Solutions to match growth of securities lending market

4 February 2008

Peresys has enjoyed a position of strength in the securities lending industry since inception. Although it was originally the organisation's Slams application (Securities Lending Administration Management System) that drew the attention of lenders and borrowers alike, Peresys has gone on to develop offerings that facilitate integration and automation in all segments of the industry's trade cycle.

Dave Harty, head of Peresys' Securities Lending Solutions, notes with pride that Slams has become the most widely used system of its type in South Africa. Development of the system, along with other Peresys solutions, has been driven by the industry's steadily increasing volumes, he adds: "The stock lending industry has a total loan value of R120 billion, a 40% growth since 2006. Extensive trade cycle administration requirements and risk potential have encouraged us to channel our efforts into providing a robust and functionally rich administration system, as well as extensive integration and automation solutions to primary lenders, borrowers and agents."

It was this realisation that led Peresys to recognise the advantage of packaging Slams with its middleware tool, Connex. "A manual processing, stand-alone admin system is insufficient to meet the demands of current volumes and the number of trading counterparts. Integration and automation within the pre-trade, trade and post-trade cycles becomes a minimum requirement in order to sustain and grow business, alleviate administration burden and reduce risk," Harty explains.

Peresys also became alert to the fact that the development of integration solutions was a job for integration staff, rather than developers, as the former are able to offer better support, quicker turnaround times and best of breed solutions for clients. "This has freed our development team to concentrate on the functionality of our core administration product instead," says Harty.

Meanwhile, the company has also turned its attention to smoothing the path for pre-and post-trade transactions - and this is where automation comes to the fore. According to Harty, the securities lending industry has traditionally been hampered by a lack of transparency. While this is far from intentional, it is a result of the fact that the industry is largely relationship-driven, and the dynamics between borrowers and lenders are hugely important.

Unfortunately, this frequently means that the end client (for example, hedge funds) does not receive the best value: rather than source stock at the best rate, a borrower is most likely to conclude a transaction with a lender simply because they share past business experience.

A further drawback is that current transactions are usually concluded over the telephone. 'Shopping around' for available stock is therefore time consuming, and involves precious minutes making phone calls and leaving messages.

In an effort to address these challenges, Peresys has developed Trade Portal, a solution which allows lenders to publish their available stock, and conclude transactions, online. Functioning as an informal market, one of the major advantages of Trade Portal is that it encourages price discovery - important, because trends amongst the offshore market show an increasing demand for transparency.

"From a local perspective, we've seen an increasing number of hedge funds coming to market. Trade Portal benefits the prime brokers who administer their business by providing a more efficient way to handle operations, without compromising risk - the portal is an electronic tool that prime brokers can use to seek and disclose information." Allowing clients to deliver on their strategies without slowing down the administration and transaction approval process unnecessarily makes a compelling argument in favour of using, if not total end-to-end electronic trading, then employing a derivative thereof, Harty notes further.

Another solution which promises to unlock value and efficiencies is Peresys' Auto Recon, currently in the final stages of development. Harty explains that "the solution will provide a platform for market participants to submit loan and collateral data to a centralised server, housed within Peresys' business process network (BPN). The business rules within the solution will provide participants with exception-based reporting on all relevant trade elements. Information on deal breaks will allow for corrections to take place on a daily basis, rather than during the bottleneck immediately after month end." The advantages are clear: Auto Recon also reduces the time spent on monthly fees and interest reconciliations.

A further benefit is created by the fact that every transaction recorded on Auto Recon receives a linked transaction code. This makes the return of stock a simple matter, as the linked code not only alerts lenders to the fact that stock is being returned, but records the actual return, so that the processing of transactions becomes a smooth-running, automated process - far more efficient than the toils of sifting through data to find information about past transactions.

"With traditional long-only asset managers now engaging in active extension strategies and the ever increasing numbers of hedge funds, both the local and international securities lending markets look set to continue their unprecedented growth in volumes. This, together with a demand for lower fees from clients, borrowers and agents, makes innovative usage of technology a necessity," Harty concludes.