What technological direction is securities lending being pulled towards? The business is usually lead by the borrower community and discussions with the borrowers indicate that they want auto borrowing or certain components of auto borrowing. Based on their types of business, some borrowers focused on automating back-office functions, while others focused on front office or wholescale automation.
Auto borrowing, in our mind, requires direct on-line links with the specified borrower in order that the information provided can be tailored to them, such as client restrictions, credit limits, collateral type, market and fees.
In the US market, custody lenders have for some time provided automated feeds of available securities to selected borrowers and a handful are able to match the needs of borrowers automatically. In Europe, we believe that we have taken the initiative in providing the securities lending comunity with the technical capabilities to meet these specific requirements. Back office functionality requests include automation of mark to markets, buy ins, recalls, kills,
rate changes, broker regulatoryreporting, corporate actions and dividend information. Front office functionalities include portfolio availability, auto borrow, auto returns and contract compare. Bearing in mind that borrowers all have different system technologies and capabilities, this means that a product provided to one borrower can not be reproduced to another without some customisation.
For now, ultimate desire is to work towards providing key borrowers with the full scope of capabilities, from front-office to back-office using the internet as the information medium. Furthermore, it is very important to be leaders in providing borrowers with this technology, after all, how many web sites do you think a borrower will log into in order to fill his trades? Our guess is not many. Any residual trades outstanding and strategic trades will be filled by picking up the phone.
Auto borrowing and other automated functions areintended by us to support general collateral (GC) trading and automating some very manual and time consuming back-office functions. An automated GC facility enables a trader to fill short positions in liquid securities, be it two shares or 2m shares. The fact that such small trades can now be covered for a period of one day or longer can provide significant cost savings to the borrower, a portion of which finds its way back into the fee structure for the lender. This makes auto borrow GC trading far ore attractive than conventional GC trading. The biggest benefit of auto borrowing from a trading standpoint is that it allows the traders to focus on value added trades and provides them with more time
to build a better relationship with
the borrower.
From a back-office perspective, it is not hard to see why auto borrowing has taken off. Prior to automating some of the back-office functions, a daily mark to market effort with a large borrower could take hours, which now only takes a few minutes. Additionally, agreeing dividends during a busy dividend period took weeks rather than a couple of hours on exceptions. The benefits to our lending clients are also significant, because although they aren’t directly involved in negotiating trades, they do reap the benefits of the additional income earned, from higher fees and volumes, which leads to higher
performance overall. The benefit
to Northern Trust from its exceptional performance makes it the securities lending provider of choice, and as more income is earned, more is spent on technology and hopefully more business is won, and so the cycle goes on.
Linda Kearney is vice president in
securities lending group of Northen Trust in London

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