where these capabilities become unavailable, the reliance shifts to manual replication, inefficient inventory distribution, and less competitive pricing.

NL: The recent cyber incident served as a wake-up call for market participants, reenforcing existing concerns around vendor concentration throughout the industry and sharpening collective focus on diversification and business continuity planning. We have observed this shift in mindset through increased interest in the Agency Lending Portal (ALP), our proprietary trading application within Venturi^SM for interacting with our agency lending business electronically.

While venue concentration was a risk known to participants, unseen risks in the back office came to the surface during recent events, including within technology solutions provided to help market participants meet Agency Lending Disclosure (ALD) requirements and perform daily mark-to-market operations.

NL: The SBL industry has remained behind the curve in adopting technology relative to other products, such as cash equities. This adoption lag has been driven partially by the fact that securities financing transactions (SFT) are more complex than the outright sale or purchase of a security. For example, the quantity of inventory available to lend to a counterparty varies depending on the status of ALDs between the borrower and the underlying principal lenders, counterparty credit limits, and other nuances. Furthermore, the pricing of SFTs is bespoke and multi-variate, often considering counterparty risk-weights, the exposure at default generated by the loaned securities and collateral posted, and the risk of settlement failure associated with lending a client’s position.

Against this backdrop, voice and chat remain the primary alternatives to EquiLend’s NGT. Despite this, the SBL market is in the early stages of becoming more diversified, with participants keen on adding redundancies to market access as well as matching their needs with platform-specific capabilities. In parallel, to meet growing interest, new and existing efforts to launch electronic venues for SBL are emerging from industry stalwarts and new entrants alike.

At State Street, we are well-positioned to meet borrowers’ demands for efficiency, transparency and redundancy with ALP, which grants unprecedented electronic access to one of the world’s largest pools of lendable securities. Whether through our GlobalLink Digital^SM single sign-on or through integration with our API, borrowers can solicit quotes and submit executable orders directly to State Street for single names or lists of securities across all products and geographies, for general collateral and hard-to-borrow inventory. Additionally, our team remains focused on diversifying our electronic routes-to-market to compliment underserved asset classes and add resiliency to our agency lending program.

When assessing a provider of agency lending services, it is important for clients to understand the strategy, capabilities and personnel in place to support automation, data-driven decisions and resilient electronic distribution while managing the associated risks. In an increasingly technology-led industry, selecting a provider that has the right tools to effectively commercialize a portfolio of assets could be the difference between sitting on idle assets, or achieving sustained outperformance.

NL: Prior to the cybersecurity incident, participants were already engaged in efforts to connect to alternative trading venues. However, the driving forces behind these engagements has changed to some extent, sharpening focus and collective sense-of-urgency.

Before the cyber incident, market participant’s interests in connecting to new trading venues was driven by platform-specific attributes favorable to products or markets that were not already satisfied by existing routes-to-market. For example, a participant may leverage a specific trading venue for centrally cleared trades, transacting in certain markets, or trading different asset classes such as government debt.

Now, market participants are no longer solely focused on the unique features a venue provides as criteria for connecting, but also heavily consider the value of redundancy. For State Street, the recent events validated our strategy of expanding our footprint across third-party venues and offering proprietary solutions through Venturi. This is further reinforced by the increased interest in ALP that we’ve seen from our borrowers in the past months. Our team continues to receive inquiries regarding ALP from principal intermediaries globally, and has onboarded several firms with many more in the pipeline pending internal risk assessments, even as conditions have normalized.

NL: Some of the primary developments shaping the securities financing industry today are regulation, market structure, financial resource management and technology modernization. In the coming years, I expect that the confluence of these factors will continue to drive participants to become increasingly data-driven, automated, and electronically connected through a network of multilateral venues and proprietary channels, optimizing around binding constraints using algorithms, quantitative strategies and smart order routing. Additionally, distributed ledger technology (DLT) continues to be a viable solution for market participants seeking transparency into custodial assets, collateral mobility, and reduced reconciliation.

In the wake of the Global Financial Crisis, the Financial Stability Board (FSB) was prompted to help strengthen oversight of “shadow banking.” Shadow banking refers to banking-like services offered by non-bank financial intermediaries. For example, agent lenders obtain cash by lending securities to principal intermediaries. Cash is re-invested in reverse repurchase agreements, which mimic collateralized loans. Similar to a bank, agent lenders provide yield for cash investors via securities lending and funding for cash borrowers through participation in the repo markets.

Implementations of the FSB’s prudential regulation have taken form through local regulations such as the European Union’s Securities Financing Transactions Regulation (SFTR). Additionally, United States regulators are seeking to increase transparency and oversight with reporting requirements such as the US Securities and Exchange Commission’s (SEC) 10c-1a and the Office of Financial Research’s recent ruling on the reporting of bilateral non-centrally cleared repo, as well as market structure mandates such as the SEC’s ruling on mandatory clearing in US Treasury Repo.

Regulation has been, and will continue to be a catalyst for electronification in securities financing markets. For example, the SFTR has encouraged electronification, as the digital record generated from trading electronically helps firms to achieve compliance. Additionally, trading electronically can help minimize the risk of late deliveries, settlement failures and the potential penalties imposed by the Central Securities Depository Regulation (CSDR). The SFTR and CSDR are examples of how regulations have influenced the behavior of market participants and served as a precursor for digitalization. Finally, the latest iteration of the Basel regulatory agenda, known as “Basel Endgame,” will place increased pressure on the sell side to manage ever-growing balance sheet constraints and cost pressures, necessitating the use of automation to augment decision-making and boost efficiency by doing more with less.

In light of these mounting pressures, it is critical to have real-time visibility into your collateral, binding constraints and available routes-to-market across repo, securities lending and over-the-counter derivatives. As a solution, market participants are continuously looking to tokenization and DLT to mobilize assets, reduce reconciliations and enhance oversight – especially with the shift to T+1 settlement in North America now underway.

At State Street, we’ve designed a cross-functional team within our Financing Solutions business to ensure we remain ahead of the curve. This group, Automation and Platform Solutions (APS), spans horizontally across our Prime Services, Agency Lending and Secured Financing businesses – partnering with trading, technology and other stakeholders to implement automated trading systems, algorithmic strategies and optimizations guided by robust quantitative analysis. We believe this organizational design helps foster stronger collaboration, increased innovation, and superior agility, helping us to achieve better outcomes for our clients and the people they serve.