The Future of the Securities Lending Market

Securities Finance as a sector is far from alone when it comes to the challenge of standardising data and how it is created, held, managed, communicated, processed and understood. Most industries have over the last few decades taken advantage of the huge progression in information technology and data/communication to make their businesses more efficient.

The journey has involved huge investments, mainly from individual institutions or organisations acting alone. In other sectors the challenge for standardisation can be because people feel ‘invested’ in their own data models and because everyone was told that ‘data is the new gold’. In capital markets, changing anything to do with data is expected to cost a lot and cause significant risk. The risks being, firstly that “…the status quo isn’t broken, so why fix it?”; and secondly, having to migrate means a potential interim period of supporting, maintaining and paying for duplicate interfaces. Hence, change is commonly kicked down the road or simply runs out of steam.

It must be said, that vendors like Trading Apps have benefited greatly from the lack of data model congruence between institutions. We’ve developed interfaces and communication capabilities that can handle the vast discrepancies that exist in our clients’ ecosystems. It seems at odds, then, that we should be supporting the ISLA CDM project, some might think.

So, in this context, what is this Common Domain Model, or CDM? How can it help? What does it do? It’s worth reiterating what it is (and what it is not) to see where it fits into the securities finance landscape.

First and foremost, the CDM is a form of language (it must be highlighted that the ‘D’ is for ‘Domain’ and not ‘Data’ – an easy mistake). The CDM not only describes all securities finance data objects, e.g., a trade or borrow request, but also the actions that can be performed on them, e.g., a rate change or counter. Furthermore, it describes how those actions are performed, ensuring consistency of outcomes.

An interesting aspect of the data structure is that they are defined as shared objects. A trade is therefore not labelled as a borrow or a loan; it is labelled as a securities lending trade with attributes showing a borrowing participant and a lending participant.

What the CDM is not, is a system or platform. You cannot buy a CDM. What you would buy, build, or use as a service, is an application that is CDM compliant; the application would store data objects in CDM format, apply actions to that data using CDM methodology, and interface with other platforms using transfers of CDM format data (or indeed pass parameters to call CDM actions on those platforms).

ISLA has been diligently extending the CDM into Securities Finance, giving regular updates to the ISLA Digital Steering Group and CDM Working Group. From the latter the CDM Trading Working sub-Group was formed earlier in 2022, with the aim of crystallising trade flow specifics using a smaller set of participants (including Trading Apps and others already focused on this area of the lifecycle).

The initial meetings concentrated – with good-natured robustness – on the trade object itself, complementing and helping validate the model as it stood thus far in the main project stream. Attention then quickly turned to how the group could make practical progress versus its mandate, and in what areas. One of the first questions asked was “Where does the CDM fit into the current securities finance ecosystem?”. Bearing in mind that the current ecosystem as it (largely) stands, consists of participants having trade negotiation / trade booking / books & records and settlement functional layers in a silo, connecting at each layer through a common area to other participants directly or via 3rd parties.

This brought to mind the evergreen joke: a lost driver asks for directions and gets the response, “Well, if you need to get to there, I wouldn’t start from here”. Which wasn’t helpful. Indeed, in an ideal world the CDM would have existed from the beginning. Data and its transformations would be stored and executed consistently within each participant’s silo, so that when that data had to face the outside world, it would be consistent (in structure and calculation methodology) with a counterparty or third parties’ records.

But the reality is that it is the common area (it’s in the name to be fair) between participants’ silos where the CDM has its contemporarily appropriate place. The CDM should exist as a transformation and mapping interface layer, translating internal system language into a language that is universally understood. The Trade Working Group is therefore currently tackling the top layer of this common area, looking at trade negotiation between participants, designing trade proposals / counters / rejections etc, leading to agreed trade executions.

Hopefully the ‘why’ this work is important, and the benefits the CDM brings should be obvious to all: if securities finance speaks a common language, the market becomes more efficient. Friction and errors are reduced or eliminated, barriers to progression (and to new participants) are lowered. Operating efficiency increases. Costs are reduced. The whole market benefits from the introduction of platforms and services that are judged on the functionality and differentiation they bring, not by which existing systems they integrate to.

Coming back to our thoughts as a vendor, of course we fully support the development of an industry standard CDM. With a CDM in place, and in particular a standardised trading workflow, securities finance participants can enjoy a step towards seamless interoperability. This goal is at the core of Trading Apps’ purpose. We believe it will make our products much more accessible to the market and easier to implement, as the heavy work of communicating efficiently and accurately is reduced.

Mostly the CDM will be a good thing, but inevitably some will think they’ve lost an edge because their competition will take a step forward. However, participants should be judged on their speed of operation, the depth and quality of their supply, their pricing. The ‘language’ participants speak should not be something that gives competitive edge.

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