An Unlikely Duo: The Combination of Innovation and Regulation will Transform the Securities Lending Industry

The last decade has seen many regulatory pressures for the securities financing business, and it continues to be an area of focus, most recently with a Discussion Paper from ESMA on the Trading Venue Perimeter and the SEC proposed amendments to Reg ATS. Given the growing number of firms providing innovative solutions and a lack of clarity on what activities are required to be conducted through a regulated firm, we should not be shocked.   

There are those who believe that innovation is, or indeed would be, stifled as these barriers are enforced and potentially increased, however I would argue that this is far from the case. Certainly, excessive regulation presents challenges for firms to scale for growth, but it is essential in delivering full adoption across the client base and supporting clients in their risk reduction and cost efficiency strategies and in providing the market with a strong structure.  

The majority would agree that where you have the same activity and same risk the same regulations should apply. This creates an equal incentive where all service providers are treated equally and a level playing field is set. It benefits the marketplace by creating greater certainty in the offerings of products, greater protection and supports the Global Regulators’ focus on investor protection, orderly markets, and financial stability.  

As an industry we are in desperate need of greater efficiency, and I make no secret of the pride I have in the innovation EquiLend has provided in the last two decades.  We have been innovating since our inception, initially with AutoBorrow and more recently with NGT and the tools it provides to clients, bringing them global scale and efficiency. This year June 15th 2022 saw 145,380 trades completed on NGT, our highest ever record for number of trades.  

From my perspective, regulation should be rigorous in placing the onus on firms to comply with rules to ensure safe market participation by all, but it is a mistake to suggest that regulation stifles innovation as a result. Not all innovation is focused on shiny new fin tech solutions, although EquiLend certainly offers all manner of those. In our endeavors to better support our client’s activities, we have invested diligently in growing our global regulatory footprint, for example. This has allowed them to increase their activity across the platform by increasing the number of clients they can execute with across additional jurisdictions. It is this dual investment that delivers the service and coverage models that clients need to support their Global business.  

ESMA, as per their MiFID II Q&A update on MiFID & MiFIR Market Structure Topics, have made clear that bringing together multiple third-party buying and selling trading interests in securities financing transactions is considered to be activity that requires the service provider to be regulated as a venue. So, the growth of innovation is likely to become more aligned with firms operating under the regulators’ approval and if so, does this lead to more or less collaboration between venues and fintech? Watch this space!