The Challenges of Changing Regulation in Securities Finance

CJ Emson

Dec 2022

Significant regulatory change has come to the Securities Finance industry in the last decade. The SFT Winter Symposium highlighted how far securities finance has come as an industry, threw light on the long road ahead for financial regulation but also highlighted the role those new technologies can play in re-shaping the market. EquiLend’s Kevin McNulty, Head of RegTech Solutions and Iain MacKay, RegTech Solutions Product Owner, both featured on panels across the day discussing the rocky path to consistent and effective financial regulation, and what the future of securities finance regulation might look like.  

Is the Regulation of Securities Finance Markets Delivering on its Objectives?

Across financial markets there is a patchwork of regulation encompassing multiple financial sectors: EMIR, MIFiD, SFTR, CSDR and the upcoming SEC 10c-1 proposal, all aim to create a more stable and safe market environment but the complexity of complying with these rules is a challenge for market participants, noted MacKay.  

Across regulators, there is a consistent aim to use regulatory data to monitor the market and prevent future cataclysmic financial events ahead of time. The lack of consistent input fields across different regulations and jurisdictions is likely to lead to challenges for regulators in gaining clear insights into the global securities finance market. Whilst SFTR and 10c-1 both have their roots in the globally coordinated post 2008 financial crisis regulatory reforms, they take different approaches and that in turn creates problems for market participants” noted MacKay. 10c-1 rule takes a different approach to creating transparency than the EU’s SFTR regime, with a drive towards near real time reporting of trade data, whereas SFTR requires both parties to report much more granular details of their transactions on a daily basis.  

“Regulation can only deliver change if it is supported through the lifecycle and there is currently a lack of robustness from booking to return. Standardization is essential and market participants will benefit from taking advantage of vendor products which would automate and standardize the data flow”, concluded Mackay. 

Future Regulatory Developments and Other Drivers of Regulatory Change

Similar themes emerged in the Securities Finance: The Future panel with an early discussion on drivers for change. Kevin McNulty commented that many developments happening in the market are still driven at some level by the application of regulation. The panel discussed the extension of the market to newer participants such as retail investors (which in turn may drive more regulation), the growth of new trading strategies driven by tougher bank capital rules, and the practical role that DLT can play in transforming the securities finance market.  

Aside from regulations designed to promote transparency and settlement efficiency, other regulatory developments are looming. At the moment the direction of travel for the rules governing bank capital are towards further tightening. This has the effect of increasing the costs of doing business and market participants are looking for solutions that deliver more data that can help them optimise their trading strategies. In addition, the US markets are set to move a T+1 settlement cycle and this will create operational challenges. Technology solution providers have a role to play in helping the market in all of these areas 

However, not all innovation is being driven by regulation. Kevin spoke of 1Source, EquiLend’s initiative to create one centralized source of truth for securities finance transactions. Describing the importance of ensuring that new technologies, such as DLT, are deployed where they are best suited to solve real problems, McNulty noted “After extensive research with clients we found that despite advancements in technology and market practice, a significant pain point in the industry still revolves around reconciling the same transaction recorded separately by the parties to a trade. 1Source and DLT are ideally suited to solve for this and will significantly reduce cost and risk with the market.

Who We Are

EquiLend is a global financial technology firm offering trading, post-trade, market data, regulatory and clearing services for the securities finance, collateral and swaps industries. EquiLend has offices in New York, Toronto, London, Dublin, Hong Kong and Tokyo.